News analysis
The economies of the United States and China are rapidly decoupling from each other, with cross-Pacific exports and imports falling greatly in recent months. Data released by the U.S. Department of Commerce last week shows imports from China down 25 percent in the first half of 2023, making Mexico America’s biggest trading partner for the six-month period.
Even as U.S. and Chinese officials try to manage strained relations, the decline in bilateral trade is driven by greater factors, including rising worries about business under a worsening political environment under the Chinese Communist Party (CCP), as well as the demonstrated lack of a post-pandemic recovery in mainland China.
Supply chain shocks that hit the global economy during the CCP’s three years of paralyzing “zero-COVID” lockdowns, coupled with increasing restrictions by the U.S. authorities on exports of high-tech semiconductors and other goods to China — which Chinese manufacturers often rely on to assemble consumer and industrial products for export — have encouraged international firms to reduce their reliance on China.
De-risking
In recent years, many US companies like HP, Stanley Black & Decker, and LEGO have been adjusting their supply chains for American consumers. This shift aims to avoid risks arising from tensions between the US and China, as well as to strategize for long-term goals focused on cost-saving and proximity to consumers.
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While imports from China accounted for almost a fourth of all U.S. imports prior to the novel coronavirus pandemic in 2019, that proportion has fallen to less than one-sixth in 2023, according to data produced by Oxford University as cited in an Aug. 6 article by the Washington Post.
Japan was also buying less from China, while major European countries like France and Germany largely maintained their pre-pandemic import levels.
China exported around US$50 billion less to the US in the first half of 2023 than it did in 2019, while the Association of Southeast Asian Nations (ASEAN) region became China’s largest trading partner.
Foreign investors are establishing fewer factories and production lines in China, indicating that other Asian countries are increasing their exports to the United States at China’s expense. “Annual spending on new or ‘greenfield’ sites in China fell from about $100 billion in 2010 to $50 billion in 2019 and hit just $18 billion last year, according to Oxford data,” The Washington Post reported.
Many Chinese manufacturers are evading U.S. tariffs by setting up shop in other countries, such as Southeast Asia or Mexico. Often, much of the assembly is performed in China before the products are simply routed through a third country prior to export to the U.S.
According to the Chinese General Administration of Customs, which released national import and export data for the month of June on July 13, exports fell by 12.4 percent year-on-year, while imports decreased by 6.8 percent. The reported trade surplus was US$70.6 billion.
The CCP itself, long known for inflating China’s economic data, has admitted the severity of the situation. State news mouthpiece Xinhua reported 0.5 percent year-on-year economic growth for the month of May, with even worse performance in June.
Li Xingqian, Director-General of the Ministry of Commerce’s trade department, said, “The foreign trade situation is extremely severe.”
U.S.-China trade peaked in 2017, at over US$600 billion that year. In 2022, the value of bilateral trade was US$690 billion, or US$561 billion in 2017 dollars when adjusted for inflation.
Drifting apart
Li Xingqian noted that while Chinese exports enjoyed a boost during the COVID-19 pandemic, such as in exports of sanitary supplies and consumer electronics, this export model is not sustainable.
Chinese state media have pointed to sluggish production, consumption, and investment following the pandemic as factors in depressing foreign trade with China. Also mentioned was high inflation worldwide, as well as “geopolitical challenges.”
The U.S.-China trade war, which began in 2018, saw the U.S. under then-President Donald Trump levy tariffs on hundreds of billions in Chinese goods.
And by the time a trade deal was finally reached in January 2020, the SARS-CoV-2 virus was spreading out of Wuhan, central China, and developing into a global pandemic.
The Biden administration has placed growing blocks on key technologies that China has yet to be able to replicate; on Aug. 8, President Joe Biden signed an exeutive order to restrict Americans from investing in “sensitive technologies critical to national security” such as “semiconductors and microelectronics, quantum information technologies, and artificial intelligence” in “countries of concern,” including China.
The CCP’s own policies have also dampened the atmosphere for foreign investment, as the Party clamped down on civil liberties in Hong Kong and has called for Chinese citizens to take part in “counter espionage” work.
According to political risk consultancy SinoInsider, both the Chinese and U.S. governments have attempted to scale down tensions in hopes of reaching at least a temporary “deténte.”
The New York-based group, which focuses on Chinese elite politics, noted that the relatively lenient terms of Biden’s Aug. 8 executive order is indicative of the Biden administration’s “vigorous pursuit of ‘deténte’ with the CCP regime after the sharp escalation of bilateral tensions in the wake of the PRC spy balloon incident,” which occurred in February.
However, SinoInsider wrote that such attempts at thawing relations would prove “at best illusory and very fragile.” Biden’s executive order and other restrictive actions were “likely to reinforce the growing perception held by investors in the U.S. and elsewhere that there are significant political and geopolitical risks involved in investing in China,” the analysts wrote in an Aug. 14 newsletter entry.
“The behavior of the governments toward each other — the more hostile, confrontational stance — is starting to affect private-sector decision-making because it changes the risk profile,” Adam Slater, lead economist for Oxford Economics in London, told the Washington Post.
“What we’re seeing from the U.S. decoupling seems set to continue,” Slater said.
By Wen Long and Leo Timm.
