The economic relationship between US and China
Powerful, Different ad Equal by Peter B. Walker is a timely and significant analysis of the US-China relationship. Today we hear his views on the relationship between the US and China on trade, investment and talent.
Before exploring the relationship between the US and China on trade, investment and talent, we should begin with China’s economic exposure to the world and visa versa. If we aggregate trade, technology and capital¬†exposures, China’s exposure to the world shrank by 25% between 2000 and 2017. Meanwhile, the world’s exposure to China increased by a factor of three. This reflects the boom in China’s domestic economy, which drove the world to beat a path to China’s door and China to reduce its exposure to the US sharply. This reduced exposure is evident in each of the three dimensions of trade, investment and talent, and will likely continue in light of the US declaration in 2017 that China was the greatest strategic threat to the US.
The US attention on its trade deficit, importantly excluding services, where the US retains substantial trade surplus, has never been higher than during the current trade war. Ironically, this increased attention is coming as China’s trade surplus dropped from 10% of GDP to¬†1.3% in 2017. As a consequence of the trade war, China has looked to reduce its trade with teh US and increase trade with countries like Japan, Israel and Italy, as well as developing countries.
While the US is raising tariffs on Chinese goods and pushing China to increase its imports from the US in agriculture, energy and other sectors, it may be a case of winning the battle but losing the war. China’s average tariff rate fo 3.7% is 50% higher than the global average of 2.6%. While the economics of tariffs are relatively inconsequential to the Chinese economy, the second-order effects of lower consumer confidence and unemployment could be problematic.
The US restrictions on China’s access to high technology is predictably leading China to accelerate its efforts to become less dependent on the US. The other impact of the trade war will be consumer prices in the US, and it’s well recorded that consumers, not producers, bear the majority of costs when tariffs increase. This forces consumer prices up and drives demand down for those goods. The touted goal by the Trump administration is the return of US manufacturing jobs, which is dismissed by major corporation leaders who indicate they will find lower-cost alternatives abroad rather than shift those jobs back to the pricey US. How the trade war plays the huge Chinese market, which is of far greater consequence than tariffs. Whether the US can win greater access through the trade negotiations or wind up losing current access is to be determined.
Every country wishing to invest in the US must now go through the Committee on Foreign Investment in the United States (CFIUS), which monitors the degree to which foreign countries are investing in US businesses and developments that could pose a threat to the US. Apart from CFIUS restrictions on Chinese deals with US companies, the US also looks to contain China in technology on two other dimensions. The first is to persuade its allies to apply constraints like CFIUS to any deal China may seek in the tech space. The second is similar in nature, which is trying to keep Huawei out o fdeals with US allies in the emerging 5G space in mobile communication. Huawei is the global leader in 5G technologies, the next-generation telecommunications network. 5G will be an intensely competitive techology globally. The US claims China’s government could use Huawei’s network to breach data security systems of Huawei customers and is trying to persuade other countries to not purchase Huawei equipment for that reason. How much influence the US exerts over other countries is unclear given its current, aggressive ‘America First’ position. Whether this security concern is real or a cover for impeding the growth of huawei is unclear.
Additionally, while noht generally understood, less than one perent of the US’s foreig direct investment (FDI) goes to China. The largest sources of FDI to China are Korea, Japan and Taiwan. Likewise, FDI from China to the US in 2018 dropped by 90% from 2017 and continues to fall in 2019.
Beyond technology deals, a closely related issue is talent. The US is tightening visa requirements on multiple dimensions, including for higjly educated scientists. Currently, approximately 60% of Chinese studenst return to China after US education. Beyond that, many CHinese scientists are working in corproations or university labs in the US. If US restrictinos on scientists and science majors contiue, China is likely to accelerate its efforts to convince the incentivize them to return to CHina. Separately, we can expect foreign universities to set up high-tech labs in China. Given the progress China continues to make in this space, clamping down on talent transfers is unlikely to deter China’s focus on advancesd technologies and many scientists suggest it would hurt US efforts.
Powerful, Different and Equal by Peter B. Walker
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