Great power game, increased competition but not necessarily decoupling
International Business News – Since 2018, the US has been responding to the rapid rise of the Chinese economy and its own relative decline with a series of protectionist policies including industrial policy, trade barriers and restrictions on foreign investment. In the Sino-US game, these policies naturally provoked a counterattack from the Chinese government. As a result, the great power competition between the US and China has intensified in the past few years. Despite the intensification of competition and the rise of trade protectionism, however, bilateral trade and investment have not decreased. How do we interpret and explain this contradictory phenomenon?
Although the Sino-US trade war is still ongoing, US exports to China increased by 21.4% to $151 billion in 2021. US imports from China also increased by 16.5%, reaching $506 billion. What is more noteworthy is that the US-China trade in 2021 was higher than the average level of the past five years. Bilateral trade continued to grow last year. China is still the largest source of US merchandise imports, reaching $537 billion in 2022. In the same year, US exports of goods to China exceeded $153 billion. The main commodities in the Sino-US bilateral trade are machinery and mechanical and electrical equipment, chemicals, plastics, rubber and leather products.
It is undeniable that both the Trump administration and the Biden administration have strengthened the export control to China. Nevertheless, the US Bureau of Industry and Security still approved most of the export and re-export license applications from China. During the period from 2017 to 2021, although the average processing time doubled in five years, indicating that US reviews have indeed become stricter; however, the number of approved tangible items, software and technology licenses from China increased from about 3000 to nearly 4000.
In terms of investment, although the US Foreign Investment Risk Review Modernization Act and China’s Foreign Investment National Security Review Law are more stringent in regulation, China’s direct investment in the US still increased from US$35.4 billion at the end of 2018 to US$38.5 billion in 2021. In addition, Chinese venture capital investment in the US increased from US$2.3 billion in 2019 to US$3.2 billion in 2020. More than half of these investments are in the fields of healthcare, pharmaceuticals and biotechnology.
At the same time, US investment in China has not decreased either. US direct investment in China was US$123.9 billion in 2020, an increase of 9.4% from 2019. In the field of artificial intelligence alone, from 2015 to 2021, US investors accounted for 17% of global investment transactions in Chinese companies. In addition, 37% (US$40.2 billion) of the total financing for Chinese AI companies involved US investors. US multinationals such as McDonald’s, Starbucks and Ralph Lauren are expanding rather than reducing their investments in China.
One explanation for the continued trading and investment links between the two countries is that they are both deeply embedded in the global supply chain, making “decoupling” almost impossible in the short and medium term. Another reason for the continued bilateral investment is that both the US and Chinese markets are huge. Companies in both countries that are driven by profit have an incentive to continue doing business with each other. A third reason is the existence of a two-way causal relationship between foreign investment and trade (which I proved in my 2018 academic paper “US-China Trade War: A Political and Economic Analysis”). Finally, multinationals (including US companies) still see long-term growth prospects in China, the world’s second-largest consumer market.
From the perspective of neo-liberal economics, if both China and the US hope to maximize their own economic interests, both parties need to strengthen trade and investment through both bilateral and multilateral channels.
At the bilateral level, it is not only high-level officials who should communicate with each other, but more importantly, influential transnational companies also need to be in contact with local communities. Wanxiang America is a good example. It demonstrates how to maintain responsible transnational corporate management and to successfully cope with great power competition. As a subsidiary of China’s Wanxiang Group, the company has made a lot of investments in the US market, including in the automotive and clean energy sectors, creating a lot of job opportunities for the US, and donating rooftop photovoltaic panels to more than 50 American schools. With the emergence of more community-based companies, mutual understanding and economic interdependence will be consolidated and strengthened, driving the two countries towards a cooperative equilibrium in the game.
On the multilateral level, many platforms such as the World Trade Organization, the Indo-Pacific Economic Framework, and the Regional Comprehensive Economic Partnership are either ineffective or exclusionary. However, the World Economic Forum and the G20 Summit can play an important role, providing a platform for policy makers in China and the US to meet and communicate, reduce misunderstandings, and correct misjudgments of each other’s strategic intentions and policies, thereby establishing direct channels of communication. For example, Chinese Vice Premier Liu He recently gave a speech on China’s investments in Davos, clearly stating “Welcome foreign investment, China’s door will only be further opened,” which is likely to boost investors’ confidence and promote further bilateral economic cooperation in the future.
Despite the worries of many people about great power competition and the pessimism towards China-US relations, bilateral trade and investment still exist. Now, both sides should take advantage of bilateral and multilateral approaches to further promote such cooperation, which is beneficial not only to the great powers themselves but also to the international community.