March 7, 2023
IntelBrief: The Complexities of an Economic Rift with China
Bottom Line up Front
- A complete economic “decoupling” between the United States and China could lead to potentially severe consequences for the U.S. economy and constrain U.S. policy options.
- Profit growth for many prominent U.S. corporations, such as Apple, Tesla, Starbucks, Nike, Boeing, and others, depends on the ability to engage in unfettered transactions in and with China.
- China’s leaders depend on trade and commerce with the large U.S. and European economies, paving the way for compromise on many of the economic-centered disputes with Beijing.
- S. sanctions and related measures imposed on Chinese entities will not cause Beijing to fundamentally change its behavior but might shape negotiations on important U.S. goals.
Press reports and U.S. and China official statements and high-level meetings are dominated by discussion of growing tensions between the United States and China. Reflecting the growing bipartisan criticism of China, a clear majority of the House of Representatives in the 118th Congress have formed a new House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party to examine the range of disputes and differences between the two powers and review policy options. On February 28, the new Committee held its first hearing; the discussion unfolded broadly across a range of strategic, political, and economic issues including the possibility that China will seek to reunite Taiwan to the mainland by force; U.S.-China trade; allegations that China might acquire and misuse personal data from the use of the Tik Tok social media application; and China’s deplorable human rights record, including the repression of its Muslim community in Xinjiang. Other issues raised across the U.S. political spectrum include China’s lack of transparency into the origins of COVID-19; President Xi Jinping’s increasing consolidation of authority; China’s espionage against the United States; the potential for China to materially support Russia’s war against Ukraine; and China’s acquisition and alleged misuse of U.S. intellectual property.
In the context of a general hardening of U.S. attitudes toward China, recommendations of U.S. economic policy responses range all the way from a complete “de-coupling” of the U.S. economy from China to suggestions of greater economic integration and cooperation with China’s leaders to resolve outstanding disputes. In between the two poles (enmity versus managed competition) lies a range of options that have been pursued by successive U.S. administrations, including imposing sanctions on Chinese firms, threats to delist Chinese companies from U.S. exchanges, imposition or increases in tariffs on U.S. imports from China, and denial of applications by some Chinese firms to invest in or operate in the United States.
Although tensions between the United States and China have been heightened by an alleged Chinese espionage balloon that traversed the United States in early February, the U.S. business community and most of the U.S. political spectrum are opposed to a broad de-coupling of the two economies. China has become the largest trading partner of the United States based on import value; the United States imported more than $536 billion worth of goods from China in 2022. A wide range of economists warn that broad U.S. divestment from China and severe restrictions on two-way trade would significantly reduce overall U.S. economic output. A large and immediate reduction in U.S. imports from China would undoubtedly increase the U.S. inflation rate by restricting the supply of those goods. Interest rates in the United States might spike if, as a response to a de-coupling, China’s central bank (People’s Bank of China, PBoC) quickly sold the nearly $900 billion in holdings of U.S. Treasury securities that it held as of the end of 2022. The Bank’s holdings of U.S. bonds have declined in recent years, reflecting China’s perception of U.S. economic uncertainty as well as U.S.-China tensions.
Amplifying the views of economists and other experts opposed to de-coupling from China, some of the largest and most well-known U.S. corporations - including such market leaders as Apple, Tesla, Boeing, Nike, and Starbucks, among others - are relying on the Chinese market for much of their future sales and profit growth. Many of these companies have developed large manufacturing capabilities in China that would be costly and disruptive to move back to the United States or elsewhere. The U.S. integration into China’s economy also enables U.S. business leaders to argue that President Xi and his team have ample motivation to avoid an outright economic rift with the United States. An exodus of U.S.-owned manufacturing facilities from China would lead to extensive losses of relatively high-paying jobs for China’s citizens.
U.S. business executives and other experts argue that many U.S.-China economic disputes have been resolved or are amenable to resolution through dialogue. Apparently heeding that advice, successive U.S. presidents appear to have opted for a middle ground that seeks to change Beijing’s behavior and gradually hinder China’s economic power using sanctions, export controls, tariff increases, and other measures. These steps have, in some cases, successfully brought China’s authorities to work within U.S. and European economic rule-based requirements. For example, Chinese authorities appear to be working to satisfy requirements in recent U.S. laws that Chinese companies increase their financial transparency to U.S. regulators to remain listed on U.S.-based exchanges. Others have suggested that an acceptable alternative to a broad ban on the U.S. use of the Tik Tok social media application could be a sale by the China-based owner of the application, ByteDance, to a U.S. firm. The Trump administration produced modest positive results by increasing tariffs on Chinese goods to compel Beijing to instill more balance in U.S.-China trade. President Biden has kept his predecessor's China tariff structures in place, while adding measures to restrict the sale to China of the most sophisticated U.S. semiconductor chips and other technologies – actions that received criticism from Beijing but have not led to significant retaliation.
Economic sanctions applied by U.S. officials to China have had limited results to date. Over the past several years, dozens of Chinese oil industry and oil trading firms have been sanctioned under U.S. laws penalizing the purchase of oil and other energy transactions with Iran – the latest designated on March 2. Global Marine Ship Mgmt. Co. Ltd. and Shanghai Xuanrun Shipping Co. Ltd. were sanctioned for knowingly engaging in a significant transaction for the transport of petrochemical products from Iran. The sanctions bar the two companies - and any Chinese or third-country company that transacts business with the two companies - from operating or holding any assets in the United States. Yet, the steady stream of U.S. sanctions imposed on Chinese oil traders for dealing with Iran has not had a measurable effect on China’s behavior; the country reportedly imported an average of 1.2 million barrels per day of Iranian crude oil in the final quarter of 2022 – nearly double the amount China imported in 2011 when there were no U.S. sanctions on buying Iranian oil. China reportedly pays below-market prices for Iranian oil because of the risk factor in conducting transactions with the heavily sanctioned Islamic Republic. Still, in the context of an effort by the United States or China to lower tensions, sanctions on China related to Iran or any other foreign policy issue might become a factor in a broader U.S.-China negotiation or trade dispute settlement.