Since 2018, the United States has been responding to China’s meteoric economic rise and its own relative decline with a slew of protectionist policies, such as subsidies, at-the-border and behind-the-border trade barriers, and foreign investment restrictions. These policies have naturally elicited retaliations[i] from the Chinese government. As a result, over the last few years, great power competition between the United States and China has intensified. However, despite this intensification in competition and increase in trade protectionism, bilateral trade and investment have not diminished. What explains this contradictory phenomenon?
Despite the ongoing U.S.-China trade war, U.S. exports to China in 2021 witnessed a 21.4% increase to $151 billion. U.S. imports from China also increased by 16.5% to $506 billion. More notably, U.S. trade with China in 2021 rose above the prior five-year average.[ii] Last year, bilateral trade continued to grow. China remained the top source of U.S. goods imports, which reached $537 billion in 2022. In the same year, U.S. goods exports to China exceeded $153 billion.[iii] The top commodity sectors in U.S.-China bilateral trade are Machinery and Mechanical Appliances, Chemicals, Plastics, Rubber, and Leather Goods.[iv]
It is undeniable that both the Trump and Biden administrations have strengthened export controls to China. Still, the U.S. Bureau of Industry and Security approves the majority of Chinese export and re-export license applications. Between 2017 and 2021, approved licenses for tangible items, software, and technology to China increased impressively from approximately 3,000 to nearly 4,000, although the average processing time doubled over the five years[v], suggesting that U.S. scrutiny has indeed become stricter.
On the investment front, despite tougher regulations such as the U.S. Foreign Investment Risk Review Modernization Act and Chinese Measures on National Security Review of Foreign Investment,[vi] foreign direct investment in the United States from China increased from $35.4 billion at the end of 2018 to $38.5 billion in 2021.[vii] Moreover, Chinese venture capital investments in the United States increased to $3.2 billion in 2020 from $2.3 billion in 2019. More than half of these investments were in the Health, Pharmaceuticals, and Biotechnology sector.[viii]
In the meantime, U.S. investments in China also have not diminished. U.S. foreign direct investment in China was $123.9 billion in 2020, a 9.4% increase from 2019[ix]. In the artificial intelligence sector alone, from 2015 to 2021, U.S. investors accounted for 17% of global investment transactions into Chinese companies. In addition, 37% ($40.2 billion) of the total capital raised for Chinese artificial intelligence companies involved U.S. investors.[x] U.S. multinationals such as McDonald’s, Starbucks and Ralph Lauren are expanding – rather than pulling back – their investments into China.[xi]
One explanation for the continuing trade and investment ties between the two countries is that both countries are deeply embedded in the global supply chains, making “decoupling” nearly impossible in the near and medium term. Another reason for continuous two-way investments is that both the U.S. and Chinese markets are enormous. Profit-driven companies in both countries are incentivized to continue doing business with one another. The third reason is that there is a bidirectional causal relationship between foreign investment and trade.[xii] Finally, multinational firms (including U.S. firms) remain bullish on the long-term growth prospects of China’s huge consumer market – the second largest in the world.
In the future, from a neoliberal economic perspective, and if both countries want to maximize economic gains for themselves, both the United States and China need to strengthen trade and investment through bilateral and multilateral channels.
At the bilateral level, not only should high-echelon officials communicate with each other, but—perhaps more importantly—influential multinational corporations also need to engage with local communities. Wanxiang America is a good example of how a company can maintain responsible stewardship and successfully navigate great power rivalry. As a subsidiary of China-based company Wanxiang Group, it has invested massively in the U.S. market, including the automobile and clean energy sectors; created numerous American jobs; and donated roof-top solar panels to more than fifty American schools.[xiii] With more community-based companies emerging, mutual understanding and economic interconnectedness will be entrenched and reinforce each other, moving both countries toward a cooperative equilibrium.
At the multilateral level, many platforms, such as the World Trade Organization, Indo-Pacific Economic Framework, and the Regional Comprehensive Economic Partnership, are either ineffective or exclusive. Yet the World Economic Forum and G20 Summit can play an important role in establishing a direct line of communication by providing a venue for policymakers to meet, reduce misperceptions, and correct misinterpretations of each other’s strategic intentions and policies. For instance, Chinese Vice Premier Liu He recently delivered China’s investment pitch in Davos, making it clear that “foreign investments are welcome and the door to China will only open up further,”[xiv] which will likely boost investors’ confidence and promote bilateral economic cooperation. Likewise, when the U.S.-China relationship seemed to be in freefall on the heels of Nancy Pelosi’s visit to Taiwan, the meeting between Xi Jinping and Joe Biden during the G20 Summit in November 2022 may have helped to get it back on track.
While many are concerned about great power competition and pessimistic about U.S.-China relations, the silver lining is that two-way trade and investments remain. Now it is high time for both sides to use bilateral and multilateral avenues to further such cooperation, which will benefit not only the great powers themselves but also the international community at large.
This article was originally published by the Asian Peace Program of the National University of Singapore in March 2023.
[i] Yuhan Zhang and Cheng Chang, “Modeling the US-China Trade Conflict: A Utility Theory Approach,” Journal of Applied Mathematics and Computation 5, no. 2 (2021): 84–88, https://doi.org/10.26855/jamc.2021.06.003.
[ii] Bureau of Industry and Security, “U.S. Trade with China” (Washington D.C.: U.S. Department of Commerce, 2021), https://www.bis.doc.gov/index.php/country-papers/2971-2021-statistical-analysis-of-u-s-trade-with-china/file.
[iii] Mary Kate Carter, “The Year in Trade: Diving Into the 2022 Numbers,” February 16, 2023, https://www.uschamber.com/international/the-year-in-trade-diving-into-the-2022-numbers.
[iv] Bureau of Industry and Security, “U.S. Trade with China.”
[v] Bureau of Industry and Security.
[vi] Yuhan Zhang, “The Death of US–China Climate Cooperation,” Global Policy Journal, January 17, 2023, https://www.globalpolicyjournal.com/blog/17/01/2023/death-us-china-climate-cooperation.
[vii] U.S. Bureau of Economic Analysis, “Foreign Direct Investment in the U.S.: Balance of Payments and Direct Investment Position Data | U.S. Bureau of Economic Analysis (BEA),” July 21, 2022, https://www.bea.gov/international/di1fdibal.
[viii] Thilo Hanemann et al., “Two-Way Street – US-China Investment Trends – 2021 Update” (New York: Rhodium Group, May 19, 2021), https://rhg.com/research/twowaystreet-2021/.
[ix] Office of the United States Trade Representative, “The People’s Republic of China,” accessed February 22, 2023, https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
[x] Emily Weinstein and Ngor Luong, “U.S. Outbound Investment into Chinese AI Companies” (Washington D.C.: Georgetown University, February 2023), https://cset.georgetown.edu/publication/u-s-outbound-investment-into-chinese-ai-companies/.
[xi] CGTN, “US Companies Plan China Expansions, Eyeing Big Growth in China: WSJ”, February 27, 2023, https://news.cgtn.com/news/2023-02-27/U-S-companies-plan-China-expansions-eyeing-big-growth-in-China-WSJ-1hLveGpVY6k/index.html.
[xii] Yuhan Zhang, “The US–China Trade War: A Political and Economic Analysis,” Indian Journal of Asian Affairs 31, no. 1/2 (2018): 53–74, https://www.jstor.org/stable/26608823.
[xiii] Wanxiang America, “Wanxiang America, Inc.: Automotive Parts Manufacturer | Bearings, Drivelines | China-US Trade Facilitator | Solar Panel Manufacturer | LED Lamp Manufacturer,” accessed February 19, 2023, https://www.wanxiang.com/.
[xiv] World Economic Forum, “中华人民共和国国务院副总理刘鹤在世界经济论坛2023年年会上的特别致辞 (Special Address by PRC’s Vice Premier Liu He at the World Economic Forum 2023 Annual Meeting),” 世界经济论坛, January 17, 2023, https://cn.weforum.org/agenda/2023/01/am23-special-address-china/.