WASHINGTON – The United States and China are the two heavyweights of the global economy. Together they produce more than 40% of the world’s goods and services.
So when Washington and Beijing engage in an economic battle, as they have for the past five years, the rest of the world suffers too. And if they hold a rare high-level summit, as Presidents Joe Biden and Xi Jinping will do this week, it could have global consequences.
The global economy could certainly benefit from a detente between the USA and China. Since 2020, it has experienced one crisis after another – the COVID-19 pandemic, soaring inflation, rising interest rates, violent conflict in Ukraine and now Gaza. According to the International Monetary Fund, the global economy is expected to grow a weak 3% this year and just 2.9% in 2024.
“That the world’s two largest economies are at loggerheads at such a tense time,” said Eswar Prasad, senior professor of trade policy at Cornell University, “exacerbates the negative effects of various geopolitical shocks that have hit the global economy.”
There are hopes that Washington and Beijing can ease at least some of their economic tensions at the Asia-Pacific Economic Cooperation summit that begins Sunday in San Francisco. The meeting will be attended by 21 Pacific Rim nations, which together represent 40% of the world’s population and almost half of world trade.
The main event will be Wednesday’s Biden-Xi meeting on the sidelines of the summit, the first time the two leaders will speak in a year as tensions between the two nations have heightened. The White House has tried to temper expectations by saying it doesn’t expect any breakthroughs.
At the same time, Prasad pointed out that the threshold for declaring a successful outcome is relatively low. “Preventing further deterioration in bilateral economic relations would be a victory for both sides,” he said.
Economic relations between the United States and China had deteriorated for years before erupting into a full-scale trade war in 2018 at the instigation of President Donald Trump. The Trump administration accused China of violating the commitments it made when it joined the World Trade Organization in 2001 to open its vast market to U.S. and other foreign companies selling their goods and services there wanted to.
In 2018, the Trump administration began imposing tariffs on Chinese imports to punish Beijing for its attempts to displace U.S. technological supremacy. Many experts agreed with the government that Beijing had engaged in cyber espionage and unfairly demanded that foreign companies hand over trade secrets as the price of access to the Chinese market. Beijing retaliated against Trump’s sanctions with its own retaliatory tariffs, making U.S. goods more expensive for Chinese buyers.
Senator Mark Warner, chairman of the Senate Intelligence Committee, said the US must continue to pressure China over intellectual property theft and win support from allies in the region. “National security is no longer just about who has the most tanks, weapons, ships and planes. It’s about who will win the battle over artificial intelligence, quantum computing, advanced telecommunications, 5G and beyond,” Warner, D-Va., said on “Fox News Sunday.”
When Biden took office in 2021, he maintained much of Trump’s confrontational trade policies, including China tariffs. The U.S. tax rate on Chinese imports is now above 19%, up from 3% at the start of 2018, before Trump imposed his tariffs. Likewise, Chinese import tariffs on U.S. goods are as high as 21%, up from 8% before the trade war began, according to calculations by Chad Bown of the Peterson Institute for International Economics.
One of the tenets of Biden’s economic policy has been to reduce America’s economic dependence on Chinese factories, which came under pressure as COVID-19 disrupted global supply chains, and to strengthen partnerships with other Asian nations. As part of this policy, the Biden administration last year forged the Indo-Pacific Economic Framework for Prosperity with 14 countries.
In some ways, US-China trade tensions are even greater under Biden than they were under Trump. Beijing is seething over the Biden administration’s decision to impose and then expand export controls designed to prevent China from acquiring advanced computer chips and the equipment to make them. In August, Beijing countered with its own trade restrictions: It required Chinese exporters of gallium and germanium, metals used in computer chips and solar cells, to obtain government licenses to ship the metals abroad.
Beijing has also taken aggressive action against foreign companies in China. As part of an apparent counterintelligence campaign, authorities this year raided the Chinese offices of U.S. consulting firms Capvision and Mintz Group, questioned employees of Shanghai consulting firm Bain & Co. and announced a security review of chipmaker Micron.
Some analysts are talking about a “decoupling” of the world’s two largest economies after decades of being heavily dependent on each other for trade. In fact, imports of Chinese goods into the United States fell 24% through September compared to the same period in 2022.
The rift between Beijing and Washington has put many other countries in a delicate situation: They must decide which side they are on if they actually want to do business with both countries.
The IMF says such economic “fragmentation” is harmful to the world. The 190-country credit agency estimates that higher trade barriers will reduce global economic output by $7.4 trillion after the world adjusts to higher trade barriers.
And these hurdles are increasing. According to the IMF, countries imposed nearly 3,000 new trade restrictions last year, down from fewer than 1,000 in 2019. The agency expects international trade to increase by just 0.9% this year and by 3,000 in 2024. will grow by 5% – a significant decline compared to the 2000-2019 annual average of 4.9%.
The Biden administration insists it is not trying to undermine China’s economy. On Friday, Treasury Secretary Janet Yellen met with her Chinese counterpart, Vice Premier He Lifeng, in San Francisco and sought to set the stage for the Biden-Xi summit.
“Our shared desire – both China and the United States – is to create a level playing field and lasting, meaningful and mutually beneficial economic relationship,” Yellen said.
Xi has reason to try to restore economic cooperation with the United States. The Chinese economy is under severe strain. The real estate market has collapsed, youth unemployment is rampant and consumer sentiment is dampened. The raids on foreign companies have spooked international companies and investors.
“As the Chinese economy faces severe headwinds and many U.S. companies pack up and leave China, Xi must convince investors that China is still a profitable place to do business,” said Wendy Cutler, vice president of the Asia Society Institute and a former US trade negotiator. “This won’t be an easy sell.”
What makes matters worse is that the tensions between Washington and Beijing go far beyond economic aspects. Under Xi, the Chinese Communist Party has punished dissent in Hong Kong and the autonomous Muslim region of Xinjiang. His government made aggressive territorial claims in Asia, embroiled itself in deadly border conflicts with India and harassed the Philippines and other neighbors in parts of the South China Sea it claims. It increasingly threatens Taiwan, which it views as a renegade Chinese province.
U.S.-China tensions could worsen next year with presidential elections in Taiwan and the United States, where criticism of Beijing is among the few areas that unite Democrats and Republicans.
Xi’s policies appear to be costing China in the battle for world opinion. In a recent survey of people in 24 countries, the Pew Research Center reported that the United States was viewed more favorably than China in all but two countries (Kenya and Nigeria).
Could China change course?
In a speech at the Center for Strategic and International Studies think tank in Washington, Rep. Raja Krishnamoorthi, an Illinois Democrat who serves on a House committee monitoring China, optimistically noted that Xi has made U-turns before — notably by announcing a sudden end to the draconian zero-COVID policy that crippled China’s economy last year.
“We must give this opportunity a chance, even as we safeguard and protect our interests,” Krishnamoorthi said. “That’s what I hope we see as a result of this meeting as well.”