USA and China: Is the Earth big enough for two?

In 1971, the Chinese table tennis team invited the US table tennis team in a what was a significant event in building relations between the two nations, which many called the Ping Pong Diplomacy. The immediate result of this was the lifting of the trade embargo with China within the same year. A year later, Nixon’s visit to China was the first time that a U.S. President had visited the People’s Republic of China. Clinton perhaps made the biggest step in improving relations with China when he signed the US-China Relations Act of 2000, granting Beijing permanent normal trade relations with the USA. This paved the way next year for China to join the World Trade Organisation in 2001. Between 1980 and 2004, U.S. – China trade exploded from $5 billion to $231 billion. It seemed that the USA and China were set to build a global alliance that would ensure global economic stability in the future.

However, we now know that this is not the case and tensions seem to be escalating in recent years. How will this affect not only the economies of China and USA but also the global economy as a result of the weakening relationship between the two largest economies in the world?

First though, let’s take a closer look at the current macroeconomic situations within the USA and China and economic outlooks for the future:

Currently, many economic analysts agree that the USA’s economy has had a “soft landing”, given the looming threat of a recession earlier this fiscal year. In fact, GDP has increase by 4.9% in Q3 compared to Q2, mainly due to inflation falling by 0.5 percentage points and consumer sentiment being up 5.2% year over year. The consequence is that consumption in the economy is growing, aided by unemployment being historically low at just 3.8%. so aggregate demand is rising. What is also interesting to note is that whilst the interest rates set by the Fed remains at the highest for 22 years (5.5%), unusually house prices are rising. Normally, at high interest rates mortgages would be more expensive so less people would be able to afford them, leading to a decrease in house prices as a result. However, the contraction in supply of houses within the market is in fact leading to an increase in the median US house price. However, we should also be cautious about this “soft landing” as the Fed predicts that we may see a lagged impact of the record high interest rates in 6-12 months’ time due to savings of households running out and only then will we see the real impact of interest rates. Overall, whilst the US is not out of the woods yet, we can be relatively optimistic about what the future holds for the US macroeconomy.

On the other hand, we could be seeing the Chinese economy starting to slowdown, which some analysts are labelling a “rise starting to reverse.” After stagnating under Mao Zedong in the 1960’s and 1970’s, China opened to the world and its economy quite literally took off in subsequent decades. China’s share of the global economy rose nearly tenfold from below 2% in 1990 to 18.4% in 2021. No nation had ever risen so far, so fast. So then, why will China’s share of the global economy fall to 17%? To put that into perspective, the global economy is expected to grow by 8 trillion USD this fiscal year and China will account for none of that gain. One reason for this is the working age population falling from a peak of 25% to now 19%: this is expected to fall further to 10% in the next 35 years. The impact of this is that the national output of China will decrease, and in addition money will have to be spent in the future looking after the old and vulnerable. Furthermore, foreign investment in Chinese factories and other projects has been cut by 12 billion USD in the third quarter, the first such drops since records began. Since China is heavily reliant on exports for revenue, we are seeing China’s GDP start to decline in nominal dollar terms. As well as a slowdown within China’s macroeconomy, debt is soaring to levels never seen before. Its Debt: GDP ratio is now 280%, a staggering figure. Therefore, whilst China has potential to reach the levels of the US economy, current long term economic problems and political issues pose a problem for it to reach this target.

With the macroeconomic climate of each country in mind, let’s examine the main cause of tension between the two economies: the trade war that has emerged. This was in large triggered by the several rounds of tariffs that the Trump administration impose on Chinese imports. These amounted to 80 billion USD of taxes on 380 billion USD worth of Chinese imports such as Chinese steel, aluminium, washing machines and solar panels. When the Biden administration took over, they largely enforced the tariffs, causing volumes of trade to continue to decline. In response to these tariffs, China retaliated with their own tariffs of approximately 20.7% on American imports, whereas tariffs for other nations are much lower at 6.7%. These policies of protectionism, government policies that restrict international trade to help domestic consumption, have knock on effects on economies. Economists generally agree free trade increases the level of economic output and income, while conversely, trade barriers have the opposite effect. In fact, the Tax Foundation estimates that the trade war will reduce long run GDP by 0.25 percent and eliminate 195,000 jobs in the USA alone. In the past couple of years, trade has been increasing again simply due to the demand for Chinese imports, especially due to the COVID-19 pandemic. US goods and services traded with China totaled an estimated 758.4 billion USD in 2022, making it the largest trading relationship globally between the two largest economies in the world. Whilst the volume of trade between the US and China is slowly increasing, perhaps more crucially trade between US and other Asian countries such as India and Vietnam are rising at a faster rate. Perhaps this could suggest that the US is preventing over-reliance on China but instead ensuring it has a stable supply network, were it to suddenly decouple from China’s economy.

But why should we care?

Well, since the USA is the world’s biggest economic consumer of goods and services and China is the global super exporter, any deterioration between the two nations would undoubtedly send economic shockwaves globally. For example, take the 12 trillion dollars in forex reserves that there are globally, which maintain stability in domestic currencies and manage various economic challenges. Of those 12 trillion dollars, a massive 60% are held in US dollars and Chinese renminbi. Quite literally, the world’s prosperity and stability rely on these two nations: USA and China.

One might argue that recently tensions between the two economies have slowly been improving. A key example of this was when Biden and Xi signed a joint statement in the UN climate summit in Glasgow in 2021 in a bid to meet economic sustainability goals. It Is here that Biden admitted that says the United States will “compete vigorously” with China, but that he’s “not looking for conflict.” More importantly, the leaders met recently in San Francisco on the 15^th of November to reduce the friction in a relationship which shoulders “heavy responsibilities for the two peoples, for the world, and for history”. However, we will most likely this relationship being tested in the Taiwan general elections next year, where there is a much more significant clash on whether the island should be allowed to self-govern itself”.

In conclusion, the future provides a lot of uncertainty about what to expect between the two nations and whether we will see them decouple from each other or co-operate to build economic stability for future generations. Will Xi’s “that the Earth is big enough for two to succeed, and one country’s success is an opportunity for the other” quote hold true for the future?