The US and China : A love-hate relationship

Both partners and competitors, sometimes allies, sometimes enemies... The relationship between the United States and China has become much more complex over the last decade. Yet these two great economic powers are inextricably linked, particularly in terms of trade. One interesting fact is that China is the largest foreign creditor of the United States. The tenure of former U.S. President Donald Trump, however, has severely damaged this relationship, leading to an exacerbated trade war between the two countries, with a clear impact on the global economy.

US et chine

The cohabitation of the world's greatest powers

China has succeeded in establishing itself as the world's leading power in international trade. Its imports and exports have grown from less than 1% of global flows in 1980 to 9% and 11% respectively in 2017. The country is now the largest importer of raw materials, the largest market for passenger vehicles, and the second largest market in the world for fixed capital goods (ahead of the U.S., but behind the European Union).

These impressive figures are a testament to the Middle Kingdom's tremendous growth. China's GDP grew by over 900% between 1980 and 2016 and its productivity surged by 620%! The relative weight of Chinese GDP (in purchasing power parity - PPP) has increased by almost 14 points according to the IMF, while that of the United States has decreased by 8 points over the last 50 years.

Nevertheless, the United States remains the largest market for goods and services consumed by households (more than a quarter of the world market), followed by China, which ranks far behind at less than 10%. Likewise, the dollar remains the most widely used currency for international trade invoicing (more than 45% in 2019, while the yuan's contribution accounts for about 1% of global flows). According to the Bank for International Settlements (BIS), the dollar was involved in nearly half of all transactions (88% out of 200%).

Sino-American competition: are we on the verge of a trade war?

Diplomatic relations between China and the United States have been highly strained with a trade and ideological war, divergent views on how to manage the pandemic and remote geopolitical clashes. These tensions have been exacerbated under the Trump presidency with a succession of events: US tariffs imposed on Chinese products (notably solar panels, a market in which China is an undisputed leader), increased tariffs by Chinese authorities on a large list of US products, the passing of a law by the US Congress that prohibits the use of equipment from Huawei, Dahua Technology, ZTE, and Hikvision by various US administrations, etc. As a result, China went from being the top trading partner of the U.S. down to third between January and June 2019.

In January 2020, the U.S. and China eventually settled on a trade agreement in which China pledges to buy $200 billion of U.S. products over 2 years, fight counterfeiting and remove nearly $75 billion in tariffs. The two nations are indeed aware that their relationship is of the utmost importance. That is why President Joe Biden attempted to renew the dialogue in September 2021 with Xi Jinping so that "the 'competition' between their two countries does not turn into 'conflict'". The two leaders had "frank, in-depth, and extensive strategic exchanges about U.S.-China relations and issues of mutual concern”.

However, Sino-American relations are still headed into dangerous waters. The Biden administration believes that China has failed to live up to the commitments made in the agreement signed in 2020. The United States also accuses the Chinese of perpetrating genocide against the Muslim Uighur people. As a matter of fact, no U.S. diplomatic representative attended the Beijing Olympics despite China's warnings.

Relations between the United States and China are more crucial than ever for the world economy, including for French companies. According to the IMF, the consequences of an escalating trade war would be colossal. "Greater uncertainty about trade policies and fears of escalation and retaliation would lead to reduced business investment, disruption of supply chains, and slower productivity growth." A decline in profitability could "undermine the confidence of financial markets and further dampen growth". This observation is shared by public actors such as Bruno Le Maire, French Minister of Economy, Finance and Recovery: "There is no greater threat to global growth than a trade war between China and the United States".

Are you passionate about the global economy? Are you interested in a career at the very heart of corporate strategy? Find out about the courses offered by the American Business School of Paris and bring your professional projects to life!

Share