WASHINGTON– The United States and China are the two heavyweights of the world economy. Combined, they produce more than 40% of the world’s goods and services.
So when Washington and Beijing wage an economic battle, as they have for five years running, the rest of the world suffers too. And when they hold a rare high-level summit, as Presidents Joe Biden and Xi Jinping will this week, it can have global consequences.
The global economy could surely benefit from a detente between the United States and China. Since 2020, it has suffered crisis after crisis: the COVID-19 pandemic, soaring inflation, rising interest rates, violent conflicts in Ukraine and now Gaza. The global economy is expected to grow a mediocre 3% this year and 2.9% in 2024, according to the International Monetary Fund.
“Having the world’s two largest economies at odds at such a tense time,” said Eswar Prasad, senior professor of trade policy at Cornell University, “exacerbates the negative impact of several geopolitical shocks that have affected the global economy.”
Hopes have risen that Washington and Beijing can at least cool some of their economic tensions at the Asia-Pacific Economic Cooperation summit, which begins Sunday in San Francisco. The meeting will bring together 21 countries from the Pacific Rim, which together represent 40% of the world’s population and almost half of world trade.
The main event will be the meeting between Biden and Xi on Wednesday on the sidelines of the summit, the first time the two leaders will speak in a year, during which time friction between the two nations has worsened. The White House has tried to lower expectations, saying it does not expect progress.
At the same time, Prasad suggested that the threshold for declaring a successful outcome is relatively low. “Avoiding a further deterioration of the bilateral economic relationship,” he said, “would already be a victory for both sides.”
The economic relationship between the United States and China had been deteriorating for years before it erupted in 2018, at the behest of President Donald Trump, into an all-out trade war. The Trump administration accused China of having violated commitments it made when joining the World Trade Organization in 2001, to open its vast market to American and other foreign companies that wanted to sell their goods and services there.
In 2018, the Trump administration began imposing tariffs on Chinese imports to punish Beijing for its actions in attempting to supplant American technological supremacy. Many experts agreed with the administration that Beijing had engaged in cyberespionage and improperly required foreign companies to hand over trade secrets as the price for gaining access to the Chinese market. Beijing responded to Trump’s sanctions with its own retaliatory tariffs, making American goods more expensive for Chinese buyers.
When Biden took office in 2021, he maintained much of Trump’s confrontational trade policy, including tariffs on China. The US tax rate on Chinese imports now exceeds 19%, up from 3% in early 2018, before Trump imposed his tariffs. Similarly, Chinese taxes on imports of American goods have risen to 21%, 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 when COVID-19 disrupted global supply chains, and solidify partnerships with other Asian nations. As part of that policy, the Biden administration last year forged the Indo-Pacific Economic Framework for Prosperity with 14 countries.
In some ways, trade tensions between the United States and China are even greater under Biden than under Trump. Beijing is furious 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 produce them. In August, Beijing responded with its own trade restrictions: It began requiring Chinese exporters of gallium and germanium, metals used in computer chips and solar cells, to obtain government licenses to ship those metals abroad.
Beijing has also taken aggressive measures against foreign companies in China. Orchestrating what appears to be a counterespionage campaign, its authorities this year raided the Chinese offices of the American consulting firms Capvision and Mintz Group, interrogated Bain employees in Shanghai & Co. consulting and announced a security review of chipmaker Micron.
Some analysts speak of a “decoupling” of the world’s two largest economies after decades in which they depended deeply on each other for trade. In fact, imports of Chinese products to the United States decreased by 24% until September compared to the same period in 2022.
The rift between Beijing and Washington has forced many other countries into a delicate situation: deciding which side they are on when they really want to do business with both countries.
The IMF says that this economic “fragmentation” is harmful to the world. The 190-nation lending agency estimates that higher trade barriers will subtract $7.4 trillion from global economic output after the world has adapted to higher trade barriers.
And those barriers are rising: Last year, the IMF said, countries imposed nearly 3,000 new restrictions on trade, up from fewer than 1,000 in 2019. The agency forecasts international trade will grow just 0.9% this year and a 3.5% in 2024, well below 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 lay the groundwork for the Biden-Xi summit.
“Our mutual desire, both China and the United States, is to create a level playing field and continued, meaningful and mutually beneficial economic relations,” Yellen said.
Xi also has reason to try to restore economic cooperation with the United States. The Chinese economy is under great pressure. Its housing market has collapsed, youth unemployment is rampant and consumer morale is depressed. Raids on foreign companies have scared international companies and investors.
“With serious headwinds facing the Chinese economy and many American companies packing up and leaving China, Xi needs to convince investors that China remains a profitable place to do business,” said Wendy Cutler, vice president of the Asia Society. Institute and former US trade negotiator. “This will not be an easy sale.”
What complicates matters is that tensions between Washington and Beijing go far beyond the economy. Under Xi, the Chinese Communist Party has punished dissent in Hong Kong and the autonomous Muslim region of Xinjiang. His government has made aggressive territorial demands in Asia, engaging in deadly border clashes with India and intimidating the Philippines and other neighbors in parts of the South China Sea it claims as its own. He has increasingly threatened Taiwan, which he views as a renegade Chinese province.
Tensions between the United States and China could intensify next year with presidential elections in Taiwan and the United States, where criticism of Beijing is one of the few areas uniting Democrats and Republicans.
Xi’s policies appear to be costing China the battle to win over 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?
Speaking at the Center for Strategic and International Studies think tank in Washington, Rep. Raja Krishnamoorthi, an Illinois Democrat who sits on a House committee monitoring China, noted optimistically that Xi had already moved on. back before, in particular by declaring a sudden end to draconian measures zero-COVID policies that crippled China’s economy last year.
“We have to give that possibility a chance, even while protecting and protecting our interests,” Krishnamoorthi said. “That’s what I hope we’ll see as a result of this meeting as well.”