Daily Management Review

Yellen Is Attempting To Soothe The Tense Yet Close US-China Trade Relations


Yellen Is Attempting To Soothe The Tense Yet Close US-China Trade Relations
The world's two largest economies continue to be closely linked, despite some warning signals of impending weakening, as U.S. Treasury Secretary Janet Yellen attempts to calm an increasingly tense relationship with China.
Friday's meetings with senior Chinese officials will begin with Yellen promising to pursue "healthy competition" with China as tensions between the two economic giants over proposed limitations on outbound investment and U.S. technology export regulations dominate headlines.
Despite discussions of an economic decoupling between the United States and China, fresh data reveal a fundamentally strong trade relationship that recovered in 2022 after five years of upheaval brought on by a trade war and COVID-19 disruptions.
Last year, two-way commerce reached a record $690 billion as demand for American agriculture products and energy increased in Beijing and the United States, respectively. After ex-President Donald Trump placed tariffs of up to 25% on over $370 billion in Chinese imports in 2018, U.S.-China trade declined. However, during the COVID recovery of 2021, trade started to increase again.
"I think it is important that people realize that business and politics are separate," said Michael Hart, president of the American Chamber of Commerce in China. "The current state of U.S.-China trade and investment is the result of 30 to 40 years' worth of ongoing trade and investment."
However, this year has started off at a noticeably slower rate, with two-way trade flows through May down $52 billion, or 18%, from the first five months of 2022.
While U.S. exports to China increased 3.5% through May, the dip is the result of a 24% decrease in Chinese exports to the U.S.
According to William Reinsch, a trade analyst at the Centre for Strategic and International Studies in Washington, the reduction may be partially attributable to the slowdown in goods demand following America's COVID-era buying binge, but he also noted that supply chain diversification away from China may play a role.
However, according to Wang Huiyao, president of the Beijing-based think tank Centre for China and Globalisation, American companies are aware that China's expanding middle class would soon surpass all others in size. Their purchasing power will maintain China "one of the fastest-growing markets in the world," he asserted.
Over the past few years, there have been some notable movements in China's imports of farm products, energy, semiconductors, and machinery while China has decreased its purchases of aircraft and machinery.
These latter are particularly susceptible to export restrictions by the United States, a subject that is anticipated to be covered in Yellen's discussions in Beijing.
China's retaliatory action to put export restrictions on gallium and germanium, metals widely used in semiconductors and electric vehicles, has caused a last-minute hitch to her visit and threatens to cause fresh supply chain problems.
Officials from the United States continue to protest that China did not uphold its obligations under the 2020 "Phase 1" trade agreement, negotiated just before the pandemic shut down the world economy, to significantly increase imports of American agricultural and manufactured commodities, especially aircraft.
For smartphones, computers, video game consoles, and other electronics products where China has unmatched economies of scale, the United States depends on China. Lithium-ion batteries, which have seen their value more than quadruple over the previous two years as American EV production has increased, are a rapidly growing import category.
Future growth of local battery production capacity and decrease in reliance on Chinese batteries may be slowed by U.S. tax subsidies.
Foreign direct investment from China into the United States has decreased in recent years due to heightened scrutiny of Chinese corporations' U.S. acquisitions.
Additionally, recent studies have revealed that American companies doing business in China are becoming more negative about their prospects there. Many are also waiting for the anticipated Biden administration executive order that will limit outbound American investment into China.
However, according to Chinese data, these variables have not yet been shown in American investment that is headed for China.
According to Hart from the American Chamber of Commerce in China, even in the hallways of the U.S. Congress, where anti-China sentiment is strong, there is acknowledgment that China is a significant market for American commodities.
"One of the things when we were in D.C. that we were saying to everybody who would listen is: 'We want, number one, to keep the commercial lanes open. It's important to keep trade going, too,'" Hart said.