President Trump has declared a temporary truce in his trade war with China. Economists point out that both countries gain from trade, but strategists complain that in terms of relative power, China gained more. Vice President Mike Pence recently pointed out that over the past 17 years, China’s GDP has grown more than nine-fold, and we should regard China as a strategic rival. Gone are earlier administrations’ rhetoric about engagement, and while Pence disavowed it, many observers believe that decoupling has already begun.
Former Australian Prime Minister Kevin Rudd recently summarized the many strands of U.S.-China economic interdependence. In trade, the U.S. accepts 19% of China’s exports while China takes only 8% of U.S. total exports, but despite this two to one asymmetry, America does not have all the cards in this game and China knows it. On foreign direct investment, the total stock of US FDI in China is $269 billion while Chinese FDI in the U.S. reached $145 billion, but annual flow rates have been decreasing as both sides tighten policy constraints. In capital markets, the overall financial relationship totals over $5 trillion including nearly two trillion in Chinese listings on US stock exchanges and $l.3 trillion in Chinese official holdings of U.S. government bonds. Rudd argues that despite strategic difficulties the two governments will not decouple these arrangements.
Technology is the most fraught area because of China’s neo-mercantilist policies. China’s “Made in China 2025” program and its goal to be first in Artificial Intelligence by 2030 have led the American government and companies to be more wary about a high degree of technology interdependence. In the area of education and talent, over three million Chinese students have been educated in American universities over the past 20 years, and over 350,000 Chinese students study in the U.S. each year, although there has been a decline in new enrollments.