Economic Realities in U.S.-China Relations

By JOHN ROSS

ECONOMIC relations between China and the United States formed a central part of discussions during Chinese Vice President Xi Jinping's recent visit to the U.S. Analysis of economic fundamentals shows that it is possible in principle to resolve this aspect of the international situation to mutual benefit. Unfortunately non-economic issues, created by the U.S. administration's approach, get in the way.

China's government approaches economic relations, as it states, and as economic trends outlined below practically demonstrate, from the point of view of securing "win-win" outcomes. Within this framework, China's economic development benefits not only itself but also other countries, as it creates an increasingly large market for their products. Equally, other countries' growth creates a greater market for China. Such economic relations, therefore, are part of an approach in which, although there will inevitably be frictions on individual issues, the overall outcome is positive for both sides. China-U.S. economic relations should therefore be fundamentally cooperative and equal – "win-win."

Unfortunately the U.S. administration has another framework — that of maintaining U.S. "leadership." Such relationships are not based on equality but on a U.S. "leader" and "followers" — "we lead — you follow" arrangement. President Obama reiterated in his 2012 State of the Union speech: "Renewal of American leadership can be felt across the globe."

Morally, no self-respecting country can accept a "leader-follower" framework and practically, the U.S. can no longer impose it. Fortunately, despite this misguided U.S. administration framework, loss of control over the international situation is unlikely because U.S. administrations no longer have the strength to impose such an approach.

These realities meant that, despite "China bashing" from much of the U.S. populist media, Vice President Xi's visit was treated with the highest U.S. protocol — a 19-gun salute, a longer than pre-scheduled meeting with President Obama, and prolonged meetings with Vice President Biden and Secretary of State Clinton.

Economically, the underlying fundamentals are that in approximately five years China's economy will be larger than the U.S.'s. The annual expansion in dollars of China's market is already greater than that of the U.S. In the four years since the financial crisis began, the U.S. economy grew by US $1.1 trillion, whereas China's grew by US $3.8 trillion. Even last year, with U.S. recovery underway, China's GDP increased by US $1.3 trillion compared to the US's $0.6 trillion. This translates directly into growth in trade and investment – the issues dominating economic media discussions during Vice President Xi's visit.

China will still take a few years to exceed the U.S. in total imports, but the annual dollar increase in China's imports is already larger than that of the U.S.— in 2011 U.S. goods imports increased by US $324 billion while China's grew by US $350 billion.

Significantly, the growth of trade between both the U.S. and the EU and China is now larger than that between the U.S. and EU. Comparing data for the fourth quarter of 2011 with the corresponding period of 2007, before the financial crisis, U.S. exports to the EU increased by an annualized US $21 billion and EU exports to the U.S. by an annualized US $8 billion. U.S. exports to China, however, increased by an annualized US $47 billion, while EU exports to China grew by an annualized US $83 billion. Growth of U.S. exports to China, therefore, was more than twice those to the EU, and EU exports to China grew by more than 10-fold those to the U.S. China, therefore, is a more important export target for the U.S. than the EU; hence the stress on economic issues during Xi Jinping's visit.

These figures show, however, that the EU is gaining more from exports to China than the US is, as EU exports to China increased by an annualized US $34 billion more than U.S. exports to China. Given that one of President Obama's top economic goals is doubling U.S exports in five years, how to increase exports to China comes right at the head of that agenda, as reflected in the documents released during Xi's visit.

A parallel pattern also exists in investment. Europe is now the largest destination for Chinese companies' foreign investment. In 2011 it also accounted for 34 percent of China's outward investment in mergers and acquisitions. In contrast to this rising trend in Europe, China's investment in the U.S. fell from US $4.2 billion in 2010 to US $3.2 billion last year.

Why is the EU gaining more from trade and investment with China than the U.S.? It is clearly not due to economic factors. The U.S. has even more advanced industries than the EU that would generate a demand in China at least equal to that for the latter's products.