U.S.-China Economic Tensions—Will Biden Get Right What Trump Got Wrong?

Although President Biden has vowed to reverse many of Trump's policies, both administrations see China as a strategic threat and great-power rival. This reflects popular sentiments expressed in various polls that China has become an "overwhelming geopolitical concern."¹ Biden has characterized the U.S.-China confrontation as "a battle between the utility of democracies in the twenty-first century and autocracies."² At the same time, Biden wants to avoid a total collapse in U.S.-China relations since China is a partner as well as competitor and rival, depending on the issue. If tensions are inevitable, then Biden's challenge is to differentiate between real issues where progress is desired and several misguided concerns that absorbed Trump's attention.

The Trump administration's misguided concerns

The Trump administration's first mistake was failing to recognize that trade deficits are not the central problem. President Trump's trade war with China was fueled by his belief that China was responsible for the United States' huge trade deficits, which contributed to lost manufacturing jobs and reduced competitiveness.³ However, trade deficits are not a good indicator of the state of the economy.⁴ For example, when an economy is doing well, increasing household incomes result in more imports and larger trade deficits. Furthermore, the United States has been running trade deficits for over forty years, long before China became a major economic power and exporter. In other words, the trade balances of the United States and China are not linked. When U.S. trade deficits soared in the late 1990s and early 2000s, China was not running significant trade surpluses. Later, when China's surpluses rose sharply, U.S. deficits declined. U.S. trade balances are largely driven by budget deficits and China's balances by rising household savings rates with urbanization—factors that have little to do with one another.⁵

Even if the goal had been to reduce the bilateral trade imbalance, the Trump administration's policy would still have made little sense. China cannot buy enough from the United States to bridge the trade deficit, in part because the latter does not produce enough of the high-end consumer goods or the raw materials that the former desires. Instead, Europe supplies China with much of its high-end consumer goods while Latin America and Africa provide much of its raw materials.

Moreover, U.S. restrictions prevent sales of the high-tech products China wants due to reasons of national security. Such restrictions may be strategically aimed, but their impact on trade imbalances should not be underestimated.⁶ Sales of military equipment generated $175 billion for the United States in 2020.⁷ Aside from the understandable banning of military sales to China, U.S. export earnings are reduced by tightening licensing requirements imposed on China's purchases of hi-tech products for civilian use. In addition, more than 300 Chinese companies have been added over the past year to the Commerce Department's Entity List, which further restricts access to U.S. hi-tech products.⁸ Cutting off sales to Chinese firms like Huawei, ZTE, and other industrial leaders not only threatens their operational existence, but also represents substantial lost revenues for American suppliers. The U.S. Semiconductor Association, for example, estimates losses of $30–50 billion if such restrictions are fully implemented.⁹ Therefore, it is no surprise that Trump's Phase One Trade Agreement committing China to buy more failed to achieve its desired effect of boosting U.S. exports to China and lowering its overall trade deficits.¹⁰

Second, Trump echoed popular but misguided sentiments that U.S. firms have been investing too much in China at the expense of the U.S. economy. Over the past two decades, only 1–2 percent of U.S. foreign investment has been going to China.¹¹ By contrast, the European Union (EU), which is comparable to the United States in economic size, has been investing roughly twice as much. So the question is why the United States invests so little in China rather than so much...