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U.S.-China Competition and Effects on U.S. Economy

May 21, 2021

On May 18, President Biden spoke in Michigan while touring the Ford Rouge Electric Vehicle Center before the unveiling of the electric F-150. During his remarks, he repeated a common theme of his speeches: “We’re at a great inflection point in American history.”

He later pointed out that China has the leading market in electric vehicles and the top manufacturer of their batteries. He continued, “And they think they’re going to win. Well, I got news for them: They will not win this race. We can’t let them. We have to move fast, and that’s what you’re doing here.” The speech follows many previous remarks made by Biden and his administration calling on the U.S. to improve its competitiveness against China, by investing in infrastructure, innovation, technology, green energy and more.

There is a high level of support for policies aimed at strengthening the U.S. in relation to China. On May 17, bipartisan legislation aimed at countering China advanced in the Senate. Senate Majority Leader Chuck Schumer said, “We can either have a world where the Chinese Communist Party determines the rules of the road for 5G, artificial intelligence and quantum computing — or we can make sure the United States gets there first.”

Some legislators, however, have expressed concern about the increasingly harsh anti-China rhetoric and policies. Senator Bernie Sanders (I-VT)’s policy advisor Matt Duss said, “Progressives are cautioning against falling into the trap of treating conflict with China as a way to build bipartisan unity. We should listen now about the potential impact of a new U.S.-China Cold War.”

A group of 66 organizations wrote a letter cautioning against a new Cold War with China. The letter warns that “presenting the U.S.-China relationship as a zero-sum economic and military struggle between democracy and authoritarianism, as the Strategic Competition Act does, creates a political environment that leaves little room for [needed] cooperation” and that “the level of demonization and outdated Cold War thinking driving such efforts threatens to fuel destabilizing arms-racing and risks escalation towards a predictably devastating conflict.”

The group instead suggests a “focus on innovation, cooperation, and multilateral approaches, not hostility and confrontation, to address shared challenges and areas of concern. What everyday Americans need to secure their futures is not the suppression of the Chinese economy — one that is intimately intertwined with our own — but a fundamental restructuring of our own economy.”

Ambassador Chas W. Freeman, Jr. also recently penned an article condemning the U.S. China strategy. He said “America’s latest policies toward China will prove self-defeating” and quipped “Washington would be easy to spot in a game of chess. It’s the player with no plan beyond an aggressive opening. That is no strategy at all. The failure to think several moves ahead matters.”

He looked at the current state of both the U.S. and China and what it means for the relationship, offering advise for a better approach. He noted, “Competitive rivalry can raise the competence of those engaged. But antagonism, seeking to hamstring one other, is not beneficial. It entrenches hostility, justifies hatred, injures, and threatens to weaken both sides.” (Read full article here)

As U.S. officials strive to increase the U.S. economic standing and competitiveness, recent data indicates U.S.-China tensions have, in fact, harmed the U.S. economy. A report released by the National Bureau of Economic Research suggests that the tariffs imposed by President Trump as part of his trade war were more damaging to the U.S. economy than originally thought. The research looked at fluctuations in the stock market to analyze what the market expected would be the future effect of tariffs.

One of the authors explained, “the new analysis suggests that the tariffs’ impact on productivity is likely to be a factor holding down U.S. growth rates. The tariffs protect the least efficient firms and reduced their incentives to innovate while hurting the most successful U.S. firms, reducing their ability to innovate.”

According to Moody’s Investors Services, most of the cost of the U.S. tariffs on Chinese goods is actually being paid by U.S. companies, with 90 percent of the added cost absorbed by the U.S. importers rather than the Chinese exporters. Many of these tariffs have been left in place since President Biden took office.

The report added that U.S. exporters were also hit hardest by China’s retaliatory tariffs, since China targeted products they were able to source from other countries. Moody’s warned, “if the tariffs remain in place, pressure on US retailers will likely rise, leading to a greater pass-through to consumer prices.”

And, despite the tariffs, the U.S. trade imbalance with China has actually increased. Beyond the impacts of tariffs, U.S. businesses operating in China are also feeling the effects of U.S.-China tensions.

The American Chamber of Commerce (AmCham) China recently released their “2021 American Business in China White Paper.” The 500 plus page paper written in English and Chinese looks at the major challenges and issues faced by their members over the past year and outlines their policy priorities and recommendations.

The paper notes how deeply interconnected the U.S. and Chinese economies are, with over $560 billion in trade last year even with the pandemic. However, it also makes clear that the recent deterioration in the U.S.-China bilateral relationship has led to increased difficulties for U.S. businesses in China while leaving many of their ongoing business concerns unaddressed. In light of this, AmCham’s members see the U.S.-China bilateral tensions as the largest challenge they face.

AmCham China chairman Greg Gilligan said, “When U.S.-China bilateral relations worsen, we often find that the implementation in the marketplace, particularly in the provinces and municipalities where our members do business, will suffer. We feel that local officials are reacting to the levels of tension in the relationship and are taking the safer path, which is to offer preference to a domestic industry.”

AmCham China is calling for a reduction of “unproductive rhetoric” and increased open communication between the U.S. and China, while also trying to navigate the COVID-19 pandemic and new domestic polices in China such as the Foreign Investment Law and the dual circulation model.

Overall, AmCham China, “remain[s] opposed to any effort at outright decoupling of the U.S.-China relationship,” saying, “The costs of decoupling from losing trade and foreign investment benefits for both countries would be significant and are unlikely to generate clear winners. In order to be globally competitive, American producers and service providers must be able to compete in the China market on a level playing field. Nevertheless, extensive market access barriers, protectionism, an opaque regulatory system, and discriminatory enforcement continue to hinder the operations of U.S. business in China today.”