More than just tariffs: Putting the U.S.-China relationship in broader context

If all we did was read the headlines in the financial press over the past year, we might get the impression that U.S.-China relations were primarily about tariffs and trade. In fact, these issues are just one part of a much larger and complex relationship.

2019 marks the 40th anniversary of the establishment of “normal” diplomatic relations between the United States of America and the People’s Republic of China. Since then, the ties between the two countries have grown at an astounding pace. U.S.-China trade has grown from just north of US$2 billion in 1979 to US$636 billion in 2017. U.S. commercial direct investment in China has grown from virtually zero to over US$256 billion, while Chinese investment in the U.S. has also grown from close to zero to over US$145 billion¹.

The social and cultural ties between the two countries have also expanded greatly. In 2018, an estimated 3.2 million Chinese citizens visited the United States, while an estimated 2.3 million Americans visited China². Forty years ago, tourism between the U.S. and China was virtually non-existent. Today, over 360,000 Chinese nationals are studying in U.S. universities, making up about 33% of all foreign students in American institutions of higher learning³. Meanwhile, an estimated 200,000 American K-12 students are currently studying Mandarin Chinese⁴.

The integration of China into the modern global economy has been one of the most important economic developments of the 20th and 21st centuries. China’s robust economic growth starting in the 1980s has been one of the main engines of the global economy and has helped lift hundreds of millions of people out of poverty in China and other developing countries.Today, China is an indispensable member of the global economic system: according to the World Bank, no other country has contributed more to global GDP growth since 2008⁵.

The U.S.-China relationship is complex because it extends far beyond trade into many other areas, most notably geopolitics. Both the United States and China aspire to be the major geopolitical power of the 21st century.This will likely lead to ongoing competition between the two countries in numerous areas, including economic, diplomatic, military, cultural and other matters.While there are elements in the U.S.-China relationship that are competitive, this does not mean that the relationship as a whole must be strongly adversarial.

The importance of a healthy U.S.-China relationship to the global economy cannot be overstated.As can be seen in Table 1, the United States and China are the two dominant economies in the world today, accounting for a combined 44% of global GDP. The U.S. is the largest economy at 26% of global GDP and China is the 2nd largest at 18% of GDP⁶. It is important to note that using an alternate GDP measure, purchasing power parity (PPP), which accounts for the differences in costs across countries, China would be considered the largest economy in the world. The U.S. and China also account for over 50% of today’s global GDP growth⁷.

Table 1: The Largest Economies in the World (GDP in US$ Trillions*)

Country	2018 GDP	% of Global GDP
United States	20.4	26%
China	14.0	18%
Japan	5.1	6%
Germany	4.2	5%
United Kingdom	2.9	4%
France	2.9	4%
India	2.9	4%
Italy	2.2	3%
Brazil	2.1	3%
Canada	1.8	2%
Total World	80.0	100%

Behind the recent move by the U.S. government to impose tariffs on China is a sense that China has benefited greatly from its inclusion into the global trading and economic system while not providing the United States with full and equal access to its market, as evidenced by the large U.S.trade deficit with China.Another major U.S. grievance is that China has appropriated American technology, often through unfair means.

From the Chinese side, there is a feeling that the underlying motivation behind U.S. actions is an effort to contain China’s rise as a world power and as a potential challenger to U.S. global supremacy. China is a proud and ancient civilization with a 5,000 year history. As recently as the early to mid 19th century (a relatively short time ago from the perspective of Chinese history), China was the largest economy in the world. Many in China aspire to return to this leading global position.

Whatever the grievances of each side, our review of history makes clear that tariffs are not the answer. They will ultimately lead to lower economic growth, higher costs for consumers and increased global financial and economic uncertainty. A recent study published by the U.S. Chamber of Commerce estimated that an escalating tariff scenario could result in the loss of US$1 trillion in U.S. GDP (vs. its baseline potential) over the course of 10 years(8). Ongoing economic antagonism between the United States and China is not good for either side and will cause everyone to lose.

The U.S.-China relationship is complex and will no doubt produce its fair share of challenges in the future. Ultimately, it will be important that both countries find the right balance between competition and cooperation. Much is at stake: the future success of the global economy depends to a large extent on a constructive relationship between its two most important members.