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CvT: It’s Time To Restore US-China Economic Dialogue

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While US-China relations remain tense, economic dialogue between the two nations appears to be resuming gradually. On May 27, Vice Premier of China Liu He and US Trade Representative Katherine Tai spoke via video call for the first time. On June 2, Liu He and US Secretary of Treasury Janet Yellen held a video call. A week later, Chinese Minister of Commerce Wang Wentao and US Secretary of Commerce Gina Raimondo followed up with a call of their own. Though details of these discussions have not yet been revealed, they are generally regarded to have delivered positive messages—a stark improvement from the Alaska meeting this past March.

All the more impressive, these calls were held while the two nations continue to wrestle over a host of geopolitical issues: President Biden recently expanded the restricted investment list of “Chinese Military Companies” from 44 to 59 entities; the US Senate passed the American Innovation and Competitiveness Act (formally the Endless Frontier Act) on June 9, which would invest US$250 billion in technology research to better compete with China; and various other hotbed areas of tension.

Such contradictory progressions within the US-China relationship are a product of economic empathy. While trade volume between the two nations has recovered rapidly, both still face rising inflation and a global semiconductor chip shortage. As such, the two competitors have temporarily shelved their differences in the face of a common enemy.  

Resuming Dialogue Within the US-China Trade Relationship

In the recent dialogues that have taken place, representatives from both the US and China have remained prudent. For the meeting on May 27 between Liu He and Katherine Tai, the Chinese statement only revealed that the two parties conducted a “candid, pragmatic, and constructive” conversation and believed in the importance of bilateral trade, while further agreeing to continue communicating. The US statement was also brief, stating that the two sides discussed the administration’s “worker-centered trade policy and ongoing review of the US-China trade relationship, while also raising issues of concern.” No further details were revealed. During the call between Liu He and Janet Yellen on June 2, the Chinese statement reiterated that both sides believed in the importance of US-China economic relations, and the statement from the US Treasury also confirmed that the US would support economic recovery and cooperative efforts that are in US interests. Following the call on June 10, the Chinese delegation said the two nations “agreed to promote the healthy development of trade and investment and cooperate in a pragmatic way to handle their differences.” This time, however, the US Department of Commerce made the US’ concerns more explicit, those being “China’s unfair and market-distorting industrial policies, the need to level the playing field for US companies in China, and the importance of protecting US technology from unauthorized users.”

Announcements from these high-level talks have not been too telling, but three points can be ascertained:

1. The US has not softened its attitude toward China.

The US has not eased its pressure on China to pursue its interests and aims to rebalance the US-China trade relationship to ensure US companies in China are fairly treated.

2. China continues to communicate openly with the US in regards to economic interests.

Though China had responded strongly against US claims against Chinese geopolitical and human rights issues, China has shown little intention to confront the US on areas of shared economic interests.

3. Both sides appear intent on adjusting the bilateral trade relationship.

While the two nations have significant grievances towards each other, a comprehensive economic decoupling between the world’s two largest economies is unrealistic. Though unclear what level of consensus can be achieved between the strategic competitors, due to the ongoing economic interests they share, high-level dialogue is widely anticipated to continue.

The Drivers of US-China Dialogue

To understand the drivers behind resumed US-China dialogue, it is important to first understand the context behind the bilateral relationship.

Recovering US-China trade volume

The US remains China’s third-largest trade partner, occupying 12.3% of China’s total trading volume. According to Chinese customs data, total trade volume between the two countries over the first five months of the year grew by 41.3% y/y to reach CN¥1.82 trillion, or US$285.5 billion.

Demand for each other’s goods remains strong as the bilateral trade relationship shakes the impact of the pandemic. Chinese exports to the US grew by 38.9% y/y to reach CN¥ 1.34 trillion, or US$ 210.2 billion. Meanwhile, imports from the US also grew by 48.5% y/y, reaching CN¥ 478.3 billion, or US$ 75 billion.

Poignantly, latest data shows that the US trade deficit with China has grown by 34.1% to CN¥860.51 billion, or US$135 billion, implying that a longstanding tariff regime leftover from the trade war has failed in its purpose and brings little benefit to either country. Therefore, it is in both nation’s interest to launch a second phase of trade negotiations.

Rising inflation helps none; threatens all

Rising inflation in China is being exported across the globe. Rapidly inflating commodity prices have taken their toll across the manufacturing industry as many producers opt to focus more on maintaining their reserves than filling orders. According to the National Bureau of Statistics, China’s producer price index (PPI) rose 9% y/y in May to reach its highest level in the last 12 years; by comparison, this figure remained comparatively stable at 1% in January. Although policymakers have attempted to stabilize prices by subsidizing small and medium-sized enterprises, letting the CNY appreciate, releasing reserve resources, and strengthening supervision on financial speculative activity, it remains to be seen how successful these initiatives will be in collaring inflation.

The US is undergoing a similar issue. The Consumer Price Index released on June 10 rose 5% y/y in May to its highest pace since 2008. Analysts believe that the inflation is short-term in nature – largely due to a booming economic recovery and the stimulus doled out throughout the pandemic. However, concerns over the current trade barriers are rising given a shortage of commodities from China would only impose an extra financial burden upon US shoppers as trade inefficiencies are passed onto the end consumer.

Coming together over a shortage of semiconductors

As demand for smart products grows and the slow burn of reduced production over the course of the pandemic comes to full flames, a global shortage of semiconductor chips has driven the US and China back to the negotiating table.

Increasingly sophisticated products have placed a severe strain on the competitive semiconductor industry. For example, in the automobile industry, a car only needed around 100 chips to function in the past; however, current models now need one-to-two thousand chips. According to Cox Automotive, new car production in North America decreased by about 3.4 million vehicles in the first three months of the year as chip supply shortages have left factories with insufficient inputs. More worryingly, it is estimated that the supply crunch for semiconductors may last until 2023. Meanwhile, chip prices in China have soared significantly as Huawei and SMIC—China’s main chip manufacturers—remain blacklisted by the US. Although the Chinese government has been eager to develop the technological capabilities to become self-sufficient in high-precision chip manufacturing, its efforts are unlikely to solve the shortage over the short-term.

A sharp supply crunch of semiconductors is a global issue that impacts both the US and China. As it becomes more difficult to obtain the crucial inputs that power a growing number of consumer electronics, the world’s two largest economies must confront the industry shortage together or risk facing skyrocketing consumer prices.

Looking Forward at US-China Relations

We can expect that the US-China relationship will continue to see unbalanced progression between mutual trade interests and political misalignment. Both nations will hold steadfast to their geopolitical ambitions, leaving little opportunity for trust between the two powers.

Nevertheless, shared economic interests are likely to drive progressive dialogue between policymakers on both sides of the Pacific. The three recent high-level talks have conveyed a sense of urgency, regardless of the conservative discourse that took place. While significant hurdles still plague the bilateral relationship, there also exists sufficient grounds for mutual cooperation under which a working bilateral relationship can be cultivated.

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