Reconsidering US-China Economic Relations

December 17, 2019

In 2019, the United States and China marked the 40th anniversary of the establishment of diplomatic relations. Since that time, the relationship has seen growing economic integration, anchored by reforms in China that introduced large elements of market capitalism to the economy. China’s admission to the World Trade Organization in 2001 was a critical turning point, opening global markets to Chinese goods and setting the stage for an accelerated flow of both inbound trade and foreign investment.

As part of this process, growing numbers of Chinese students were sent to universities in the United States, particularly for graduate study in fields such as computer science and engineering. As China’s economy grew, and with it the middle class, Chinese tourists also began traveling abroad to Asia, Europe, and the United States. Most recently, this engagement has taken the form of large flows of outbound Chinese investment, as China’s capital reserves grew and companies such as Tencent, Baidu, Huawei, and Alibaba expanded. China became a major exporter of capital, acquiring companies and investing in real estate and technology around the world. The three leading destinations for that investment in the United States were New York, Los Angeles, and the San Francisco Bay Area. Today, the Bay Area hosts a wide range of Chinese-funded development projects, companies, accelerators, and investment funds.

Supported by these developments and by government strategies, China has grown over this period to become the world’s second largest economy after the United States. At the end of 2018, China was the United States’ largest trading partner.

Despite this web of connections linking the two economies, the US-China relationship today stands at a crossroads where the further deepening of economic ties cannot be assumed and could be reversed. The reasons lie in politics as much as economics, as past assumptions regarding China’s political and economic direction are being questioned, and longstanding policy issues in the relationship have risen to the surface in ways that bring the priorities of the two governments into increasingly open conflict.
The power lies in both governments to address those issues and set a new foundation for economic cooperation. Whether or not that occurs, businesses on both sides must manage their way forward in an increasingly complex environment. The choices that governments and business make now will set the direction for how US-China economic relations will evolve in the next 40 years.

The current complex of issues in US-China economic relations falls into three major categories: trade, investment, and student and scientific exchanges. This brief analyzes each from the standpoint of current laws and policies, their impacts, and their possible resolution.