So, when Washington and Beijing engage in an economic battle, as they have for five years in a row, the rest of the world suffers, too. And when they hold a rare high-level summit, as Presidents Joe Biden and Xi Jinping will do this week, it could have global consequences.
There is no doubt that the global economy could benefit from a detente between the United States and China. Since 2020, it has suffered one crisis after another – the Covid-19 pandemic, rising inflation, rising interest rates, violent conflicts in Ukraine and now in Gaza. The global economy is expected to grow by 3% this year and 2.9% in 2024, according to the International Monetary Fund.
“Having the world’s two largest economies at loggerheads at such a fraught moment exacerbates the negative impact of the various geopolitical shocks that have hit the global economy,” said Eswar Prasad, professor of trade policy at Cornell University.
Hopes are rising that Washington and Beijing can at least calm some of their economic tensions at the Asia-Pacific Economic Cooperation summit, which begins Sunday in San Francisco. This meeting is scheduled to bring together 21 countries bordering the Pacific Ocean, which together represent 40% of the world’s population and nearly half of global trade.
The most prominent event will be Biden and Xi’s meeting on Wednesday on the sidelines of the summit, which is the first time the two leaders have spoken in a year, a period during which frictions between the two countries have worsened. The White House sought to lower expectations, saying it did not expect any breakthroughs.
At the same time, Prasad noted that the threshold for declaring a successful result is relatively low. He said: “Preventing any further deterioration in bilateral economic relations will be a victory for both sides.”
In 2018, the Trump administration began imposing tariffs on Chinese imports to punish Beijing for its actions in trying to replace American technological superiority. Many experts agreed with the administration that Beijing engaged in cyberespionage and inappropriately demanded foreign companies hand over trade secrets as a price for access to the Chinese market. Beijing responded to Trump’s sanctions with retaliatory tariffs, making American goods more expensive for Chinese buyers.
When Biden took office in 2021, he retained much of Trump’s confrontational trade policy, including tariffs on China. The US tax rate on Chinese imports now exceeds 19%, compared to 3% at the beginning of 2018, before Trump imposed his tariffs. Likewise, Chinese import taxes on US goods are now at 21%, up from 8% before the trade war began, according to calculations by Chad Bown of the Peterson Institute for International Economics.
One of Biden’s economic policy principles has been to reduce America’s economic dependence on Chinese factories, which came under pressure when the coronavirus disrupted global supply chains, and to solidify partnerships with other Asian countries. As part of this policy, the Biden administration last year drafted the Indo-Pacific Economic Framework for Prosperity with 14 countries.
In some ways, trade tensions between the United States and China are higher under Biden than they were under Trump. Beijing is deeply angered by the Biden administration’s decision to impose — and then expand — export controls designed to prevent China from obtaining advanced computer chips and the equipment needed to produce them. In August, Beijing responded with trade restrictions of its own: it began requiring Chinese exporters of gallium and germanium, the metals used in computer chips and solar cells, to obtain government licenses to send those metals abroad.
Beijing has also taken aggressive measures against foreign companies in China. Coordinating what appears to be a counter-espionage campaign, its authorities this year raided the Chinese offices of American consulting firms Capvision and Mintz Group, interrogated employees of Bain & Co., a consulting firm in Shanghai, and announced a security review of chipmaker Micron.
Some analysts are talking about a “decoupling” between the world’s two largest economies after decades of deep dependence on each other for trade. In fact, imports of Chinese goods into the United States were down 24% through September compared to the same period in 2022.
The dispute between Beijing and Washington has forced many other countries into a delicate dilemma: deciding which side to stand on when they actually want to deal with both countries.
The International Monetary Fund says such economic “fragmentation” is harmful to the world. The 190-nation lending agency estimates that higher trade barriers will shave $7.4 trillion from global economic output after the world adjusts to higher trade barriers.
These barriers are rising. The IMF said last year countries imposed nearly 3,000 new restrictions on trade, up from less than 1,000 in 2019. The agency expects international trade to grow just 0.9% this year and 3.5% in 2024 — down sharply from average. Annual for the period 2000-2019. By 4.9%.
The Biden administration insists it is not trying to undermine the Chinese economy. On Friday, Treasury Secretary Janet Yellen met with her Chinese counterpart, Vice Premier He Lifeng, in San Francisco and sought to pave the way for the Biden-Xi summit.
“It is our common desire, China and the United States, to create a level playing field and sustained, meaningful and mutually beneficial economic relations,” Yellen said.
Xi has reasons to try to restore economic cooperation with the United States. The Chinese economy is under severe pressure. Its real estate market has collapsed, youth unemployment is widespread, and consumer sentiment has declined. The raids on foreign companies have raised concerns among international companies and investors.
“With serious headwinds facing the Chinese economy and many American companies packing their bags and leaving China, Xi needs to convince investors that China remains a profitable place to do business,” said Wendy Cutler, vice president of the Asia Society Institute. Former American trade negotiator. “This is not going to be an easy sale.”
To complicate matters further, tensions between Washington and Beijing extend beyond the economy. Under Xi, the Chinese Communist Party has punished dissent in Hong Kong and the Xinjiang Islamic Autonomous Region. His government has made aggressive territorial claims in Asia, engaged in deadly border clashes with India and bullied the Philippines and other neighbors in parts of the South China Sea it claims as its own. It has increasingly threatened Taiwan, which it views as a breakaway Chinese province.
Tensions between the United States and China may escalate next year with presidential elections in Taiwan and the United States, where criticism of Beijing is among the few areas that unite Democrats and Republicans.
Xi’s policies appear to be costing China significant costs in the battle of global public opinion. In a recent study of people in 24 countries, the Pew Research Center reported that perception of the United States was more positive than China in all but two countries (Kenya and Nigeria).
Can China change course?
Speaking at the Center for Strategic and International Studies in Washington, Rep. Raja Krishnamurthy, an Illinois Democrat who serves on a House committee that monitors China, noted optimistically that Xi had reversed his position before — most notably in declaring an abrupt end to brutal repression. Zero coronavirus policies that crippled the Chinese economy last year.
“We have to give this possibility a chance, even as we hedge and protect our interests,” Krishnamurthy said. “And that’s what I hope we’ll also see come out of this meeting.”
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