The Contentious U.S.-China Trade Relationship
Backgrounder

The Contentious U.S.-China Trade Relationship

Trade between the world’s two biggest economies has ballooned in recent decades, bringing significant benefits but also frictions over China’s state-led development and calls to rethink the relationship.  
A Chinese worker rushes to produce stainless steel products for export.
A Chinese worker rushes to produce stainless steel products for export. Costfoto/Future Publishing/Getty Images
Summary
  • U.S.-China trade has exploded in the two decades since China joined the World Trade Organization.
  • This trade has benefited U.S. consumers and companies, but Beijing’s state-led development has created a range of problems, leading Washington to push back.
  • President Trump wielded tariffs in an effort to reshape the bilateral relationship. President Biden wants a more multilateral approach but is still crafting his response.

Introduction

U.S. trade with China has grown enormously in recent decades and is crucial for both countries. Today, the United States imports more from China than from any other country, and China is one of the largest export markets for U.S. goods and services. This trade has helped the United States in the form of lower prices for consumers and higher profits for corporations, but it has also come with costs.

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Though U.S. consumers benefited from the flood of cheaper goods from China, millions of Americans lost their jobs due to import competition. The United States has long accused China of pressuring American companies to hand over their technology, or pilfering it outright. The optimism that accompanied China’s entry into the World Trade Organization (WTO) twenty years ago has vanished as Beijing has embraced state-led development, pouring subsidies into targeted industries to the detriment of U.S. and foreign companies. Meanwhile, investment by Chinese companies has increasingly raised national security concerns. In the wake of President Donald Trump’s aggressive approach, the future of the economic relationship is uncertain.

What is the history of the U.S.-China trade relationship?

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For thirty years following the establishment of the People’s Republic of China in 1949, there was virtually no trade between the two countries as Washington had severed ties with the communist government in Beijing. In 1979, the United States and China normalized relations, prompting an explosion of trade over the next four decades from a few billion dollars worth to hundreds of billions of dollars annually. 

China also began a decades-long process of economic reform in the late 1970s under the leadership of Deng Xiaoping. His government loosened state control over the economy and allowed private industry to develop. Chinese policymakers aimed to boost trade and investment, and in 1986 Beijing applied to rejoin the General Agreement on Tariffs and Trade, the WTO’s predecessor. After protracted negotiations with the United States and other WTO members, China joined the WTO in December 2001. As a condition of admission, Beijing committed to a sweeping set of economic reforms, including steep tariff cuts for imported goods, protections for intellectual property (IP), and transparency around its laws and regulations.

At the time, U.S. President Bill Clinton and his advisors contended that bringing China into the global trading system would not only benefit the United States, but also foster economic and ultimately democratic reform in China. Still, the move was opposed by U.S. labor unions and many congressional Democrats, who argued that China’s weak worker and environmental protections would incentivize similar practices elsewhere and bring about a “race to the bottom.”

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Even before China joined the WTO, trade between the two countries was growing. But WTO membership ensured “permanent normal trade relations,” thereby providing U.S. and foreign companies additional certainty that they could produce in China and export to the United States. Trade surged: the value of U.S. goods imports from China rose from about $100 billion in 2001 to $500 billion in 2017. This leap in imports is due in part to China’s critical position in global supply chains; Chinese factories assemble products for export to the United States using components from all over the world.

What are the benefits of this trade?

U.S. consumers have benefited from lower prices, and U.S. companies have profited immensely from access to China’s market. In a 2019 study, economists Xavier Jaravel and Erick Sager found that increased trade with China boosted the annual purchasing power of the average U.S. household by $1,500 between 2000 and 2007. China is now the third-largest export market for the United States, behind Canada and Mexico. A 2017 study [PDF] commissioned by the U.S.-China Business Council, an industry group, found that exports to China supported nearly two million jobs in the United States.

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American companies earn hundreds of billions of dollars annually from sales in China—money they can then invest in their U.S. operations. Chinese companies have invested tens of billions of dollars in the United States, though this investment has dwindled in recent years amid heightened U.S. government scrutiny. 

For China, the gains from trade with the United States and the rest of the world have been tremendous. Since 2001, China’s economy has grown roughly five-fold, adjusted for inflation, and it is now the world’s second largest, behind only the United States. (By some measures, it is the largest.) Hundreds of millions of people have escaped extreme poverty as a result of this growth.

What issues has it created?

Though the trade relationship has undoubtedly brought benefits, it has also presented the United States and other countries with a host of problems. 

Manufacturing job losses. Research led by economists David Autor, David Dorn, and Gordon Hanson found that the disruption from boosting trade with China, the so-called China Shock, was more pronounced than that from increased trade with other countries, such as Japan. This was due to the speed at which imports rose, the vast size of China’s low-wage workforce, and the range of affected industries. Their research shows that political polarization also increased in the areas of the country most harmed by competition with China, which some analysts say helped to spur the rise of Donald Trump and populist political forces. CFR’s Edward Alden and other experts say the United States lacks effective policies for managing these economic disruptions.

Technology transfers. U.S. policymakers are increasingly worried about Chinese efforts to acquire U.S. technology to achieve Beijing’s industrial policy goals and bolster China’s military. Washington has repeatedly accused Beijing of requiring American companies to share their technologies as a condition of doing business in China, known as forced technology transfer. Government-backed hackers have also stolen IP from U.S. companies to help rival Chinese firms. U.S. regulators have become wary about Chinese investment in U.S. high-tech companies and critical infrastructure.

Subsidization and state-owned enterprises. To achieve its economic goals, the Chinese government has poured subsidies into a range of industries with the aim of creating “national champion” companies. Some experts argue that these subsidies are wasteful, but they can be disruptive to other countries whose companies cannot compete against such levels of state support. The United States argues that many Chinese state-owned enterprises are effectively arms of the government and, unlike their private competitors, do not make decisions based on market forces.

Currency manipulation. Many economists say China kept the value of its currency, the renminbi, artificially low in the decade after it joined the WTO by accumulating U.S. dollar reserves. A weaker currency makes Chinese imports cheaper and U.S. exports more expensive, thereby contributing to the trade deficit.

Labor and human rights violations. The United States has long been critical of China on human rights issues, and U.S. labor groups have persistently complained about poor working conditions in China. These concerns have resurfaced on the trade agenda in recent years with reports of forced labor in Xinjiang, where China is repressing millions of Uyghurs

“You start to see how big a problem it is to try to live in this world in which China owns more and more markets and you can’t get in.”
Jennifer Hillman, CFR Senior Fellow

At the heart of the trade conflict are the two countries’ competing economic systems. As journalist Paul Blustein details in his book Schism: China, America, and the Fracturing of the Global Trading System, Chinese officials enthusiastically implemented Beijing’s WTO commitments at first, engineering a profound transformation of the economy and legal system. But even as China liberalized its economy in some ways—giving rise to a thriving private sector—it never fully embraced the invisible hand of the market. The state, dominated by the Chinese Communist Party, oversees the economy in unique ways [PDF], including through centralized management of state-owned enterprises, control over financial institutions, and a powerful economic planning commission. China’s leaders say their system is necessary to improve the lives of the Chinese people and is in line with the economic strategies used by Western countries at similar stages of development.  

CFR’s Jennifer Hillman says China has perfected the model of obtaining Western technology; it uses it to develop domestic companies into giants, and then unleashes them into the world market—at which point foreign companies can no longer compete. Hillman cites 5G networks as an example of an industry in which China dominates. “You start to see how big a problem it is to try to live in this world in which China owns more and more markets and you can’t get in,” she says. The United States has been the most vocal critic of Chinese trade practices, but other countries including European Union (EU) members and Japan share these concerns.

How has the United States responded?

The United States has attempted to address its trade concerns with China through a mixture of negotiation, disputes at the WTO, heightened investment scrutiny, and tariffs. The relationship grew more combative under President Donald Trump, who wielded unilateral tariffs far more extensively than his predecessors. 

As part of China’s entry into the WTO, U.S. negotiators demanded a temporary safeguard that could be used to limit imports from China, but this was hardly used before it expired twelve years later. Blustein writes that the George W. Bush administration was worried about cascading calls from U.S. companies for better protection and needed Beijing’s support for other foreign policy objectives, including the global war on terror. The Bush administration imposed some tariffs on a range of Chinese goods that were subsidized or “dumped” (i.e., sold at an abnormally low price). It also launched high-level dialogues with China to address trade issues.

These dialogues continued under President Barack Obama, whose administration cracked down on Beijing. Obama used the special safeguard to impose tariffs on imported tires, and his administration won a number of WTO disputes against China. Scrutiny of Chinese investment also increased, with Obama taking the rare step of blocking two Chinese acquisitions on the recommendation of the Committee on Foreign Investment in the United States (CFIUS), an interagency body that screens investments on national security grounds. His administration also concluded negotiations for the Trans-Pacific Partnership (TPP), a mega-regional trade agreement that it billed as a way to confront China on trade. 

President Donald Trump took an even more assertive approach, imposing tariffs on hundreds of billions of dollars worth of Chinese goods. The two countries eventually negotiated what they called a “Phase One” agreement, which many experts have criticized as punting on core U.S. concerns in exchange for a commitment by China to purchase an additional $200 billion worth of U.S. goods—which it has failed to live up to

In 2019, under Trump, the Treasury Department designated China a currency manipulator for the first time in decades, though many economists said Beijing was no longer devaluing its currency. Meanwhile, the U.S. Congress—responding mainly to fears over Chinese acquisition of U.S. technology—passed legislation expanding the role of CFIUS and tightening controls over high-tech exports. 

A harsh critic of multilateral trade deals, Trump withdrew the United States from the TPP. He also maintained the Obama administration’s block on new appointments to the WTO’s Appellate Body, which has crippled the organization’s dispute settlement system. U.S. frustration with the Appellate Body stems in part from how the body has ruled [PDF] on the use of U.S. trade remedy laws against China. Additionally, the Trump administration coordinated with the EU and Japan to craft new multilateral rules for addressing Chinese trade practices including tech transfer and the use of industrial subsidies. 

What lies ahead for U.S.-China trade?

President Joe Biden has largely maintained his predecessor’s approach to trade with China. Tariffs on Chinese goods and U.S. export controls remain in place, as do China’s retaliatory tariffs on American exports, and the Biden administration is in talks with Beijing over its compliance with the Phase One deal. In late 2021, Biden signed a law banning imports from China’s Xinjiang region unless companies can prove no forced labor was used. His administration has reportedly struggled to craft a trade approach to China due to internal disagreement, with some officials pushing for new trade deals in the region and others leery of them. The administration plans to launch an economic framework for the Indo-Pacific in lieu of rejoining the TPP, though details are still scant.

The rise of China, as well as a new appreciation for the fragility of global supply chains laid bare by the COVID-19 pandemic, has contributed to the revival of industrial policy in the United States. Legislation working its way through Congress, for example, would invest tens of billions of dollars in research and development and domestic production of high-tech goods, such as semiconductors, with the aim of improving U.S. economic competitiveness vis-à-vis China. 

While many trade experts panned Trump’s unilateral approach to confronting trade abuses, some have questioned whether the WTO system is sufficient to address U.S. grievances and whether China’s economic model is fundamentally incompatible with global trading rules. The concept of a subsidy, for example, presupposes a bright line between the state and private industry that is increasingly blurry in China. In a recent report, the Office of the U.S. Trade Representative (USTR) said it has become “widely accepted in the United States that WTO rules do not, and cannot, effectively discipline many of China’s most harmful policies and practices.” As a result, the USTR is considering ways to reform U.S. trade laws to counter these practices, the report states.

CFR’s Hillman argues that allowing China into the WTO was not a mistake, but that the United States erred by failing to use the tools at its disposal to deter China’s unfair trade practices sooner. Although the WTO remains a valuable forum for the United States, Washington might need to look elsewhere, Hillman says. Some experts have suggested a compact among like-minded countries that would function in parallel with the WTO. Some politicians advocate for more extreme options; Senator Josh Hawley (R-MO), for example, has called for abolishing the WTO altogether.

Henry Gao, a professor at Singapore Management University and an expert on Chinese law and international trade, says that the use of unilateral tariffs under Trump (and now Biden) damages the United States’ image as a champion of free trade and cedes moral authority to China. Hillman and Gao agree that it was a mistake for U.S. leaders to assume that WTO membership would fundamentally change China. “I would take a step back and ask: was the WTO even designed to convert countries’ economic systems?” Gao says. “My answer to that is no.” Gao argues that China’s model is unsustainable, and says that the United States should therefore be patient and work within the WTO, negotiating new rules as needed. “If you try to compete with China by becoming China, what is the point even if you win in the end?” Gao says.

Recommended Resources

In an influential 2016 paper [PDF], Harvard Law Professor Mark Wu examines the inner workings of “China, Inc.” 

Journalist Paul Blustein examines the fractious U.S.-China trade relationship in his book Schism: China, America, and the Fracturing of the Global Trading System

In a series of papers, economists David Autor, David Dorn, and Gordon Hanson study the effects of increased trade with China on U.S. workers.

Singapore Management University’s Henry Gao looks at China’s changing view of the WTO in this November 2021 paper.

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