How Will China’s Economic Slowdown Affect U.S.-China Trade Relations?

December 18, 2024

China’s economy, once the undisputed engine driving global growth, has recently experienced a significant downturn. Since President-elect Donald Trump assumed office in 2017, various factors have combined to alter the U.S.-China trade relationship fundamentally. Most notably, China’s share of the global economy has decreased for the first time in over forty years. It plummeted from its peak of over 18 percent of global GDP in 2021 to approximately 16 percent, reshaping the trade dynamics between these two superpowers. This economic slowdown in China has significant implications for its trade relations with the United States, affecting everything from tariff strategies to supply chain alignments.

Economic Decline in China

The collapse of China’s property sector in 2021 marked a pivotal moment in the country’s economic trajectory. This event unveiled the risks embedded in China’s rapid urbanization and construction booms, leading to a cascade of economic challenges that culminated in extensive financial distress. Compounding these issues were the stringent COVID-related restrictions imposed in 2022. Though aimed at controlling the pandemic, these restrictions significantly hindered economic activities, ratcheting up the pressure on an already stressed economy. When these restrictions were finally lifted at the end of 2022, domestic demand and household consumption showed only a marginal rebound, pointing to deeper systemic issues.

Official GDP growth data from China suggests a less severe economic situation than reality, showing minor increments. However, the stark trade imbalances and the decline in domestic prices paint a much graver picture. With waning domestic demand, China has faced the urgent need to pivot back to its export-driven growth model. China’s inability to absorb its massive industrial output domestically has made overseas markets increasingly crucial. This greater reliance on exports to sustain its economy may expose it to new vulnerabilities, especially as global market conditions become less favorable.

U.S. Leverage in Trade Relations

The weakening of China’s economy presents the United States with unique opportunities to recalibrate its strategy toward Beijing. The U.S., boasting robust consumer and financial markets, can leverage these strengths to offer allies and partners a viable alternative to the Chinese export surplus. Rising global concerns about China’s dominance in manufacturing supply chains have created an environment conducive to Washington’s “de-risking” strategy. This strategy aims to limit the economic exposure of the U.S. and its allies to China, promoting more diversified and secure supply chains.

For the de-risking strategy to be effective, the Trump administration must carefully consider its tariff approach. Proposals to impose 60 percent tariffs on all Chinese imports or 10 percent tariffs on all other imports are fraught with risks. Such sweeping measures could trigger adverse economic reactions, driving up costs and depressing demand. A more prudent approach would involve selective tariffs targeting specific sectors where Chinese exports undermine the competitiveness of Western industries. Coupling this with an inward investment strategy to bolster critical supply chains, excluding China, could strike a balance between economic pressure and market stability.

Economic Symptoms and Responses

Since the property sector’s financial crunch, the ripple effects have extended across related industries such as steel, cement, and home appliances. Local governments in China have found themselves constrained in infrastructure investment due to elevated levels of debt. GDP data from China, riddled with inconsistencies, suggests that the reported growth metrics may be overstated. Practical economic indicators point to a contraction in 2022, with only a sluggish recovery forecasted for 2023. These indicators include reduced industrial output and slowed infrastructure projects, revealing the fragility of China’s economic resurgence.

In response, Beijing has rolled out aggressive economic stimulus measures that include interest rate cuts and domestic consumption subsidies. However, these efforts may fall short of generating the substantial and sustainable consumer spending needed to invigorate the economy fully. The need to turn to foreign markets has grown more pronounced, with China aiming to diversify its exports predominantly to Southeast Asia. However, much of this diversification appears superficial, with goods often rerouted through third countries to evade tariffs imposed by trading partners like the U.S.

Redirecting Exports and Investment

As a countermeasure against U.S. trade restrictions, Chinese firms have increasingly invested abroad, establishing factories in countries such as Mexico and Vietnam. This strategic move allows Chinese companies to continue exporting to the U.S. while avoiding hefty tariffs. By setting up manufacturing centers in these countries, Chinese firms not only maintain their market presence but also mitigate some of the financial strain caused by U.S. trade barriers. This tactic highlights the lengths to which China is willing to go to preserve its export-driven growth model amidst increasing global resistance.

Meanwhile, the U.S. and its allies are increasingly viewing reduced economic dependency on China as essential for national security. This perspective aligns with ongoing efforts to rebuild diversified and secure supply chains. Many countries now see a congruence of interests with the U.S. in addressing Chinese economic practices, particularly in light of China’s aggressive growth strategies. Developed economies and manufacturing nations are more inclined to adopt protective measures against Chinese exports, reflecting a broader trend toward economic nationalism and trade protectionism.

Technological Competition and Economic Stimulus

In the realm of advanced technologies, the U.S. has made significant strides in reinforcing its leadership. Legislation such as the CHIPS Act and the Inflation Reduction Act demonstrates a concerted effort to maintain a technological edge over China. Alongside these legislative measures, there is an increasing imposition of export and investment controls designed to curb China’s access to U.S. technologies. These policies aim to prevent China from leveraging American advancements to bolster its own technological capabilities, a crucial element in the ongoing U.S.-China rivalry.

China, on the other hand, has responded with more aggressive economic stimulus efforts to spur growth. With internal demand remaining weak, Beijing’s measures include substantial interest rate cuts and subsidies aimed at domestic consumption. Yet, despite these efforts, generating substantial, sustainable consumer spending has proven elusive. To counteract U.S. trade measures, China is expected to employ various tools, including currency devaluation and sophisticated trade manipulations. Investment in third countries by Chinese firms may provide temporary relief but faces the looming threat of further U.S. trade restrictions.

Strategic Implications for U.S. Trade Policy

China’s economy, once the unstoppable force propelling global growth, has recently hit a significant slump. Since Donald Trump took office in 2017, a variety of factors have fundamentally altered the trade relationship between the United States and China. Notably, China’s portion of the global economy has dropped for the first time in over four decades. At its peak in 2021, China contributed more than 18 percent to the world’s GDP. However, this share has since declined to roughly 16 percent, substantially shifting the trade equilibrium between these two economic giants.

This slowdown in China’s economic growth has profound effects on its trade connections with the U.S., influencing everything from tariff policies to supply chain configurations. The drop in China’s economic contribution signals a notable shift in the global economic landscape. With China no longer the unchallenged driver of global growth, stakeholders from various sectors are now re-evaluating their strategies to adapt to the changed environment. These adjustments are crucial for both nations, as they navigate the complexities of a transformed trade relationship, with potential impacts on broader economic policies and global market stability.

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