Is China the sole beneficiary of Sino-US economic ties?

Did the US make a strategic blunder by facilitating China’s economic rise? Part of the Indian strategic establishment seems to think so. But the reality is more complicated.

China’s decision to not oppose (and implicitly back) Russia in the ongoing impasse over Ukraine might be the beginning of a new alliance between China and Russia to challenge US hegemony in the strategic world order. The fact that China’s current strategic capabilities would not be what they are had the US not facilitated China’s economic rise by throwing open its export markets to the latter has raised a question of whether the US made a strategic blunder in doing so? Part of the Indian strategic establishment seems to think so. But the reality could be slightly more complicated. Here are three charts which explain why.

It is perfectly plausible that American capital which relocated to China did not lose its profits from selling to domestic consumers in the US economy. (AP File Photo)

US’s trade deficit with China has increased significantly

In 1992, the earliest period for which data is available in the WITS database of the World Bank, China actually had a small trade deficit with the US. Chinese exports to the US were valued at $8.6 billion against US imports of $8.9 billion. By 2000, China’s exports to the US increased to $52.2 billion, at least double the value of its imports from the US. The gap widened to more than three times by 2019, the latest period for which data is available in WITS. What is also worth noting is the fact that while the US continues to be the biggest export destination of China, its significance is much smaller when it comes to imports in China. None of this is new information and China’s trade surplus with the US is widely acknowledged as an important tailwind to its export-led rapid growth phase.

But it does not capture the gains to American companies from FDI opportunities and access to Chinese markets.

A trade deficit, when seen as part of the national income identity – GDP is the sum of private and government consumption, capital formation and net exports – entails a loss of income at the country level. However, this need not be the case for individual stakeholders in the economy.

For instance, a lot of Chinese exports into the US are actually Made in China products of American companies; iPhones are a good example. It is perfectly plausible that American capital which relocated to China did not lose its profits from selling to domestic consumers in the US economy. In fact, it stood to make additional gain by moving to China: the opportunity to capture the Chinese market too.

This issue was highlighted in a 2019 article published on the World Economic Forum’s website. “There are serious problems with the simplistic cross-border trade-deficit metric – not least its failure to account for the business conducted within a foreign country’s borders. In 2016, (the latest year for which data are available), US multinationals, including their foreign affiliates, generated $5.8 trillion in sales in foreign countries. That figure not only dwarfs direct US exports, which amounted to $2.2 trillion in 2016; it exceeds the $4.1 trillion in total sales by all foreign multinationals in the US market. When it comes to sales in foreign markets, therefore, the US had a “surplus” of $1.7 trillion in 2016 – three times larger than the US trade deficit of $502 billion that year. This has meant major profits for US multinationals: the ratio of overseas sales to foreign direct investment (FDI) implies that companies are doubling their initial investments”, the article said.

China was among the best markets for US companies on this count. “In 2016, European sales by US multinationals reached $2.8 trillion, or just under half the global total. But FDI amounted to $3.3 trillion, meaning that every dollar of FDI produced $0.85 of sales… US multinationals recorded $1.58 trillion in sales in the APAC region, while delivering $881 billion of FDI. For every dollar of investment in APAC, US multinationals gained $1.80 in sales… One country is driving up this average: China. In 2016, US multinationals made $345.3 billion in sales, while investing $97.3 billion. That translates to an impressive sales-to-FDI ratio of 355%, up from 267% in 2009”, the article added.

These numbers, provide the much-needed context for the $285 billion worth of US FDI which has gone into China between 1990 and December 2020. While there has been a recent surge in Chinese FDI in the US as well -- $85 billion of the cumulative FDI of $175 billion during this period came in just 2016 and 2017 – US FDI into China had a greater greenfield content than its Chinese counterpart in the US. This suggests that American capital actually went to China to exploit cheaper production opportunities.

Workers, especially in manufacturing have lost in a big way though

Even as American companies made billions of dollars through trade with China, workers in the US, especially blue-collar ones, suffered heavily due to trade with China. According to a 2020 report by the Economic Policy Institute, the growing trade deficit with China cost the US 3.7 million domestic jobs between 2001 and 2018. Of these, 1.7 million jobs were lost since 2008 alone, the year when the global financial crisis hit. Three-fourths (75.4%) of the jobs lost between 2001 and 2018 were in manufacturing (2.8 million manufacturing jobs lost due to the growth in the trade deficit with China). The report shows that job losses due to Chinese imports were spread across the country and jobs displaced as share of total employment in the state ranged from 0.85% to 3.66% of total state employment.

State-wise job losses in US due to Chinese imports.

“Between 2001 and 2011 alone, growing trade deficits with China reduced the incomes of directly impacted workers by $37 billion per year, and in 2011 alone, growing competition with imports from China and other low wage-countries reduced the wages of all U.S. non–college graduates by a total of $180 billion”, the article said.

To be sure, Chinese imports or outsourcing at large is not the only reason for the fall in labour share of incomes in the US. A McKinsey Global Institute paper shows that three-fourth of the decrease in labour share in the US since 1947 has come since 2000 but outsourcing or globalization is not the major reason behind this change. Other factors such as supercycles (33%), rising depreciation and rise of intellectual property product capital (26%), superstar effects and consolidation (18%), capital substitution and technology (12%) have had a bigger role in the decline of labour share than globalization and labour bargaining power (11%), it added.

Private interest undermining national interest in the US?

The statistics given above clearly demonstrate that the Sino-US economic relationship in the last two decades has been extremely beneficial for American capital, even as American workers have suffered. The irony is that in its pursuit of higher profits, American capital might have ended up undermining the strategic prowess of their nation-state. Whether, and to what extent the US will force its private capital to decouple from the Chinese economy is a question which needs to be answered in this context.

As of now, it is the Chinese state which seems to have seized the initiative on this front through its decisions such as the ban on companies trying to float their IPOs in the US. Not being a democracy and by extension, having no dependence on private capital for political finance is clearly a big advantage the Chinese state has over the US where big business is indispensable for political funding.