The U.S.-Chinese Economic Relationship Is Changing—But Not Vanishing – Foreign Affairs

The U.S.-Chinese Economic Relationship Is Changing—But Not Vanishing – Foreign Affairs. In boardrooms and executive suites, many fear that a sweeping and potentially painful economic rupture between China and the United States is inevitable. According to a 2023 survey of Western businesses by the insurance firm WTW, more than 40 percent of corporate respondents anticipated that economic decoupling between the world’s two largest economies would “greatly strengthen” in 2023, up from under 15 percent in 2022.

In recent weeks, the Biden administration has sought to allay these concerns. In an April speech on economic policy, U.S. National Security Adviser Jake Sullivan made clear that the United States is “for de-risking, not for decoupling,” a formulation first articulated by European Commission President Ursula von der Leyen. Sullivan explained that U.S. export controls would remain “narrowly focused on technology that could tilt the military balance,” adding that “we are not cutting off trade.” One week earlier, U.S. Treasury Secretary Janet Yellen argued that the United States did not seek to fully decouple from China, an outcome that she warned would be “disastrous” and “destabilizing” for the world. The United States and its allies are now beginning to sing from the same sheet: the G-7 leaders’ communiqué at the Hiroshima summit in late May firmly endorsed an approach to China based on “de-risking, not decoupling.”

The strategy of de-risking aims to achieve three broad goals: limiting China’s abilities in strategic sectors that have national security implications, such as cutting-edge semiconductors and other advanced technologies; reducing Beijing’s leverage over the West by eroding Chinese dominance of the market for certain essential inputs, including critical minerals; and diversifying corporate economic exposure more broadly to reduce the potential costs of a sudden disruption in trade between China and the West.

Still, many analysts doubt that a targeted approach to de-risking can succeed. Others worry that the result will be the same as that of a broader decoupling. We believe that the more nuanced approach of the Biden administration is viable, but that it will still fundamentally rewire Western economic ties with China. De-risking will move faster and go further in certain strategic sectors, such as technology and clean energy, and more slowly or not at all in others. Even if supply chains don’t move in a broad-based way, corporations are already working to mitigate the risk that a single point of failure could upend their operations.

Much of this process will be driven by the private sector, rather than by policymakers. A vivid example involves semiconductors. The United States is attempting to shift more production of chips back home in order to insulate the global economy from rising tensions over Taiwan. Yet where chips are produced in the future will depend more on the demands of large private purchasers than on government policy. Still, the United States needs to coordinate its de-risking strategy with those of its allies, ensuring that Western countries act in unison as they work to cordon off potentially dangerous areas of economic activity with China. Otherwise, Beijing will exploit their divisions.


The history of de-risking begins with the administration of U.S. President Donald Trump. Although Trump failed to reduce the trade deficit between the United States and China, his administration’s tariffs on Chinese goods altered bilateral trade flows and sent a strong signal to U.S. businesses that the era of unfettered integration with China was over. To Chinese President Xi Jinping, Trump’s policies underscored that Beijing could no longer depend on the free flow of U.S. capital and trade. The U.S.-Chinese Economic Relationship Is Changing—But Not Vanishing – Foreign Affairs

The COVID-19 pandemic turbocharged this shift. Supply chain disruptions altered basic assumptions about China’s role in the global economy, undermining the view that China is always open for business and a dependable source of “just-in-time” manufactured goods. Xi’s draconian “zero-COVID” policy spurred boardrooms to reexamine their dependence on foreign suppliers. Russia’s invasion of Ukraine only heightened these concerns.

The Biden administration added a strategic lens to de-risking: thwarting China’s advancement in strategic sectors tied to national security, increasing supply chain resilience (by encouraging reshoring and “friend-shoring”), and reducing U.S. dependence on China for critical goods. These efforts have involved a combination of carrots and sticks, including unprecedented export controls on advanced technology, an upcoming screening mechanism on outbound U.S. investment into Chinese technology companies, and industrial policies that encourage the relocation of manufacturing and sourcing to the United States and allied countries.

Corporate views have also evolved. In China, consumer boycotts against foreign companies—often over sensitive political topics—have grown more frequent: according to the Swedish National China Centre, there were 21 such boycotts between 2008 and 2015 and 78 between 2016 and this year. Chinese consumers increasingly prefer local brands, and Chinese firms now compete more effectively against multinational firms, partly because Chinese state regulators often tilt the scales in favor of domestic champions. China’s recent expansion of its counter-espionage law to cover a much wider array of information, coupled with raids on some advisory firms and a pickup in exit bans on foreigners, has made the business environment more uncertain. And with the possibility of a disruptive escalation over Taiwan lurking in the background, many U.S. and Western corporations have begun to rethink their exposure to China.


Despite these important shifts, little de-risking (let alone decoupling) shows up in the data at first glance. U.S.-Chinese trade in goods reached a record high in 2022, and China remains the United States third-largest trading partner after Canada and Mexico, accounting for nearly 20 percent of total U.S. goods imports. European trade with China is also on the rise, with EU imports from China more than doubling since 2016 and EU exports to China increasing by 50 percent.

But look closer at the data and a more complicated story emerges. Much of the increase in U.S.-Chinese trade in 2022 was due to price inflation. And as Chad Bown and Yilin Wang of the Peterson Institute for International Economics have found, overall trade between the two countries is growing much less quickly than U.S. or Chinese trade with other partners.

U.S. exports to China in 2022 were 23 percent lower than their projected levels “had they grown at the same rate as China’s imports from the world” between 2018 and 2022, according to Bown and Wang. Under the hood, a shift is underway: the United States is exporting more agricultural goods to China and less in manufactured goods, including advanced electronics. U.S. exports of semiconductors and semiconductor manufacturing equipment, for example, declined considerably in 2022, even before new U.S. export controls on semiconductors came into effect last October. Meanwhile, the nominal value of U.S. agricultural exports to China (soybeans in particular) has surged, driven by elevated prices resulting from the war in Ukraine.

No overall decoupling has occurred so far.

The same story holds for U.S. imports from China. Today, U.S. imports from the rest of the world are 38 percent higher than they were in June 2018, when Trump’s tariffs went into effect, whereas imports from China are only seven percent higher than they were in June 2018—and 18 percent below the level indicated by their pre–trade war trend. U.S. imports have responded as expected to the Trump tariffs: those facing the highest tariffs (such as IT hardware, semiconductors, and furniture) have declined the most on a relative basis, whereas those facing lower or no tariffs (such as consumer electronics) have maintained or even exceeded their pre-pandemic trajectory.

De-risking has had the greatest effect on foreign direct investment in China. It plummeted by around half in 2022 as corporations shied away from the country because of COVID-19 lockdowns and concern about geopolitical risk. Other proxies for foreign direct investment tell a similar story. According to the Rhodium Group, foreign “greenfield investment”—for instance, in new factories and facilities—in China has fallen to its lowest level in 20 years, and cross-border acquisitions of Chinese companies have declined to their lowest level in a decade.

Investment in China is also growing more concentrated among a smaller set of firms. Since 2019, the gap between the best- and worst-performing multinational companies in China has widened considerably. Those that are big and doing well are investing more and doing even better. The rest are retrenching, and fewer companies are entering the market. This concentration is apparent in the foreign direct investment data. For example, four firms (BASF, Daimler, Volkswagen, and BMW) accounted for 34 percent of all European foreign direct investment into China between 2018 and 2021, according to the Rhodium Group. The U.S.-Chinese Economic Relationship Is Changing—But Not Vanishing – Foreign Affairs

Meanwhile, supply chains are starting to shift, but slowly. Corporate interest in diversifying supply chains to Southeast Asia or Mexico is high, but action on that interest is sluggish. This more gradual path reflects the difficulty of shifting operations (only one to two percent of supply chains move every year). Moreover, alternate destinations have their own challenges: Vietnam and Mexico don’t have the capacity of China given their smaller populations, and India is plagued by perceptions of volatile regulation and subpar infrastructure.

The reality is that for many companies, the Chinese market is too big and too valuable to abandon, despite the geopolitical risks. China accounts for one-fifth of the global GDP and has a consumer class of 900 million people. Its unique combination of infrastructure investments, human capital, and supplier ecosystem has made it a manufacturing powerhouse. De-risking, therefore, requires sacrificing revenue and efficiency, and a full break is often impractical.


This doesn’t mean that companies are complacent. On the contrary—many corporate executives and boards are working to de-risk their exposure to China because of the challenges they face (such as local competitors and policy uncertainty).

One strategy companies are adopting is to localize their branding and operations to cater to a more nationalist market. Many are building “China for China” ecosystems, creating self-contained operational divisions in China that manufacture for the Chinese market while moving manufacturing operations for export elsewhere. The goal is to reduce the costs of a major dislocation and make operations easier to navigate should the worst come to worst.

Relatedly, many firms with production or vendors centered in China are pursuing a “China plus one” strategy in which they develop a just-in-case supply chain to hedge against disruption from China. Some are also moving final assembly or critical components outside of China—even if many of the inputs are dependent on China—to avoid the “made in China” tag and U.S. tariffs. Interestingly, Chinese companies are also proactively moving elements of production out of the mainland to places such as Mexico and Vietnam to reduce their exposure to U.S.-Chinese trade tensions.

Finally, companies are actively planning for crisis scenarios that could transform de-risking into rapid decoupling. Many companies were caught flat-footed by Russia’s invasion of Ukraine and don’t want to repeat the same mistake. An escalation over Taiwan is the most-discussed threat since it would put companies operating on the mainland in an impossible position. But Taiwan is not the only worry: other triggers for decoupling could include a crisis in the South China Sea, policy changes targeting China from a more hawkish U.S. government after the 2024 election, and sanctions in response to Chinese lethal aid to Russia.


Absent a major geopolitical event, the economic relationship between the United States and China won’t significantly weaken over the coming decade. But it will be dramatically reshaped by de-risking. Foundational technologies (such as semiconductors) and emerging technologies (such as artificial intelligence and quantum computing) will likely be cordoned off into two separate ecosystems, as both the United States and China seek leadership in these areas and limit dependence on each other. More targeted restrictions may turn into a slippery slope: despite the focus of export controls on the most advanced-node chips, many U.S. semiconductor design and machinery companies could see their broader businesses in China peter out as Beijing builds its own domestic semiconductor ecosystem to reduce reliance on Western technology.

Clean energy will also be transformed by de-risking, although a full decoupling isn’t possible any time soon. China is home to 77 percent of global lithium-ion battery manufacturing capacity and dominates 80 percent of the manufacturing stages of solar panels. China is also the global leader in the processing of critical minerals necessary for clean technologies, refining over half of all lithium, nickel, and cobalt. The hundreds of billions of dollars in incentives provided for by the Inflation Reduction Act—coupled with EU green subsidies—will diversify the West’s dependence on China for these components, but this process will take decades to play out. For example, it typically takes between five and 15 years for a greenfield mining project to deliver any output. Ten years from now, clean energy supply chains will remain mostly integrated.

Some areas, such as consumer technology and goods, will rely on China as a key market for even longer than that. Many will diversify some manufacturing away from China but still depend on it. Other sectors may be a little transformed by de-risking. Luxury brands will still invest heavily in China, which accounts for nearly 20 percent of global luxury spending. Industrial goods and service providers, such as chemical companies, will still fuel the Chinese industry. Consumer brands that can sell into the world’s biggest consumer market will continue to do so, although some Western consumer brands in retail and apparel that are lower value and more commoditized may have their market share gobbled up by local competitors.

De-risking may be driven largely by the private sector, but public policy will play a vital role in shaping the eventual outcome. To succeed in its targeted approach to neutralizing potential dangers, the United States will have to persuade its allies and partners to pursue a common strategy. The May G-7 communiqué endorsing de-risking was a good first step. Export controls, investment restrictions, and subsidies have more power if they are jointly implemented by a U.S.-European superblock. As the Biden administration has leaped forward with export controls and industrial policies aimed at subsidizing domestic production, divisions have emerged between the United States and Europe—divisions that are being actively exploited by Beijing as it seeks to isolate Washington from its partners. A shared Western framework for de-risking would offer a more coordinated, balanced, and effective approach to competition with China than racing ahead alone. It may also strengthen, rather than erode, the foundations of a stronger transatlantic alliance.



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