Can China and the U.S. return to status quo ante in economic relations?

May 12, 2021

About the author:

Jean-Marc F. Blanchard, The Executive Director, Mr. & Mrs. S.H. Wong Center for the Study of Multinational Corporations, Distinguished Professor, East China Normal University

1. What does foreign direct investment (FDI) in China in 2020 and in 2021 Q1 suggest about interdependence of the Chinese and U.S. economies? In other words, have the external factors like trade disputes and global pandemic had a major impact on bilateral economic relations?

China’s attraction of FDI in 2020 and the 1st quarter of 2021 was impressive. Unfortunately, currently available figures for U.S. FDI in China and Chinese FDI in the U.S. in 2020 do not permit us to generalize about the state of U.S.-China economic relations or interdependency. What we do know from surveys by industry associations such as AmCham Shanghai and the American Chamber of Commerce China as well as media reports is that there has been no major outflow of American FDI from China or Chinese FDI from the U.S. However, FDI is but one slice of the overall picture and one also must look at, inter alia, trade, portfolio investment, the composition of currency reserves, and business exchanges to evaluate the extent to which the two countries remain interdependent. Even in these areas, no data indicates a notable change in the extent to which the two economies are intertwined. For instance, U.S. imports from China remain very significant and China’s holdings of U.S. government bonds remain quite substantial. However, none of this means trade disputes and the global pandemic have not influenced bilateral economic ties. Indeed, investments, trade in high-tech, and stock listings have been adversely affected by both.

2. How do you think each country’s industries’ stressing supply chain resiliency will affect international trade and globalization?

(source: pixabay.com)

Early on, conventional wisdom was that initiatives to increase supply chain resiliency could only result in diminished international trade and deglobalization. In my view, this reflected overly simplistic thinking. While the U.S. and China seek to do more at home, they appear to recognize that achieving supply chain resilience requires working with countries and multinational corporations near and afar to access raw materials, parts, and intellectual property (IP). For instance, reports in China Daily make clear China’s “dual circulation” initiative will profit from the research and logistics skills of foreign companies. In addition, there is an awareness that severing economic bonds --e.g., through export controls, may diminish the generation of resources needed to fund the cutting-edge R&D that supports supply chain resilience. This, at least, is an argument made by American semiconductor industry representatives. Over the long run, it is hard to say what will happen. It depends upon the state of U.S.-China ties, technological developments, resource discoveries, the structure of the U.S. and China economies, and the behavior of American and Chinese FDI. The key point is that it should not be presumed that the search for supply chain resilience only has negative implications for U.S.-China economic links.

3. What kind of opportunities does China’s opening-up to FDI offer for cooperation?

In theory, the opening-up of China’s financial services industry, education and medical sectors, energy exploration and production, select supply chain areas, and advanced manufacturing will create the space for increased American FDI in China. China’s desire to attract more FDI to its central and western regions likewise will fuel opportunities. The actual impact of China’s opening in these and other areas on FDI flows and bilateral cooperation will depend upon China’s growth, conditions in individual sectors, the nature of the playing field, the regulatory environment, and the alternatives that American firms have (or do not have) elsewhere.

4. Chinese Premier Li Keqiang and a senior official of the National Development and Reform Commisssion (NDRC) recently told a group of presidents and CEOs of some large U.S. companies that China and the U.S. can cooperate more in economic field, calling on them to directly contact Chinese authorities on forced technology transfers and intellectual property rights issues. What could be the role of U.S. or multinational corporations in increasing or creating new cooperation areas between the two countries?

(source: pixabay.com)

China’s efforts to address concerns about IP rights (IPR) as reflected in the statements of top Chinese leaders such as Premier Li, its 2019 Foreign Investment Law, and the yet-to-be-ratified EU- China Comprehensive Agreement on Investment certainly have caught the attention of foreign companies. If businesses judge that the situation has improved to their liking, this could be one factor that leads them to deepen the breadth and depth of their activities in manufacturing, medical sciences, and other technology-heavy sectors in China either individually or in partnership with Chinese firms, research centers, and universities. As far as the U.S companies themselves are concerned, reduced anxieties about IPR could make them a more positive force in the U.S.-China relationship given that displeasure with the IPR regime in China was one of the factors that led them to press for more forceful U.S. government measures towards China. Still, expectations about the potential positive externalities of China’s improving IPR regime should be tempered. First, the IPR regime is evolving. Second, it is just one part of the equation. Third, U.S. companies currently are quite sensitive about extensive cooperation with China given the state of opinion about China in Washington, D.C. and among the American public.

5. One major U.S. think tank has recently published a comprehensive analysis of the Belt and Road Initiative (BRI), first identifying it as a domestic economic policy-oriented project and then calling it a risk to the U.S. interests. In your opinion, what kind of cooperation avenues and opportunities does the BRI offer for bilateral cooperation between China and the U.S.?

There is potential for cooperation across the entire spectrum of the Belt and Road Initiative infrastructure projects ranging from economic viability to environment impact analysis, design and engineering, procurement, construction, project operations, and project financing. This does not mean, though, that the U.S. and China should aim to cooperate across every dimension of the BRI. This simply is not realistic given that the two countries would face difficulties cooperating in certain countries or in specific sectors such as telecommunications (due to its sensitivity) or high-speed rail (due to the balance of comparative advantages). American and Chinese policymakers should consider discussing countries, sectors, and projects where there might be mutual interests and fit. The likelihood of cooperation would increase further if Washington and American companies corrected their misunderstandings about the BRI’s goals, the BRI’s state in participating regions and countries, and its implications. For their part, Chinese entities involved in the BRI could lay the groundwork for more cooperation if they more extensively heeded President Xi Jinping’s calls at the Second (2019) Belt and Road Forum for more joint consultation and contribution, greater transparency, and adherence to international rules and standards in project development, operation, procurement, and tendering and bidding.

(source: GE)

6. Given recent on-shoring tendency, is the West, or more specifically the U.S., aspiring to be a manufacturing economy?

The U.S. is a major manufacturing economy, though its share of manufacturing as a percentage of total economic activity or versus China’s share does not seem large. Nevertheless, it is true Washington wants more manufacturing to be done “at home” for national security, job “quality,” and other reasons. While U.S. manufacturers are highly productive in many areas, there are other areas where reshoring will be infeasible due to cost factors, the absence of suitable domestic supply chains, or regulatory hurdles. Consequently, China will remain the manufacturing locale of choice. What does not seem to be recognized is that there are geographic areas or industrial sectors in the U.S. where China could bolster U.S. manufacturing, with gains also accruing to Chinese firms in terms of market access, the acquisition of know- how, and branding. Chinese investors need to realize that the Committee on Foreign Investment in the United States, better known as CFIUS, and even Washington’s heated political environment do not prima facie constitute insurmountable barriers to such FDI, assuming that it avoids sensitive sectors like, for illustrative purposes, semiconductor equipment manufacturing.

7. Is there any way or areas to return to status quo ante in U.S.-China trade, investment and other economic relations?

If we are talking about the numbers, it is conceivable that trade or FDI flows could return to pre-Covid or pre-Donald Trump presidency levels. There is very little possibility, though, of the background political milieu returning to its earlier form because the attitudes and capabilities of China and the U.S. as well as American and Chinese companies have changed notably. Moreover, the world is not the same as in 2019 or 2015--U.S.-China frictions over the BRI, export controls, investment policies, tariffs, and global economic institutions, among others, have emerged or intensified. Besides, important international economic actors like the European Union, India, or Brazil no longer view China or the U.S. in the same way as before. The slim potential for a return to the economic “status quo” is discouraging. One hopes, nonetheless, that policymakers will try to put the economic relationship on a better or, at least, more stable path.

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