US-China Relations – The Next Big Issue for America’s New President

Trump vs. Clinton – On 8^th November, the USA elects a new president. During the campaign, China was portrayed as the embodiment of globalization trends and held responsible for what appear to be the increasingly negative effects of globalization on the USA’s economy. Against this backdrop, both candidates attracted attention for their anti-free trade comments. Will the USA, once the most prominent champion of free trade, become drawn into a downward spiral of protectionism? Given a context in which an increasing number of US Americans consider themselves to be globalization losers, this is not totally un-realistic. Our Globalization Report 2016 shows indeed that during recent years the USA has to some extent lost its leading role in the world economy. China’s economic rise is not the only cause for this, but it has undoubtedly been a contributory factor.

China’s rise, the USA’s decline?

Our Globalization Report 2016 shows that between 1990 and 2000 the USA was able to considerably increase its global interconnectedness – as measured by the globalization index. During this period the index for the USA rose by some eight points, from 57.9 percent to 65.6 percent. By contrast, from 2000 it decreased steeply and over the next few years was repeatedly subject to significant fluctuations. In the period between 2000 and 2014, the index for the USA fell by 4.4 points in total to 61.1. The Dotcom Crisis (2000) and the financial crisis naturally played a crucial role here. However these developments also coincided with China joining the WTO (2001) and its subsequent rise as “factory of the world”. As we already explained in a previous Blogpost, China is not as globalized as one might assume, still lying far below the USA on the globalization index. That said, between 1990 and 2014 China was able to virtually double its index score from 22.9 to 41.1 points.

China’s accumulated increase in per capita income in relation to GDP, which can be attributed to an increase in globalization, is the highest among the 42 countries under review. It amounts to 406 percent of the per capita GDP in 1990. The USA achieved just 37 percent, so finding itself last, but one on the index (Table 1), with only Norway scoring lower. Additionally, between 1995 and 2014, China was able to hugely increase its share of global export goods, from 3.8 to 17.1 percent. Particularly since joining the WTO in 2001, China has enjoyed a steep increase in exports. In the same period, the USA’s share in world exports dropped from 14.4 to 10.5 percent. In 2007 China overtook the USA and in 2009 it even supplanted Germany as “Export World Champion” (Figure 1).

China’s competitiveness increases, the USA’s falls

And as if that wasn’t enough: while China succeeded in tangibly increasing its international competitiveness, conquering global markets with its low cost products, the USA not only saw a decline in its share of the global market; there was also a noticeable decrease in the competitiveness of US products, especially in the years following China joining the WTO in 2001 until the financial crisis of 2008. During this period, 3.7 percentage points of the change in the US share of global markets can be attributed to a fall in competitiveness. In contrast, in the same period, eight percentage points of China’s increase can be attributed to an increase in competitiveness. Naturally, these trends are not exclusively applicable to China. Because other emerging economies, such as India, Poland, South Korea or Mexico have also clearly gained ground in the world economy over the last 15 years (Figure 2). As a result international competition has increased overall for the industrialized countries, as we showed in our Blogpost on globalization of the G7.

China has already displaced the USA in some sectors

In some sectors however, China can be identified as the USA’s most important competitor among the emerging economies. This is particularly marked for office equipment and computers or broadcasting and communication technology. Between 1995 and 2014 China’s global market share increased from 3 to 52 percent for office equipment and computers and from 4 to 49 percent for broadcasting and communication technology. By contrast, in the same period the USA’s market shares fell from 24 to 12 percent and from 21 to 8 percent respectively. This trend is in keeping with our observation that emerging economies have been catching up overall in these sectors since 1995, while the market share for industrialized countries in these sectors has decreased. In this respect, this trend is not specific to the USA. In sectors such as the chemical industry and automobile construction, by contrast, industrialized countries continue to have a stronger position on global markets than China. In these sectors, the USA faces much stronger competition from other industrialized countries, such as Germany or Japan.

Protectionism: the wrong response to increasing competition

After the fall of the “Iron Curtain” and the collapse of the Soviet Union, a phase began in which the USA was the only superpower left standing, not only politically speaking, but economically too. However China’s swift economic rise over the last 15 years has meant that at the beginning of the new millennium there are once more two countries with a claim to superpower status. The USA is going to have to get used to its new competitor. Historically speaking, the economic rise of nations is a regularly recurring development. The USA itself is the best example of this. Such development is often accompanied by structural change and a shift in the global division of labor, if domestic industries can no longer compete with their new competitors.

The USA, which views itself as a liberal market economy and a global economic heavyweight, should not respond to increasing competition with protectionism. Instead, it would make sense for the country to further develop its own competitiveness through technological advantage and innovation. The withdrawal from sectors that are no longer competitive should, where necessary, be accompanied by political measures in order to cushion potential hardships brought about by structural change. The USA should continue to strive for fair competitive conditions with China, rather than trying to prevent competition. Reciprocity is the keyword here.

Regardless of who moves into the White House in the aftermath of November 8^th as the 45th president of the United States, the country will only be economically successful in the future if it refrains from disconnecting from global markets. If the protectionism as presented in the election campaign were to become a reality, then it will be the USA itself that suffers most as a result.