The trade liberalism between the two largest economies over the last four decades defines the boom and bust periods of globalization.
Globalization has undoubtedly reshaped the world, driving progress and lifting millions out of poverty. However, its uneven distribution of benefits has fueled skepticism and protectionist policies lately. As the world’s two largest economies redefine their relationship, the outcomes will likely shape the future of bilateral trade and the broader course of globalization in the 21st century.
The evolution of U.S.-China trade over the last four decades mirrors the broader narrative of globalization, marked by notable political and economic upheavals. As illustrated in the chart below, U.S.-China trade expanded rapidly in the early 2000s before experiencing a sharp downturn post-2018. This pattern highlights the profound impact of geopolitical, economic, and global health crises on the dynamics of bilateral trade relations. Let’s delve into how this transformation unfolded.
The Blossoming Trade Liberalization
➤ 1980s: The chart begins with modest levels of trade in the 1980s. This era marked the gradual liberalization of global trade, with China beginning to open its economy under the reforms introduced by Deng Xiaoping. The United States, on its part, saw China as a potential trading partner and began laying the groundwork for a mutually beneficial relationship.
➤ 2001 – China’s WTO Accession: China’s accession to the World Trade Organization (WTO) in 2001 was a pivotal moment. With this integration into the global trading system, the U.S. significantly increased imports from China, leading to a sharp rise in the U.S. trade deficit with China, which reached 1.5% of GDP by the mid-2000s. This milestone marked the peak of optimism surrounding globalization and the idea that economic interdependence could enhance mutual prosperity.
Globalization during this period brought immense benefits to the world, lifting millions out of poverty, particularly in developing countries like China & India. The interconnected global supply chains enabled access to cheaper goods, technological advancements, and economic growth in both developed and emerging markets. The integration of economies also fostered cultural exchanges and innovation, showcasing the transformative power of open markets.
Peak Trade and the Beginning of the Decline
➤ 2008 – The Global Financial Crisis: The 2008 financial crisis marked the first significant inflection point. While the trade deficit briefly dipped due to declining U.S. consumption during the recession, it quickly rebounded as China’s export machine adapted. However, this period also marked the beginning of growing scrutiny over the uneven benefits of globalization, with critics highlighting the loss of American manufacturing jobs attributed to trade imbalances.
➤ 2018 – U.S.-China Trade War: The onset of the U.S.-China trade war in 2018 marked the most dramatic shift in bilateral trade relations. Under the first Trump administration, the United States imposed tariffs on billions of dollars worth of Chinese goods - accusing China of unfair trade practices and intellectual property theft. In retaliation, China imposed its own tariffs, leading to a steep decline in trade volume. The trade deficit as a percentage of GDP began to shrink, reflecting reduced trade activity rather than a true rebalancing.
➤ 2020 – COVID-19 Pandemic: The COVID-19 pandemic further accelerated the decline. Global supply chains were disrupted, and political rhetoric blaming China for the pandemic’s origins exacerbated tensions. The pandemic also highlighted vulnerabilities in globalized supply chains, prompting both nations to reconsider over-reliance on each other for critical goods.
What Lies Ahead for U.S.-China Trade?
2024 and Beyond: The forecasted continuation of declining trade reflects both structural and political changes. On the U.S. side, bipartisan consensus on being tough on China has hardened. Policies encouraging reshoring, decoupling, and investment in domestic manufacturing suggest that trade liberalism with China is unlikely to rebound to previous levels.
China, for its part, is focusing on diversifying its trading partners through initiatives like the Belt and Road Initiative and strengthening ties with emerging markets. However, as a major global exporter, China remains heavily reliant on access to the U.S. consumer market.
Now that we have established that trade liberalism is unlikely to return to the boom period, what could happen next?
Potential Scenarios:
➀ Managed Decoupling: Both nations may continue a controlled reduction of economic interdependence, focusing on strategic sectors like semiconductors, green technologies, and pharmaceuticals. This scenario would see each country investing heavily in self-sufficiency while maintaining limited trade in non-sensitive areas to minimize economic shocks.
➁ Trade Realignment: As the U.S. seeks alternative trade partners in regions like Southeast Asia and India, China may strengthen its ties with the Global South, creating parallel trade ecosystems. This realignment could reduce dependency on bilateral trade while fostering competition between trading blocs, potentially reshaping global trade dynamics.
➂ Geopolitical Reset: While unlikely in the short term, renewed dialogue and trust-building measures could stabilize relations and foster a new framework for trade cooperation. This scenario would require significant political will on both sides and could involve new agreements on trade, intellectual property rights, and technology sharing.
➃ Fragmented Globalization: Without coherent strategies, escalating tensions could lead to further fragmentation of the global economy. This scenario would involve both nations pursuing inward-looking policies, resulting in a divided world with diminished trade and slower economic growth.
Looking ahead, the rise and fall of U.S.-China trade liberalism reflects broader dynamics of globalization and de-globalization. The optimism of the early 2000s has given way to a complex and adversarial relationship shaped by competing economic and strategic interests. While the two economies remain deeply intertwined, the trajectory suggests a cautious unwinding of trade liberalization, with implications for global markets and the rules-based international trade system.
Originally published at Substack.
