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  May 14th, 2018 | Written by

The World’s Two Largest Economies Are Disentangling

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  • China’s levels of investments in the United States is declining.
  • Twenty years ago, there were good reasons for the US to accept China’s larger role in the world economy.
  • It was hoped that China’s growing role in the global economy would lead it to play by international rules.

What are we to make of the latest series of developments in the US-China economic relations? One way is to look at each new event as another skirmish in an ongoing trade war. Another is to take a longer view and understand that after a couple of decades of increasing economic interdependence, the world’s two largest economies are undergoing a process of disentanglement.

We’ve previously reported on how China’s levels of investments in the United States is declining, and that this process started before Donald Trump became president of the United States. The same is also happening on the trade front, really another aspect of the same phenomenon.

As Derek Scissors of the American Enterprise Institute points out in a recent article, there were good reasons for the US to accept China’s larger role in the world economy. Low-cost goods from China helped American consumers and retailers and there are still US interests that benefit from trade with China and from its larger presence on the world stage.

At the same time, it was hoped that, with China’s growing role in the global economy and with its membership in the World Trade Organization, that it would start playing by international rules, especially when it came to respect for intellectual property rights. Those hopes appear to be misplaced, as China has also retreated from the moderation of its regime and the introduction of market reforms in its economy to one in which Xi Jinping will serve as president for life, working to achieve Maoist goals with twenty-first century methods.

“In 2018…,” wrote Scissors, “reasons for US acceptance of continued Chinese trade predation are waning. Relocation of low-margin manufacturing in the 2000s hurt less skilled American workers…”

Twenty years ago, China’s GDP was one-ninth of the US GDP. The economic stakes of US-China interdependence were much lower back then.

“Beijing now seeks to displace foreign firms in high-end manufacturing and technology,” wrote Scissors. “It aims to do this not through comparative advantage, but via subsidies and scale achieved in sealed-off home market.”

The Trump administration’s trade and economic policies towards China represent a negative reaction to developments on the other side of the pacific, signaling that the US will no longer tolerate how China operates in the global economy. Unfortunately, these policies and attitudes are usually articulated with the vocabulary of trade war, and the sharp policy shifts that wil likely ensue will carry costs for US companies.

The Sino-US “economic relationship will shrink,” Scissors concluded. “We’re just arguing about timing.”