This bilateral trade relationship, valued at $559 billion in 2019, forms a critical context within which HNWIs and UHNWIs operate, especially when diversifying assets internationally or engaging in cross-border investments. The discourse around Sino-American trade relations often revolves around tariffs, trade imbalances, and, more recently, the economic decoupling rhetoric.
Historical Context of Trade Relations
Over the years, trade volumes between the two nations have soared, creating a web of economic interdependencies. In 2001, China´s accession to the World Trade Organization (WTO) marked a significant milestone, propelling trade volumes as the country emerged as a global manufacturing hub. By 2018, the trade volume between the US and China peaked at around $737 billion, reflecting the deep economic ties.
However, this flourishing business relationship has not been without disputes. The US-China Bilateral Investment Treaty discussions are one of many trade agreements that aim to promote a favourable environment for trade and investments, but disagreements on various fronts frequently overshadow them. Intellectual property rights, market access, and unfair trade practices have been recurrent points of contention.
The trade disputes escalated into a full-blown trade war in 2018, with both nations imposing tariffs on each other’s goods, disrupting the established trade equilibrium. This period saw a series of negotiations, leading to the “Phase One” trade deal in early 2020, aimed at de-escalating tensions and addressing some of the longstanding issues.
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Trade Imbalance
The trade imbalance between the United States and China has been a focal point of economic and political discourse over the years. The US has consistently run a trade deficit with China; in 2018, this deficit reached a peak of $419 billion, highlighting the disparity in trade volumes. This imbalance is primarily attributed to the US’s high demand for Chinese manufactured goods, driven by China’s cost-effective production, and China’s less reciprocal appetite for American goods.
The deficit has fueled numerous debates and policy discussions in the US. It’s often cited as evidence of unfair trade practices by China, such as alleged currency manipulation, intellectual property theft, and state subsidies to Chinese firms, which purportedly provide an unfair competitive advantage on the global stage.
On the political front, the trade imbalance has been leveraged as a rallying point to advocate for more stringent trade policies towards China, culminating in the trade war initiated during the Trump administration. The imposition of tariffs aimed to address this imbalance, though with varying degrees of success. The ongoing discourse around the trade imbalance continues to shape Sino-American trade policies, making it a crucial aspect for HNWI and UHNWI to monitor.
The Trade War and Tariff Escalations
The onset of the Sino-American trade war in 2018 marked a significant escalation in trade tensions between the two largest economies. It commenced with the US imposing tariffs on a broad range of Chinese goods, aiming to level the playing field and compel China to address the aforementioned issues. Following the initial steps, both countries reciprocated by imposing tariffs on each other’s exports. At their zenith, tariffs covered hundreds of billions of dollars worth of goods traded between the US and China. For HNWI and UHNWI, the trade war posed new challenges and uncertainties, necessitating a reevaluation of investment strategies, particularly in sectors impacted by tariffs and the broader geopolitical tension.
Supply Chain Interconnectedness
The US-China trade nexus is not merely a transactional relationship but a complex, intertwined supply chain that stretches across borders. The intricacies of this supply chain depict a scenario where disruptions in one part can reverberate through the entire global trade ecosystem. For instance, China, often termed the world’s factory, is a critical link in the supply chains of numerous US-based corporations, supplying everything from basic components to finished goods.
Trade tensions, particularly the tariff escalations, have highlighted the nexus of supply chain disruptions. Companies faced increased costs, disruptions, and uncertainties, prompting a reevaluation of supply chain structures. Businesses have proposed and implemented a number of strategies to reduce supply chain risks amid ongoing trade tensions. It is, for example, diversification of supply sources and reducing dependency on a single country or region, then nearshoring or reshoring, which is production closer to home or to regions with more stable trade relations, and finally investing in technology and utilising advanced technologies like blockchain and artificial intelligence to enhance supply chain visibility and resilience.
Understanding the dynamics of the interconnectedness of the US-China supply chain and the strategies being employed to mitigate risks is crucial. This helps UHNWIs and HNWIs decide where to invest their money, even though trade relations between China and the US are always changing.
Broader Geopolitical Rivalry and its Consequences
- Economic Decoupling: The US and China’s decoupling, especially in high-tech and strategic sectors, is seen as a major geopolitical risk for 2023. This means that risk managers need to keep a close eye on efforts to untangle important supply chains.
- Global Repercussions: The outbreak of a full-blown trade war between the US and China can cause global economic losses of at least $600 billion and may reduce the world economy’s growth rate by several percentage points.
- Impact on Global GDP: The new tariffs announced in the trade war are expected to subtract about 0.3% of global GDP in the short term, half of which stems from adverse effects on business and market confidence.
Ripple Effects of Sino-American Trade Tensions
- Disruptions in Supply Chains: The trade war has resulted in a reallocation of products and services globally, with a 25% export loss for China in the US market for tariffed goods in the first half of 2019 alone, affecting global markets and economies.
- Environmental Impact: A study highlighted that the cessation of US-China trade and the consequent reallocation of products and services globally could increase global emissions by 0.3%-1.8%. This is due to the dismantling of global supply chains, particularly in the semiconductor and tech industries, which are significant sources of carbon emissions.
- Technology and Clean Energy Supply Chains: Trade tensions have notably impacted the supply chains for critical components used in climate technology, such as the solar supply chain and electric vehicle (EV) supply chain. For instance, China, which manufactures 80% of solar cells and assembled solar panels, is a key player in the global clean energy supply chain. Restrictions and tariffs relating to forced labour have an impact on Chinese suppliers in the US solar industry. Additionally, the EV supply chain is critically impacted by the trade tensions, as China holds a significant share of global battery-grade lithium-refining capacity.
- Potential Cold War Scenario: According to the World Economic Forum, the tensions have been compared to a potential cold war scenario, with global consequences that could be more severe due to China’s rising economic power as opposed to the declining power of the Soviet Union during the original Cold War.
