U.S.-China Trade Stayed Robust in 2022. Will That Last?

The recent 2022 U.S.-China goods trade figures underscore that despite escalating geopolitical tensions, continued high tariffs, and a barrage of export controls and regulatory restrictions, the U.S.-China trade relationship remains robust. U.S. exports of agriculture, semiconductors, and oil to China topped the list, while Chinese exports of communications and computer equipment have continued to be strong. We are still awaiting services trade data for the year.

But 2022 may have been the peak year for U.S.-China trade flows for a number of reasons. First, higher prices due to inflation boosted the value of trade. Second, lingering COVID spending habits continued into at least the first part of the year, elevating the U.S. demand for items such as laptops, phones, and toys. The impact of both of these factors is already diminishing in 2023.

On top of that, the U.S. economy is cooling off, indicating a likely decrease in imports, including from China. The pace and magnitude of China’s economic comeback are also uncertain, which could impact Chinese demand for U.S. exports. The IMF forecasts that the Chinese economy will grow by 5.2 percent this year after a dismal 3 percent showing in 2022. But IMF officials have not been shy in highlighting serious short-term and longer-term economic challenges that Beijing must navigate. The impact of these challenges on economic growth in 2023 and beyond cannot be ignored.

Moreover, the U.S. and China are trying to reduce their economic reliance on each other. While these untangling efforts are largely focused on strategic and emerging high-technology goods, the lines are increasingly blurred between what is and what is not strategic. Washington and Beijing are seeking to achieve this by increasing their domestic capacity and capability to make more stuff at home and diversifying import sources and export markets. The U.S. is embracing government subsidy policies while China continues its multi-billion-dollar effort to foster national champions. In addition, both countries are strengthening economic and supply chain ties with countries in Southeast and South Asia, Africa, and Latin America. Not a week goes by without Washington or Beijing announcing a new initiative or dialogue with eager partners.

Meanwhile, U.S. boardroom discussions are focusing on how to reduce their footprint in China, as they see the writing on the wall—with little sign of geopolitical tensions abating, business plans must be adjusted. Other factors are also driving these shifts, such as China being less competitive for labor-intensive production. This doesn’t mean that all companies are packing up and leaving China. While some are, many others are pursuing a “China plus one strategy” for supply chain inputs, and considering other global destinations for new product lines.

All of this suggests that we are likely to see increased U.S. trade with other parts of the world in the years ahead and a downward trend line for bilateral trade with China. But how steep that line will be is uncertain. While some product areas, such as agriculture, consumer goods, and environment-related products, may continue to experience strong trade flows, it seems doubtful that U.S.-China trade will break the 2022 record anytime soon. Trade with other Asian countries is likely to increase as U.S.-China trade steadily decreases.

U.S.-China bilateral trade hit an all-time high in U.S. dollar terms in 2022, but last year was abnormal. The U.S. and global economies were recovering from the COVID-19 pandemic, and U.S. households were still shifting from splurging on imported consumer goods to resuming spending on domestic services. Meanwhile, inflation was high in the United States and other major economies. With prices elevated, the nominal value of U.S.-China trade jumped, but not all volumes did. For example, U.S. imports of laptops, smartphones, and video game consoles from China—together worth $120 billion—declined 15 percent, 2 percent, and 12 percent in volume terms, respectively. U.S. demand for Chinese imports showed signs of peaking during the last quarter of 2022.

Bilateral trade remains substantial but is decreasingly important for both economies. China’s share of U.S. imports have fallen from a peak of 22 percent in mid-2018 to 17 percent by the end of 2022. Both imports and exports have declined as shares of both economies’ GDPs since the trade war. Total sales of U.S. corporate affiliates in China were lower in 2019 and 2020—the latest data available—than in 2018. That said, in recent years, final assembly of key goods with Chinese components have shifted from China to Southeast Asia and Mexico, suggesting that U.S. import figures understate Chinese firms’ contributions.

Foreign capital flowed out of China in 2022, both among direct and portfolio investors. This was because of concerns about China’s economy, Beijing’s strategic support for Moscow’s invasion of Ukraine, cross-Strait tensions, and geopolitical and regulatory uncertainties, especially about Beijing’s treatment of private firms. Trade flows often follow where multinational firms invest for production. Net FDI flows into China turned negative in 2022, according to official Chinese data. Estimates from Rhodium Group suggest Chinese FDI into the United States fell dramatically after 2017, when the U.S. enacted stronger investment screening measures. U.S. balance of payments data support this claim and suggest that U.S. direct investment into China slowed in 2022.

Some foreign investors will return to the Chinese market and far more never left. U.S. multinational firms in China for its enormous local market will be reluctant to leave and some, especially in consumer-oriented sectors, will expand operations. But many multinational firms are reassessing their reliance on China for their supply chains and exports and some are shifting new investment away from China.

The resurgence of industrial policies in the United States and elsewhere, plus the general counter-People’s Republic of China thrust of U.S. policymakers and Congress, do not bode well for sustained robust economic ties. These policies are likely underpowered relative to what it would take to incentivize full supply-chain disintermediation from China, but they will have an effect in the medium term. Even U.S. Secretary of Commerce Gina Raimondo speaks of the onshore semiconductor goals of the CHIPS Act in terms of targets for 2030.

The downward trajectory of the broader U.S.-China relationship—both in terms of policies and geopolitical risks—will help determine the extent to which strong economic ties persist, especially by influencing decisions among firms and investors. It took about 20 years for the United States and China to form substantial economic, financial, and technological interdependencies. Unwinding those linkages would be costly and probably take many years, but governments on both sides are pursuing resiliency or self-sufficiency efforts to do so. Economic incentives do not necessarily trump national security concerns, as the events of recent years remind us. A year of record nominal bilateral trade does not change that.

The fact that there is record-breaking trade between the United States and China is further proof that intense competition between the two countries has not resulted in a meaningful decoupling in the vast majority of industries. Underneath topline trade numbers live a whole ream of positive stories. The US-China Business Council estimates that U.S. goods exports to China support more than one million American jobs. American farmers take advantage of China’s lucrative market for agriculture imports—the United States sent a record-breaking $40.9 billion of agricultural goods to China last year. China’s market also boosts the United States’ role as an energy exporter; U.S. firms shipped $12 billion of oil and gas to China in 2021. While the latest numbers are about goods trade, there is a positive story behind services trade too. Chinese students visit the United States, supporting American universities and bringing their experiences of American society back to China.

While the most recent trade numbers show robust growth, there are obvious headwinds. U.S.-China tensions have increased risks for American companies doing business with China. Both countries continue to levy high tariffs on the other’s goods (though both have provided various degrees of relief). The United States has implemented export controls on advanced semiconductors and chipmaking equipment and taken steps to re-shore microchip supply chains. Yet more sanctions are possible in the near future if China offers material aid to Russia for its war in Ukraine. In some cases, this has made American companies the supplier of last resort in China.

Even though factors like demographics and debt will prevent China from growing at the rate it did in past decades, it will remain an important market for U.S. exports and a critical element of global supply chains. The IMF predicts that China’s economy will grow 5.2 percent in 2023, while the world economy will grow 2.9 percent. This growth is occurring on a huge base–China’s economy is roughly the size of the European Union’s, with GDPs at around $17 trillion. China is home to the world’s largest middle class, an impressive talent base, a vast labor market, and an unparalleled manufacturing ecosystem. There is currently no substitute for engaging with the China market. While some American companies report that they have moved some segments of their supply chains out of China, most have no plans to relocate.

Tensions between our two countries do not spell the demise of our trading partnership. Robust trade has long provided ballast to the bilateral relationship, and the latest trade figures show that can continue. Navigating our disagreements with China will not be easy, but trade can help put a floor under the relationship, and hopefully will continue to make both of our nations more prosperous for years to come.

The 2022 trade data released by the U.S. Department of Commerce showed that the two-way trade flows between China and the U.S. have remained fairly strong so far. However, once we take into account America’s global trade performance, there are early signs that potential geoeconomic fracturing and trade decoupling between the two countries could be underway.

Bilateral merchandise trade between China and the U.S., including both exports and imports, managed to grow more than 5 percent in 2022 over 2021, reaching a record high of $690.6 billion. In particular, U.S. imports from China increased 6.3 percent, to $536.8 billion, while exports grew 1.6 percent to $153.8 billion. This expansion of the bilateral trade took place against all the odds and headwinds, including the Trump tariffs, the retaliatory Chinese tariffs, the Biden technology export ban, U.S. Treasury Secretary Janet Yellen’s “friend-shoring” policy, the U.S. Congress bills aimed to reduce reliance on China, as well as China’s self-inflicted and painful pandemic lockdowns. This is evidence of the strong and resilient U.S.-China trade ties that have grown over more than three decades.

And yet, ongoing geopolitical tensions may start to alter and shape the medium trend of China-U.S. trade. One obvious sign is that the 5 percent increase of the bilateral trade between China and the U.S. in 2022 was easily dwarfed by the 16.2 percent rise in U.S. trade overall. In other words, American trade grew three time faster globally than did its bilateral trade with China. This pattern appears to be broad-based. For instance, within the G3, the U.S. bilateral trade flow expanded 18.4 percent with the EU and 9.2 percent with Japan. “Nearshoring” helped bilateral trade between Mexico and the U.S. rise 18 percent last year. In fact, there are reports that some Chinese companies have been actively investing in Mexico to bypass trade restrictions.

Geopolitical tensions and supply chain concerns may both give rise to trade diversification away from China. The disruptive COVID lockdowns in China over the past few years haven’t helped. One way to detect such a possible trend is to compare the U.S.-China bilateral trade to those bilateral flows between the U.S. and the trading partners that are considered potential competitors to China. If we pick five such potential competitors, in 2022 U.S. bilateral trade flows with India, South Korea, Singapore, Taiwan, and Vietnam rose 17.5 percent, 16.3 percent, 20 percent, 19 percent, and 23 percent, respectively. The signs are on the wall that a gradual and partial geoeconomic fracturing and trade decoupling may be underway between China and the U.S.

The U.S. has rolled out a wide range of trade and investment restrictions aimed at China. Some are general measures, notably the 25 percent tariff that Trump imposed on about half of what the U.S. imports from China and which Biden has so far left in place. Other measures target specific technologies, notably semiconductors. These measures include putting Chinese high-tech firms on the “entity list” and severely restricting their interactions with American consumers and companies. They also include export controls on particular items, such as the machinery used in semiconductor manufacturing. After five years, what can we say about this trade war?

First, the measures have had surprisingly little effect on aggregate trade. U.S.-China trade hit a new high in 2022, surpassing the level reached in 2018 before the trade war. The U.S. imports a wide range of products from China: furniture, exercise equipment, TVs, clothing, footwear, toys, etc. Many of these products were not subject to tariffs. The U.S. response to the pandemic, sustaining people’s incomes with cash transfers, led to continued high demand in general. Households shifted many of their purchases from services to goods useful at home for work and leisure, including the Chinese imports named above. Some products with the 25 percent tariff continued to be imported, indicating the efficiency of Chinese production and lack of alternatives.

Second, there is some evidence of shifts in global supply chains resulting from the trade war and the pandemic. But this has not taken the form of re-shoring to the U.S. or “near-shoring” to Mexico or Canada. The main shift is that some Asian exports now come from Vietnam or elsewhere in Southeast Asia. China’s share of U.S.-manufactured imports declined four percentage points since 2018, while the share of other Asian developing countries increased an equivalent amount. These exports often contain Chinese-manufactured components because Chinese firms have invested in these neighbors, and/or China supplies the machinery and parts. Given uncertainties around the trade war and the pandemic, these shifts are natural hedging by both Chinese and American firms.

Third, the effect of the economic conflict between the U.S. and China is very clear in the trade of some specific, high-tech products. U.S. imports of semiconductors or telecom equipment from China declined more than 50 percent between 2018 and 2021. Sanctioning Huawei and other Chinese telecom firms had a major effect on trade in these products. Thus, the conflict is more a tech war than a trade war. The high level of continuing trade in most products indicates both Chinese efficiency, as well as practicality on the part of the Chinese government, which has kept retaliation and escalation to a minimum. There are important interest groups on both sides that have a stake in continuing trade, as well as important third countries that do not want to follow the U.S. down the road of a new Cold War. The key question is whether this equilibrium is stable, with tough measures on tech products and a high level of trade and investment otherwise.

U.S.-China trade in goods indeed hit a new record in 2022, making China the U.S.’s third-largest trading partner after Mexico and Canada. It made the U.S. China’s third-largest trading partner, after ASEAN and the EU; it is the largest when considering single-country trading partners. This record comes even as the U.S. has imposed an average tariff rate of approximately 20 percent on around two-thirds of all goods imported from China since the trade war started and amid intensifying geopolitical tensions between these two countries.

The foremost driver of this outperformance of U.S.-China bilateral trade is higher commodity prices, because of higher production costs caused by China’s disruptive zero-COVID policy and surging inflation in the U.S. According to the U.S. Bureau of Economic Analysis (BEA) and the Fed, the average price-level of U.S. imports from China increased by 3.1 percent year-on-year in 2022 and the average price index of U.S. commodity exports to the world (including China) increased by 13.1 percent, both of which largely contributed to the growth of these nominal trade figures.

Looking further into product categories, computers and electronics remained the U.S.’s largest import commodity in 2022, with nominal import value reaching $161 billion, a slight decrease of 0.4 percent year-on-year. Meanwhile, the U.S.’s main exports to China were agricultural products (the majority of which were soybeans), with value exceeding $30 billion. These patterns imply that the economic and export structures of the U.S. and China are still more complementary than substitutable, which is another reason for the high level of observed mutual reliance.

Lastly, a simple back-of-the-envelope exercise shows inflation-adjusted average exports per Chinese manufacturing firm has been increasing consistently since 2020, suggesting that Chinese exporters might have adopted approaches to increase productivity and reduce production costs so as to maintain and expand their exports to the U.S., in face of the rising tariff rates. This conjecture is consistent with academic findings that challenging external environments often spur self-renewal and upgrading at Chinese manufacturing firms.

In the long term, with both countries seeking greater self-reliance, there is a possibility that bilateral trade in certain sectors will eventually decrease. But inherent features of China’s economy, including a large market scale, a comprehensive industrial structure, high-quality infrastructure, and an efficient labor force, will make decoupling too costly for both the U.S. and China for the foreseeable future.

Interdependence has become a bad word in Washington. Yet despite the United States’ attempts to extricate itself from China—through tariffs, export controls, sanctions, and other tools—the world’s two largest economies remain deeply intertwined. Record bilateral trade flows in 2022, amounting to over $690 billion, are just one indicator of persistent integration between the two countries. While the rate of FDI flows to China slowed, the stock of direct U.S. investment in China still reached a record in 2021. The 2022 U.S.-China Business Council survey shows that 77 percent of U.S. firms view China as a top five priority within their overall strategy. Similarly, the American Chamber of Commerce’s China Business Climate Survey finds that China remains a top destination among U.S. companies. Asset allocators, for their part, remain bullish on Beijing. In 2023, several U.S. banks turned optimistic on China’s investment outlook as it reopens from strict COVID-19 policies.

The fact is that many American companies still manufacture products in China, still seek investment opportunities in China, and are still gaining inroads into China’s growing consumer market, while the United States remains an attractive destination for Chinese exporters. Trade economists tell us that bilateral trade, for the most part, is a function of the size of the two economies, the distance between them, and transaction costs. Since the launch of the trade war in 2018, while costs like tariffs and shipping have risen, the U.S. and Chinese economies have also grown by over 20 percent in nominal terms. It is not surprising, then, that U.S.-China trade continues to grow.

Ultimately, the trade war has slowed rather than reversed the rate of U.S.-China integration. Were it not for bilateral tariffs and the broader securitization of economic transactions, one can reason that U.S.-China trade volumes would be greater than they are now. Economist Chad Bown has demonstrated that, over the last four years, U.S. trade grew at a faster rate with the rest of the world than with China. In particular, goods slapped with 25 percent tariffs—such as semiconductors and furniture—have struggled to keep pace with U.S. imports from the rest of the world.

While the data suggest that geopolitical tensions have had marginal effects on the overall depth of U.S.-China interdependence to date, decoupling could accelerate going forward. Rhodium Group finds that the outbound investment screening mechanism being debated in Congress would have reduced U.S. investment in China over the last two decades by as much as 43 percent. On the other side of the Pacific, Beijing has made “self-reliance” one of its primary economic priorities. As both Washington and Beijing continue to implement protectionist policies, there is a risk that economic relations no longer serve as a bulwark against rapidly deteriorating ties.