COMMENT - The US and China want to become more independent from each other – but it is not so easy

For a long time everything went well, but now something crucial has changed.

China was desperately poor after Mao Zedong's death. His leadership wanted to open up the country to generate prosperity. Armies of migrant workers toiled on assembly lines; China became the world's workshop. As a result, it actually became astonishingly richer. In the past 25 years alone, its per capita economic output has not doubled, but rather increased nearly sixfold, adjusted for purchasing power.

In return, the West received clothes and shoes, electronics, and toys that were much cheaper than they could have produced themselves. In the United States, per capita economic output, adjusted for purchasing power, has increased by a third since 2000. But this underestimates the average increase in prosperity, because goods imported from China not only became cheaper but also better.

America's status as the world's strongest and most open economy helped the dollar establish itself as a coveted global currency. China invested its trade surpluses in dollar-denominated assets in the US, thus financing a relatively cheap life on credit for the US. Over the past quarter-century, Americans have consumed more than they produced and invested more than they saved. China's trade surpluses made this possible, in no small part. They mirrored the US debt. It was no coincidence that the slogan "What's good for China is good for us" still held true under Barack Obama.

However, this has now changed significantly: the USA accuses China of unfair competition.

China has become richer and more capable. It doesn't want to remain stuck in a state of moderate prosperity and no longer want to be merely the world's workshop. The Chinese leadership is concentrating its efforts on catching up technologically and becoming a leader in the most important future technologies (including military armaments). This will enable the Middle Kingdom to become a highly developed, innovative economy.

The US therefore increasingly sees China as a rival threatening its own dominance. The US is attempting to slow China's rise by denying it access to its cutting-edge technology. In response, China is concentrating its efforts on reducing dependence. The world's two largest economies have been toying with the idea of ​​a more or less strong decoupling for some time.

Donald Trump started this during his first term. Joe Biden has further intensified the rivalry with export and cooperation bans, as well as industrial policy subsidies. Since Donald Trump took office, tariffs have been raised. First on steel, aluminum, and goods containing these metals. In mid-April, the tariff war escalated. The US raised its import tariffs on goods from China to a prohibitively high 145 percent (although it then made some exceptions to their application). China followed suit with 125 percent on goods from the US and imposed export bans of its own.

But decoupling isn't that simple. While official Chinese figures show that China's exports to the US did indeed fall by a fifth in April compared to the same month last year, exports to other Asian countries also increased by a fifth, and exports to Europe by 8 percent. The result was overall export growth of 8.1 percent.

China is now a more important trading partner for a majority of countries globally than the United States. Its goods are competitive and not easily substituted. And at least some of its exports to Southeast Asian countries are intermediate goods for goods sold from there to the United States.

The trend toward trade diversion has been ongoing for several years, as American trade statistics show. For a long time, most goods imported into the United States came from China. Imports from the free trade zone with Canada and Mexico have since increased in value. At the same time, countries such as Vietnam, Taiwan, and South Korea, which process many inputs from China, have gained importance as countries of origin.

A look at the structure of direct trade in goods between China and the US reveals the dominance of electronics, including smartphones, home furnishings, toys, and plastic products, in US imports. In anticipation of the imposition of additional tariffs, these tariffs increased in the first quarter of this year compared to the same period last year. In return, American companies exported electronics, machinery, aircraft, and aircraft parts, as well as fossil fuels and agricultural goods such as soybeans, grain, fruit, and meat, to China.

With $4 billion each for electronics and aircraft or aircraft parts, and nearly $3 billion each for machinery and agricultural goods in the first quarter, exports to China continued to be substantial for the American economy. However, the different dimensions are striking: Chinese exports of smartphones and electronics to the US amounted to around $20 billion in the first quarter, while toys and home furnishings each accounted for around $3 billion.

It's no coincidence, therefore, that the US is pushing for a more balanced relationship. However, neither side can have any economic interest in a complete decoupling. They are too closely intertwined.

With the bursting of the real estate bubble, the Chinese economy and public sentiment have noticeably deteriorated; university graduates are struggling to find suitable jobs. And in the US, despite everything, Trump must be careful not to anger the lower middle class he courts with a sharp rise in inflation, and to harm farmers and the agricultural sector by losing an important customer.

The fact that the two sides are negotiating an agreement again therefore at least follows the logic of short-term common sense. For the Chinese, however, the question is likely to be the extent to which they can still trust Trump's promises. They will have to decide whether they want to pursue a greater decoupling from the US in the long term or an agreement with it. Security circles in the US will continue to warn against strengthening Beijing. The question is whether and when, under Trump, the realization will prevail that China's rise to a modern, innovative economic power – like Japan's once was – can no longer be stopped and that it is better to deal with it constructively.

However, a more fundamental reduction in the global imbalances between China as a net exporter of trade goods and the USA as a country that is increasingly indebted abroad will require much more than Beijing's willingness to buy more agricultural goods from the USA again.

China's globally dominant role as an exporter is due to the fact that the Chinese leadership has closed off the country's capital market internationally and the poorly developed social safety net. To avoid financial hardship in illness and old age, the Chinese must save a lot – more than they invest. They receive only low returns, which in turn allows the system to ensure consistently high levels of investment in industry and the export economy. This is despite rapidly growing consumption, but still relatively low compared to prosperity.

To become less dependent on exports, the Chinese leadership would have to adapt its growth model. It would have to shift from a controlled export orientation to more domestic consumption. This would require more spending on the social system instead of investments in industry and infrastructure. The trade balance is not merely the cause of global imbalances, but equally the result of the interplay of savings, investment, and consumption.

This is especially true for the United States. To significantly reduce its global trade deficit in goods and services, the US economy would have to save more and consume and invest less. Then it would no longer need to finance itself through constant capital inflows from abroad.

A breakdown of net financing by sector clearly demonstrates the core of the problem. Contrary to widespread stereotypes, private households in the US are net savers, and private companies generally finance themselves on a net basis. The government is the increasingly large deficit sinner.

If the gap between investment and savings in the US is to close again, public fiscal discipline would have to increase. Beyond all of Elon Musk's crude but ineffective efforts to increase the efficiency of the US government, Donald Trump and Congress would have to force Americans to consume less and instead pay higher taxes to finance growing social spending on healthcare and retirement, as well as debt service. Or they would have to significantly cut social benefits and spending on healthcare and defense. But neither of these measures is likely to win elections.

But without such structural reforms, Trump's trade policy will not succeed. And without strengthening domestic consumption, China will face growing accusations that its policies are flooding the global market with goods produced outside of market conditions. A consensual deal between the US and China could make some things easier, but ultimately, nothing will circumvent the need for structural reforms in either country.