Before the spy balloon fell, trade with China was booming

U.S.-China relations have reached a low point after a Chinese spy balloon was discovered — and shot down — over U.S. territory last week, but trade between the world’s two leading economies just hit an all-time high.

According to numbers released Tuesday by the Commerce Department, two-way trade between the United States and China set a new record in 2022 — $690 billion — part of a surge in U.S. trade with partners around the world last year.

In 2022 the U.S. imported record amounts from 90 countries, led by Canada, Japan, and Mexico.

While some of the increase in last year’s trade figures may be a result of historic levels of inflation, the figures remain eye opening, particularly considering the years-long U.S. tariff campaign on Chinese imports and new efforts to stop the flow of U.S. tech to Beijing. And they demonstrate just how intertwined the U.S. and China remain, commercially at least, despite efforts to effectively “decouple” their economies.

“The decisions of consumers and businesses so far have been more powerful than governments,” said Ed Gresser, a former chief economist at the Office of the U.S. Trade Representative. “Tariffs are basically a form of taxation. They have an influence on trade flows, but they don’t have the overwhelmingly powerful influence, or at least they haven’t so far.”

After years of rising imports to China, the former President Donald Trump launched a trade war called “Tit-for-Tat” in 2018. This resulted into tariffs of more than $300 Billion worth of Chinese goods. The initial motivation was due to concerns about Chinese trade practices, which forced American companies into giving up valuable intellectual property. However, the original purpose of this trade war was quickly lost.

Beijing responded by hitting roughly $100 billion of U.S. goods. Most of the duties imposed on both sides remain in effect two years after the Biden administration.

Trump justified a number of his trade actions in the name of national security, a trend that has continued during the Biden administration, especially in the form of export controls aimed at keeping the most sensitive U.S. technology away from China’s military.

That reflects concern over Chinese President Xi Jinping’s goal of reuniting China and Taiwan, a self-governing island that Beijing has long viewed as part of its territory and whose strategic position would help the Chinese military dominate the region.

Still, despite talk of “decoupling” from China, U.S. imports of Chinese goods increased to $538.8 billion in 2022, only slightly less than the record set in 2018. The U.S. also exported record amounts of goods to China, reaching $153.8 billion last year.

The trade deficit between China and the United States was $382.9 trillion in 2022. It was also the second highest bilateral trade deficit.

The largest share of U.S. exports from China is agricultural goods. This puts farmers at the forefront of any attempts to cut or reverse trade relations.

“I think decoupling from China would be a terrible mistake,” John Bode, president & CEO of the Corn Refiners Association and a member of the Farmers for Free Trade Coalition, told reporters recently. “What needs to happen is a strategic approach to managing the relationship so that strategically sensitive information is protected.”

This seems more likely at the moment, despite all the uncertainty. current diplomatic uproar over a Chinese spy balloon discovered flying over U.S. territory and similar episodes — former House Speaker Nancy Pelosi’s trip to Taiwan in August — that have strained the relationship.

The Boston Consulting Group recently reported that trade between the U.S.A. and China will decline by $63Billion, or approximately 10 percent, by 2031. This is because companies are trying to avoid supply chain disruptions and shift production to less geopolitically sensitive places like Mexico, India, and countries in Southeast Asia.

Instead of abandoning China completely, many companies and countries are developing “a China-plus-one strategy” to diversify their options, Nikolaus Lang, a managing director and senior partner at Boston Consulting Group, said in an interview.

Vietnam has been particularly benefited by American companies seeking to hedge their dependence on Chinese supply chains, a trend that predates Trump.

The record-breaking $127.5 billion worth of bilateral trade between Vietnam and the United States in 2022 is a result of more than three times the growth in the last ten years. The growth in U.S. exports to Vietnam has been mainly due to companies shifting production from China. This has led to a U.S. trade surplus with Vietnam of $116.1 billion last year.

U.S. trade with other countries also reached a record in 2022, despite new levels of protectionism in the United States and the rest the world. It’s a reminder that even as Covid-19 severed supply chains and geopolitical tensions prompted talk of “near-shoring,” the end of globalization may not be as definitive as some have suggested.

“You can see some shifting of sourcing — a little bit less from China and somewhat more from some other sources,” Gresser said. “But you haven’t seen that show up as the U.S. trading less than it used to be. In dollar terms, we’re trading more than we did in the past.”

The 2022 numbers include records imports of $553.3 trillion from the European Union. This has been a loud complaint about U.S. new clean energy and technology subsidies, which they fear will harm their sales to the United States as well as siphon off investment.

That could be the case in the future, but it’s still too early to see the impact of the new U.S. policies on the trade data, Lang said.

In fact, in recent years imports have increased as a percentage the U.S. economic total, while exports declined in those terms. That may be because companies have had less incentive to export because of strong domestic demand, or it could be that Trump’s tariffs boosted the cost of inputs and made U.S. products more expensive, Gresser said.

He also said that the strong U.S.dollar, which increases American goods costs for foreign buyers is also a problem for exports.

Despite all this, the United States had record exports to many trading partners, including China, Europe, and more than 70 others.

One obvious exception was Russia, which the United States and its allies hit with a number of sanctions after Moscow’s further invasion of Ukraine in late February 2022. The bilateral U.S.-Russia trade volume was half that of 2021, and both imports as well as exports were significantly lower than pre-war levels.