If you follow the news, you know that tensions between the United States and China are high and that the trade relationship between the two largest trading nations on the planet has been fraying.
However, amid ominous headlines about a possible “decoupling” of the United States and China, it may be surprising how strong and binding their financial ties remain.
Many large American companies rely on China for a substantial portion of their revenue and rely on Chinese suppliers and factories for their products. The two economies are closely linked, and as a China expert, I think that’s a good thing. It implies that even if relations deteriorate further, countries have many incentives to step back from the brink of serious conflict.
Consider that while publicly traded U.S. companies in the S&P 500 earn nearly 60 percent of their revenue domestically, the largest source of their foreign sales is China. This is according to estimates from financial data company FactSet, which said sales from China amounted to 7.1 percent of S&P 500 revenue during the 12 months through December. The second largest foreign source was Japan, with 2.6 percent; followed by Germany and Great Britain, with 2.2 percent each; and then Taiwan, with 1.8 percent.
Numbers like these are critical to evaluating U.S.-China relations, Dale Copeland, a political scientist at the University of Virginia, said in an interview. “Expectations of future earnings are a key and often neglected factor in international relations,” he said. Copeland is the author of “A Safe World for Trade: American Foreign Policy from the Revolution to the Rise of China.”
“History shows that when a great power abruptly cuts off business and resources, so that the prospects for future trade appear bleak, the possibility of war becomes much greater,” he added. “Fortunately, that has not happened so far with the United States and China. Greater conflicts, even wars, are not inevitable. “There are still many opportunities for future business and I think that is, and should be, a deliberate part of current American policy.”
The case against China
Business results offer only one perspective on a complex issue. But they are revealing because they seem to go against the drumbeat of conflicts and restrictions between the United States and China.
From tariffs to tech bans to concerns about TikTok, the Biden administration has been cracking down on China, which it says is abusing longstanding trade relationships, subsidizing local industries directly and indirectly, illegally obtaining American intellectual property. unlawful and fundamentally threatening the national security of the United States. US intelligence estimated that China had “the ability to compete directly with the United States and its allies” and, if unopposed, could “alter the rules-based global order” in its favor.
It’s an election year in the United States, and the country’s new policies toward China build on a shift that began during the Trump administration. Donald J. Trump’s advisers now say that if he is re-elected, he will seek a full “decoupling” from China, although he has been inconsistent: He recently questioned the need to require TikTok’s Chinese owners to sell the app or shut it down in the United States. , but as president, he tried to force a sale.
China’s reaction to recent US measures has been muted. But some additional response is more likely if the United States continues to push to create an allied trade front that aims to prevent Chinese factories from exporting torrents of low-cost goods like electric vehicles, solar panels and steel that could hurt industries. localities and cause internal dislocations in the economy. many countries.
porous barriers
The highest specific tariffs (such as the new 100 percent tariff on Chinese electric vehicles) apply to goods that are not imported in large volumes into the United States. That means President Biden’s new tariffs wouldn’t change the overall picture much, an analysis by Oxford Economics, an independent research firm, suggested.
The trade-weighted average U.S. tariff on goods from all nations was just “1.6 percent before the Trump trade wars and rose to 3.1 percent,” Ryan Sweet, chief economist, said in an email. of the firm for the United States. Before Biden’s latest tariffs, the average U.S. tariff was 2.7 percent, he said, and the new tariffs would “permanently add 0.14 percent to the effective tariff rate.”
But the effective tariff will fall below 2.3 percent over the next decade, he projected, as companies find ways to avoid “the Trump and Biden tariff increases.” That assumes that the tariff wars do not get worse.
To put that in perspective, the World Bank estimated that the global average tariff was 2.6 percent in 2017, before the US-China conflict began. Therefore, the United States is not yet a global outlier, even if it no longer reduces trade barriers or costs for consumers. At this point, as American corporate earnings reports show, there are still great opportunities for profitable trade between the two countries.
The chip war
What I find surprising is that even the companies that design, manufacture and create tooling for advanced silicon chips continue to receive substantial revenue from China.
Let us remember that in 2022, the United States began to impose export controls on these types of companies from countries that used American technology. restricting its sales to China. At the same time, with the Chip Act, the United States began subsidizing the construction of domestic semiconductor foundries, effectively replicating parallel efforts that China had previously initiated.
I spoke with Chris Miller, a historian at the Fletcher School at Tufts University, who wrote “Chip War: The Fight for the World’s Most Critical Technology.”
The US restrictions are calibrated so that even some advanced chips are sent to China, he said. “The United States is really targeting chips that are critical for AI. Others are achieving it.”
Nvidia, the main designer of chips that make artificial intelligence possible, is prohibited from shipping its most advanced products to China. That has affected his business there. Jensen Huang, Nvidia’s chief executive, said on an earnings call last week that Nvidia’s business in China had declined “due to the limitations of our technology.” By 2023, FactSet estimated that China was Nvidia’s third-largest market, with 16.6 percent of its total sales, behind only the United States, with 44.3 percent, and Taiwan, with 22 percent. .
In fact, all of the semiconductor companies I analyzed (Nvidia, Broadcom, AMD, Intel, Taiwan Semiconductor, Samsung, Lam Research, KLA and Tokyo Electronics) received substantial revenue from China in 2023. China was among the companies’ top three markets . and, in most cases, ranked No. 1. Intel, for example, received 26.8 percent of its revenue from China.
The case of ASML, a Dutch company, is instructive. The company makes lithography machines needed to etch circuits for the smallest, cutting-edge chips. Roger Dassen, the company’s chief financial officer, said in an earnings call in April that the U.S. ban could eliminate 10 to 15 percent of its sales in China.
However, he said, “we are still looking for a strong level of sales for China this year.” FactSet estimated that ASML received 25.8 percent of its revenue from China in 2023. Revenue from the United States was only 11.4 percent.
Let’s think about Apple. It’s not just that China accounted for 17.8 percent of the company’s revenue in 2023, second only to the United States. Apple routinely ships large quantities of tiny, advanced, next-generation semiconductors in and out of China. “The regulations were written to allow this to happen,” Miller said.
The iPhone 15 in my pocket contains a four-nanometer chip designed by Apple in California, manufactured in Taiwan, shipped to China for assembly, and then shipped back to consumers like me in New York. The iPhone 15 Pro already uses three-nanometer chips, and Apple is preparing to incorporate even more advanced two-nanometer chips from Taiwan Semiconductor. All this technology is beyond China’s commercial capacity. Apple did not respond to a request for comment.
Last week, China held military exercises in the waters around Taiwan, issuing a “stern warning” against moves toward the island’s independence. China was also demonstrating that it could cut off access to the advanced silicon chips that have become the jet fuel of the world’s stock markets.
The peak of globalization may have passed, but peaks come and go. Long-term trends are what matter.
It is in everyone’s interest that the United States and China coexist peacefully. In their quest for profits, companies around the world are still finding ways to achieve this.