Chill Out About China

Recently, U.S. and Chinese officials concluded a marathon 100-day round of trade talks without reaching agreement on a single significant economic issue. The dialogue reportedly ended in a stalemate after China balked at the U.S. side’s demand that it curtail its alleged overproduction of steel.

The Trump administration has made limiting Chinese steel imports a central tenet of its trade policy — though Chinese steel accounts for just 3% of U.S. steel imports — while giving short shrift to the likely jump in domestic steel prices and job losses in the construction industry that would accompany an imposition of tariffs and quotas on Chinese steel.

The emphasis on Chinese steel is just the latest example of how narrow interests on both sides of the aisle in the United States have commandeered Sino-American relations. Republicans have been vocal critics of China’s trade policy, while also raising the specter of national security concerns, and Democrats have sought to tap into and exploit the prevailing protectionist views, taking a decidedly anti-competitive, pro-union stance. Cooler heads ought to prevail.

Like many complex issues in the Twitter era, the true state of Sino-American relations has been obscured by a multitude of players, often operating outside of the mainstream, with outsized voices. Based on recent proposals emanating from Congress — from threats to label China a currency manipulator to efforts to inject economic considerations into the regulatory review of foreign investment in sensitive U.S. assets — one would think that China is America’s biggest creditor; China will soon become the world’s most dominant economy; Chinese companies are snapping up whole industries in a fire sale of U.S. assets; and, in short, the days of the United States as top dog are over.

But those assertions are inaccurate. While there is an asymmetry in access to our respective markets that needs to be addressed, the current conversation about China overstates its prowess — and that risks scaring off valuable Chinese investment in the United States that can create American jobs and spur development in the next generation of critical U.S. infrastructure and industry.

So here are some facts, to put matters into much-needed perspective.

Lanier Saperstein

China is not our chief creditor. It simply does not own most of the U.S.’s debt. While China held $1.102 trillion of U.S. national debt as of May 2017, that share constituted a modest 5.55% of the U.S.’s overall $19.845 trillion in debt. That paled in comparison to the U.S. government’s more than 40% stake in U.S. debt. China is not even the U.S.’s largest foreign creditor; that title belongs to Japan.

While China is the second-largest economy in the world, it is not the second-strongest economy. China has done an impressive job growing its economy since Deng Xiaoping introduced the policy of reform and opening in the early 1980s, but it still is a developing economy that faces all of the challenges that other rapidly developing countries have faced in trying to shift from export-oriented to consumption-based growth. A more accurate picture of China’s economic growth can be found by focusing on its per capita data. China’s gross domestic product in 2016 on a per capita basis was 14% of U.S. per capita GDP, placing it 68th in the world, falling between Mexico and Lebanon. The China Daily has calculated how far average Chinese citizens still have to go to achieve the level of wealth currently enjoyed by their American counterparts, noting that a sustained GDP growth rate of 5.4% “would allow the country to become a much richer society in 20 years and China’s per capita real income [to] reach $28,600.”  That is approximately half the GDP per capita of the U.S. today.

Japan did not buy up all of the U.S., and China won’t either. Chinese individuals and companies are seeking to geographically diversify their holdings through overseas investment to hedge against an economic slowdown and a sweeping corruption crackdown in China. Yet that does not mean that the Chinese will — or even can — buy whatever they please in the U.S. It is true that, in 2016, Chinese investment in the U.S. tripled year-over-year to $46 billion. But, at least on the corporate front, those investments were largely strategic in nature, and many were thoroughly vetted by U.S. regulators before receiving official approval. The Chinese government also took careful note of this development, and has enhanced its capital control regime to stem the outflow of Chinese money from China. Finally, historically speaking, the amount of Chinese investment in the U.S. pales in comparison to U.S. investment in China over the last 30 years. Indeed, Chinese companies have invested $110 billion in the U.S. since 1990, while the value of U.S. investments in China in that time exceeded $240 billion. China has a way to go before it can make up that gap.

There is tremendous economic opportunity in the U.S.-China relationship, and it is a relationship that can spur growth and jobs in the United States. While we cannot be naïve in our contacts with China, we should not allow shrill voices to hijack the opportunity to forge a level-headed and forward-looking U.S.-China policy.

Lanier Saperstein is a partner at the international law firm Dorsey & Whitney and serves as co-chairman of the firm’s award-winning U.S.-China Practice Group.