The Contentious U.S.-China Trade Relationship

Introduction

U.S. trade with China has grown enormously in recent decades and is crucial for both countries. Today, China is one of the largest export markets for U.S. goods and services, and the United States is the top export market for China. This trade has brought lower prices to U.S. consumers and higher profits for American corporations, but it has also come with costs.

The optimism that accompanied China’s entry into the World Trade Organization (WTO) twenty years ago has vanished as Beijing continues to embrace state-led development, pouring subsidies into targeted industries to the detriment of U.S. and foreign companies. Though U.S. consumers have benefited from the flood of cheaper goods from China, millions of Americans have lost their jobs due to import competition. Meanwhile, investment by Chinese companies is raising national security concerns. The United States has long accused China of pressuring American companies to hand over their technology, or of pilfering it outright. How to respond to China now sits at the center of the U.S. political debate, with President Joe Biden following his predecessor, Donald Trump, in adopting an aggressive economic approach.

What is the history of the U.S.-China trade relationship?

For thirty years following the establishment of the People’s Republic of China in 1949, there was virtually no trade between the two countries; Washington had severed ties with the communist government in Beijing.

China began a decades-long process of economic reform in the late 1970s under the leadership of Deng Xiaoping. His government loosened state control over the economy and allowed private industry to develop. In 1979, the United States and China normalized relations as Chinese policymakers aimed to boost trade and investment, and in 1986 Beijing applied to rejoin the General Agreement on Tariffs and Trade, the WTO’s predecessor. After protracted negotiations with the United States and other WTO members, China joined the organization in December 2001. As a condition of admission, Beijing committed to a sweeping set of economic reforms, including steep tariff cuts for imported goods, protections for intellectual property (IP), and transparency around its laws and regulations.

At the time, U.S. President Bill Clinton and his advisors contended that bringing China into the global trading system would not only benefit the United States, but also foster economic and ultimately democratic reform in China. Still, the move was opposed by U.S. labor unions and many congressional Democrats, who argued [PDF] that China’s weak worker and environmental protections would incentivize similar practices elsewhere and bring about a “race to the bottom.”

Even before China joined the WTO, trade between the two countries was growing. But WTO membership ensured “permanent normal trade relations,” thereby providing U.S. and foreign companies additional certainty that they could produce in China and export to the United States. Trade surged: the value of U.S. goods imports from China rose from about $100 billion in 2001 to more than $400 billion in 2023. This leap in imports is due in part to China’s critical position in global supply chains; Chinese factories assemble products for export to the United States using components from all over the world.

What are the benefits of this trade?

U.S. consumers have benefited from lower prices, and U.S. companies have profited immensely from access to China’s market. In a 2019 study, economists Xavier Jaravel and Erick Sager found that increased trade with China boosted the annual purchasing power of the average U.S. household by $1,500 between 2000 and 2007. China is now the third-largest export market for the United States, behind Canada and Mexico. A 2023 report by the U.S.-China Business Council, an industry group, found that exports to China supported more than one million jobs in the United States, or about 0.5 percent of the civilian labor force.

American companies earn hundreds of billions of dollars annually from sales in China—money they can then invest in their U.S. operations. Chinese companies have invested tens of billions of dollars in the United States, though this investment has dwindled in recent years amid heightened U.S. government scrutiny. 

For China, the gains from trade with the United States and the rest of the world have been tremendous. Since 2001, China’s economy has grown more than five-fold, adjusted for inflation, and it is now the world’s second largest, behind only the United States. (By some measures, it is the largest.) Hundreds of millions of people have escaped extreme poverty as a result of this growth.

What issues has it created?

Though the trade relationship has undoubtedly brought benefits, it has also presented the United States and other countries with a host of problems. 

Manufacturing job losses. Research led by economists David Autor, David Dorn, and Gordon Hanson found that the costs of boosting trade with China, the so-called China Shock, were more pronounced than those from increased trade with other countries, such as Japan. This was due to the speed at which imports rose, the vast size of China’s low-wage workforce, and the range of affected industries. Their research shows that political polarization also increased in the areas of the country most harmed by competition with China, which some analysts say helped to spur the rise of Donald Trump and populist political forces. In 2024, economists including CFR Senior Fellow Brad W. Setser referred to a renewed glut of Chinese exports—particularly in electric vehicles, solar panels, and other “green” technologies—as the “second China shock.”

National security. U.S. policymakers are increasingly worried about Chinese efforts to spread disinformation and collect sensitive information on Americans. Wary of espionage, Washington has raised concerns that U.S. companies that use Chinese technology could be putting U.S. national security at risk. U.S. officials also fear that China’s acquisition of sensitive U.S. technology will bolster China’s military. They have repeatedly accused Beijing of stealing IP and requiring American companies to share their technologies as a condition of doing business in China, known as forced technology transfer. 

Subsidization and state-owned enterprises. To achieve its economic goals, the Chinese government has poured subsidies into a range of industries, including renewable energy, with the aim of creating “national champion” companies. Some experts argue that these subsidies are wasteful, but they can be disruptive to other countries whose companies cannot compete against such levels of state support. The United States argues that many Chinese state-owned enterprises are effectively arms of the government and, unlike their private competitors, do not make decisions based on market forces.

Currency manipulation. Many economists say China kept the value of its currency, the renminbi, artificially low in the decade after it joined the WTO by accumulating U.S. dollar reserves. A weaker renminbi makes Chinese products more affordable abroad and U.S. goods more expensive in China, thereby contributing to the United States’ trade deficit with China.

Labor and human rights violations. The United States has long been critical of China on human rights issues, and U.S. labor groups have persistently complained about poor working conditions in China. These concerns have resurfaced on the trade agenda in recent years with reports of forced labor in Xinjiang, where China is repressing millions of Uyghurs. Beijing’s 2020 national security law, which fundamentally altered Hong Kong’s freedoms, is another source of tension; experts say the law could make foreign firms hesitant to do business in the city, jeopardizing its standing as a global financial hub.

At the heart of the trade conflict are the two countries’ competing economic systems. As journalist Paul Blustein details in his book Schism: China, America, and the Fracturing of the Global Trading System, Chinese officials enthusiastically implemented WTO requirements at first, engineering a profound transformation of the economy and legal system. But even as China liberalized its economy in some ways—giving rise to a thriving private sector—it never fully embraced the invisible hand of the market. The state, dominated by the Chinese Communist Party, oversees the economy through centralized management of state-owned enterprises, control over financial institutions, and a powerful economic planning commission. China’s leaders say their system is necessary to improve the lives of the Chinese people and is in line with the economic strategies used by Western countries at similar stages of development.  

CFR’s Jennifer Hillman says Beijing has perfected the model of obtaining Western technology; it uses it to develop domestic companies into giants, and then unleashes them into the world market—at which point foreign companies can no longer compete. Hillman cites 5G networks as an example of an industry in which China dominates. “You start to see how big a problem it is to try to live in this world in which China owns more and more markets and you can’t get in,” she says. The United States has been the most vocal critic of Chinese trade practices, but other countries including European Union (EU) members and Japan share these concerns.

How has the United States responded?

The United States has attempted to address its trade concerns with China through a mixture of negotiation, disputes at the WTO, heightened investment scrutiny, tariffs, and its own industrial policy. The relationship has grown more combative over the past decade as U.S. policymakers have charted a progressively more assertive course. But experts including CFR senior fellow Edward Alden say the United States lacks effective policies for managing economic disruptions.

As part of China’s entry into the WTO, U.S. negotiators demanded a temporary safeguard that could be used to limit imports from China, but this was hardly used before it expired twelve years later. Blustein writes that the George W. Bush administration was worried about cascading calls from U.S. companies for better protection and needed Beijing’s support for other foreign policy objectives, including the global war on terrorism. The Bush administration imposed some tariffs on a range of Chinese goods that were subsidized or “dumped” (i.e., sold at an abnormally low price). It also launched high-level dialogues with China to address trade issues.

These dialogues continued under President Barack Obama, whose administration cracked down on Beijing. Obama used the special safeguard to impose tariffs on imported tires, and his administration won a number of WTO disputes against China, while blocking new appointments to the WTO’s Appellate Body. Scrutiny of Chinese investment also increased, with Obama taking the rare step of blocking two Chinese acquisitions on the recommendation of the Committee on Foreign Investment in the United States (CFIUS), an interagency body that screens investments on national security grounds. His administration also concluded negotiations for the Trans-Pacific Partnership (TPP), a mega-regional trade agreement that it billed as a way to confront China on trade. 

President Donald Trump took an even more assertive approach, imposing tariffs on hundreds of billions of dollars worth of Chinese goods. Trump also withdrew from the TPP and negotiated a so-called Phase One agreement with China, which many experts criticized as punting on core U.S. concerns in exchange for a commitment by Beijing to purchase an additional $200 billion worth of U.S. goods—which it failed to live up to. Trump also designated China as a currency manipulator for the first time in decades and maintained the Obama administration’s block on new appointments to the WTO’s Appellate Body, incapacitating the organization’s dispute settlement system. Meanwhile, the U.S. Congress—responding mainly to fears over Chinese acquisition of U.S. technology—passed legislation expanding the role of CFIUS and tightening controls over high-tech exports. 

Under President Biden, Washington has taken the most serious steps yet toward weakening China’s play for economic dominance. He has signed legislation that could lead to the ban of China-owned social media giant TikTok; retained some $360 billion worth of tariffs as well as many sanctions applied by Trump on Chinese individuals associated with human rights abuses in Xinjiang and Hong Kong; introduced unprecedented export controls that restrict Beijing’s ability to obtain advanced technology; and banned some U.S. investment in sensitive technologies that lawmakers fear could be used to aid China’s growing military. He has also quadrupled tariffs on electric vehicles made in China, tripled those on steel and aluminum, and doubled the duty on semiconductors. Meanwhile, several U.S. governors have signed laws preventing state pensions from investing in equities controlled by the Chinese state.

What lies ahead for U.S.-China trade?

Biden’s willingness to continue the economic confrontation with China has raised questions about the future of the trade relationship. Neither U.S. tariffs on Chinese goods (and retaliatory Chinese tariffs on U.S. exports) nor U.S. export controls has shown signs of being rolled back. Some legislators have introduced bills that would expand Biden’s investment restrictions to include more Chinese industries; other proposed legislation would require federal government investment plans to divest from Chinese companies. The renewed pressure on TikTok marks another major escalation. Beijing calls the move “bullying,” and TikTok is suing the U.S. government, arguing that the forced sale is not feasible and violates the First Amendment.

The rise of China, as well as a new appreciation for the fragility of global supply chains laid bare by the COVID-19 pandemic, has contributed to the revival of industrial policy in the United States. The CHIPS and Science Act and Inflation Reduction Act, both passed in 2022, direct hundreds of billions of dollars to scientific research and domestic production of high-tech goods, such as semiconductors. Experts say the simultaneous efforts to impair competing Chinese industries, particularly export controls, could stifle China’s semiconductor industry. Biden administration officials argue that these restrictions are part of a “small yard, high fence” approach aimed at preserving national security, not a broader economic “decoupling.” During a visit to China in August 2023, U.S. Commerce Secretary Gina Raimondo said that the United States believes “a strong Chinese economy is a good thing.”  

Meanwhile, some experts have questioned whether the WTO system is sufficient to address U.S. grievances and whether China’s economic model is fundamentally incompatible with global trading rules. The concept of a subsidy, for example, presupposes a bright line between the state and private industry that is increasingly blurry in China. In a 2022 report, the Office of the U.S. Trade Representative (USTR) said it has become “widely accepted in the United States that WTO rules do not, and cannot, effectively discipline many of China’s most harmful policies and practices.” That view has informed the decisions of both Democrat and Republican leaders to continue neutering the WTO. 

CFR’s Hillman argues that allowing China into the WTO was not a mistake, but that the United States erred by failing to use the tools at its disposal to deter China’s unfair trade practices sooner. Although the WTO remains a valuable forum for the United States, Washington might need to look elsewhere, Hillman says. Some experts have suggested a compact among like-minded countries that would function in parallel with the WTO. Politicians have advocated for more extreme options; Senator Josh Hawley (R-MO), for example, has called for abolishing the WTO altogether.

Henry Gao, a professor at Singapore Management University and an expert on Chinese law and international trade, says that the use of unilateral tariffs damages the United States’ image as a champion of free trade and cedes moral authority to China. Hillman and Gao agree that it was a mistake for U.S. leaders to assume that WTO membership would fundamentally change China. “I would take a step back and ask: was the WTO even designed to convert countries’ economic systems?” Gao says. “My answer to that is no.” Gao argues that China’s model is unsustainable, and says that the United States should therefore be patient and work within the WTO, negotiating new rules as needed. “If you try to compete with China by becoming China, what is the point even if you win in the end?” Gao says.