New Cold War – The Cold Decoupling of the US and China

New Cold War US China Cold War

The intensifying geopolitical and economic rivalry between the United States and China has been increasingly characterized as a New Cold War. As tensions escalate, both countries are increasingly seeking to reduce their economic interdependence and establish greater self-reliance.

US exports to China, which suffered greatly during President Donald Trump’s trade war in 2018-2019, continue to face challenges. China has started shifting its purchases of foreign goods away from the United States, driven by concerns that trade flows could be weaponized by either side in the name of security. In an attempt to stay ahead, both countries are now exploring diversification.

China’s turn away from US exports began when it imposed tariffs in response to Trump’s trade confrontation. Although a truce was announced in January 2020, with China pledging to increase imports from the United States by $200 billion over two years, it fell short of meeting the target for various reasons. Even by 2021, US exports to China had barely recovered to pre-trade war levels.

Data from 2022 indicates that US exports are falling further behind foreign competitors in the Chinese market. Key US manufacturing exports like automobiles and Boeing jets have become scarce, while semiconductor sector sales have also diminished due to new US export control policies. US services exports suffered a significant decline during the pandemic and have yet to make a full recovery.

Even in areas where US exports seem strong, such as record-high US farm sales to China in 2022, concerns have arisen. The agricultural gains were largely driven by higher prices and worries over global food insecurity related to the Russia-Ukraine war, rather than increased shipments. Moreover, Chinese buyers are diversifying their suppliers, while the US agricultural sector remains heavily reliant on the Chinese market.

Although there was once mutual dependence and benefit in China-US trade, the situation has changed. The reality is that US exports to China serve as another avenue through which the bilateral relationship continues to deteriorate, despite the existing challenges.

New Cold War – US Exports to China Fell Behind in 2022

In January 2020, President Trump signed the well-known “phase one” agreement with China, which aimed to halt the trade war but left most tariffs in place. As part of the agreement, China committed to purchasing an additional $200 billion worth of US goods and services over the 2017 baseline levels in specified amounts from 2020 to 2021. China did not fulfill its commitment and ended up buying none of the extra $200 billion of US exports agreed upon in Trump’s trade deal.

New Cold War US China Cold War -   US exports to China
New Cold War – US exports to China

In 2022, US exports to China showed a slight improvement. They reached their “largest ever recorded” level in nominal terms, primarily because they exceeded the pre-trade war levels of 2017 and experienced modest growth compared to 2021. This achievement is somewhat misleading as even if export volumes remain unchanged from year to year, the nominal value of exports would naturally increase due to inflation.

To gain a more meaningful perspective, it is crucial to compare US exports to China with their projected levels if they had grown at the same rate as China’s imports from the rest of the world between 2018 and 2022. This comparison takes into account the actual performance of US exports relative to international competitors exporting to China. It also considers the impact of the extraordinary COVID-19 pandemic, including China’s stringent zero-COVID measures, which significantly affected Chinese economic growth and import demand from 2020 to 2022 (with GDP growth rates of 2.2% in 2020, 8.4% in 2021, and only 3.0% in 2022). Additionally, this analysis considers the effects of inflation.

According to this comparison, US exports to China in 2022 were 23% lower than the projected trend. This reveals a potential widening gap over time, indicating a second issue. In 2020, the first year of the phase one agreement, US exports underperformed by only 16%, but this performance deteriorated further as the gap expanded to 22% in 2021.

It is worth noting a final comparison: the exports promised by President Trump under the phase one agreement. Although the purchase commitments expired at the end of 2021, US exports to China in 2022 only reached 58% of the second year’s (2021) commitments, showing only a slight improvement compared to the 2021 US export performance of 57%.

New Cold War – No sign of U.S. manufactured product exports returning to pre-trade war trajectory

New Cold War US China Cold War -   US manufactured product exports to China

U.S. exports of manufactured goods to China not only failed to recover after the trade war but are now showing signs of further decline. This is significant because manufacturing constituted 44 percent of total U.S. goods and services exports to China before the trade war, making it the largest component of pre-trade war commerce. However, by 2022, this percentage had dropped to 41 percent.

In 2022, U.S. sales of manufacturing goods to China decreased by 3 percent compared to 2021 and fell below pre-trade war levels once again. (It is worth noting that China’s imports of manufactured goods from the world also decreased by 8 percent in 2022.) U.S. exports of manufactured goods to China in 2022 were 23 percent lower than the projected growth rate of Chinese imports of these products from the rest of the world.

New Cold War US China Cold War -   US manufactured product exports to China by categories
New Cold War – US Export to China of manufactured products by categories

The semiconductor industry played a significant role in the decline of U.S. exports of manufactured goods in 2022. Semiconductors and semiconductor manufacturing equipment had been one of the few positive aspects of manufacturing during 2020-2021, surpassing expectations under the phase one agreement. Several factors contributed to this decline.

Firstly, the high demand for electronics due to the COVID-19 pandemic and the shift towards remote work, schooling, and leisure activities decreased in 2022 from the pandemic peak. Secondly, concerns about U.S. export controls on semiconductors and equipment led to hoarding behavior during 2020-2021. It is important to note that U.S. sales of semiconductors and semiconductor equipment to China may continue to decline due to the introduction of strict U.S. export controls in October 2022.

The automotive and aircraft sectors also showed limited signs of recovery in 2022, even from their already low base. These were the two largest manufacturing export sectors prior to the trade war. When faced with the costs associated with tariffs in 2018, automakers like Tesla relocated their production outside of the United States to maintain access to Chinese consumers. U.S. auto exports to China have never regained their former levels.

Following two crashes involving Boeing’s 737 MAX model, U.S. exports of aircraft to China sharply declined in 2019 and have not recovered since. (Chinese airlines resumed flights of their 737 MAX aircraft in January 2023.) While Chinese state-owned airlines traditionally split their aircraft purchases between Boeing and Europe’s Airbus, China announced significant combined Airbus jet purchases totaling approximately $40 billion in July and September 2022.

Boeing’s announcements, on the other hand, have been more limited, citing “geopolitical differences” as a constraint on U.S. aircraft exports. China even imposed sanctions on an executive at Boeing’s defense division in September for arms sales to Taiwan. Considering concerns about dependency, China may be particularly hesitant to purchase Boeing products, having witnessed how Western countries imposed export sanctions on aircraft parts and services to Russian commercial airline fleets following Russia’s invasion of Ukraine in February 2022.

Read More about the New Cold War

The New Cold War: How It Differs from the First

Implications for Investments and Industries in the New Cold War

New Cold War – US Energy Exports to China Plunge Amid Russia’s War on Ukraine

In 2022, the value of US energy exports to China experienced a significant decline of 13% compared to peak levels in 2021, despite soaring global energy prices. Although US exports to China had not reached their purchase commitments outlined in the phase one agreement during 2020-2021, they had expanded considerably from pre-trade war levels. The decline in 2022 can be attributed, in part, to the redirection of energy trade flows between the two countries in response to the Russia-Ukraine war.

New Cold War US China Cold War - US Energy Export to China

Western European nations faced shortages in 2022 due to Russia’s strategic use of energy supplies, including the restriction of natural gas pipeline sales to Europe as a form of punishment for its support of Ukraine. Additionally, Western sanctions imposed limitations on imports of Russian coal and oil.

Consequently, the United States shifted its export capacity towards supplying its allies in Europe rather than China. US export volumes of crude oil, coal, and liquefied natural gas (LNG) to the European Union and the United Kingdom combined saw significant increases of 46%, 64%, and 145%, respectively, compared to the previous year. In contrast, US export volumes to China of crude oil, coal, and LNG in 2022 decreased by 13%, 77%, and 77%, respectively.

New Cold War US China Cold War - US Energy Export to China By Categories

As a result, the value of US exports of LNG and coal to China experienced a sharp decline, with exports of crude oil showing only a slight increase, despite higher prices for all three commodities. In 2022, China shifted its energy sourcing towards Russia, which had surplus export capacity due to reduced sales in the European market. China also diversified its energy imports by turning to countries like Malaysia (oil), Qatar (LNG), and Mongolia (coal). Furthermore, China experienced an 11% increase in coal production in 2022, marking its largest annual rise since 2005.

New Cold War – US Services Exports to China Continue to Struggle, Significant Declines in 2020-21

US exports of services to China experienced a substantial decline during 2020-21, primarily attributed to the impact of the pandemic, and their performance remained challenging in 2022. In the years leading up to 2019, travel constituted over half of US services exports to China. But both tourism and business travel plummeted to less than 10% of 2019 levels in 2020-21 as China implemented strict measures limiting international travel. US exports of educational services, involving Chinese students studying at American colleges and universities, also declined during this period.

New Cold War US China Cold War -  US Services Exports to China

Notably, US exports of financial services and charges for intellectual property remained below the levels observed in 2019, despite being areas addressed by the legal commitments outlined in other parts of the phase one agreement. These were areas where export growth was expected. US services exports to China in 2022 showed a modest increase of only 7% compared to 2021 but they remained 25% below the levels seen in 2017 and even 24% lower than the projected levels if US exports had kept pace with Chinese services imports from the rest of the world during 2018-22.

New Cold War – The Interdependencies Between US Farmers and Chinese Consumers May Be Growing Apart

In the agricultural sector, signs of a divergence between the outcomes for US and Chinese stakeholders are becoming evident. Over time, American farmers have grown more dependent on the Chinese market for their export sales, with the exception of the damaging trade war in 2018-19 when China imposed retaliatory import tariffs on soybeans and other agricultural products. During 2022, more than 19% of total US agricultural exports were destined for China, up from 14% in 2017 and 13% in 2009.

Although the dependence on China has moderated for soybeans, which are the most valuable crop exported to China, it remains substantial. Prior to the trade war, over 60% of total soybean exports were destined for China in some years, while the figure stood at over 50% in 2021-22.

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Meanwhile, Chinese buyers may be gradually reducing their reliance on the United States. The share of total Chinese imports of farm products from the United States in 2021-22 was only 18%, down from 22% in 2016 and 26% as recently as 2012. In the case of soybeans, imports from the United States accounted for only 31-32% of total imports in 2021-22, compared to over 40% before the trade war. China has been actively seeking to decrease its dependence on soybeans imported from all sources, with expanded domestic soybean production being a significant political goal in 2022 under the pursuit of “food security,” as declared by China’s Ministry of Agriculture at the end of 2021.


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