US government data through November suggest that imports and exports in 2022 will add up to an all-time high, or at least come very close, when the final report comes out Feb. 7. Beijing just published its own full-year figures that show record trade of around $760 billion

There are some caveats. Trade slowed toward the end of the year, as US import demand cooled and China struggled to manage its Covid restrictions. And the trade data isn’t adjusted for inflation, which means higher dollar figures may not translate to more goods shipped.

Still, they’re striking numbers in an era when tough-on-China is the closest thing there is to bipartisan consensus in Washington. They illustrate how deeply entwined the two economies remain — even as the US aims to hold back China’s advance and Beijing seeks to counter Washington’s global influence. 

There have been positive signs recently, including the first face-to-face meeting in November between presidents Joe Biden and Xi Jinping, and plans for more high-level connections, including a visit to China this year by Secretary of State Antony Blinken. But it’s unlikely the two will easily resolve their differences, including Beijing’s stance on Taiwan and the South China Sea, as well as Washington’s aggressive drive to restrict Beijing’s access to key semiconductor technology. 

‘What Companies Want’

“Can we have this tech war and still have a very robust trading relationship in everything else? My instinct is ‘Yes,’” said David Dollar, senior fellow in foreign policy at the Brookings Institution. “It’s based on economic efficiency, it’s what companies want, it enables them to deliver goods and services to consumers.”

The kind of “draconian decoupling” that some in Washington are advocating would have “a big negative effect on US living standards,” he said. “I just don’t think US policy is going to go down that road, whatever the rhetoric.” 

A similar calculus likely applies in China too, where export-led economic growth still holds the key to rising living standards and stability.

That’s why so much trade has survived the tariffs imposed under President Donald Trump, and their continuation during the Biden administration, which has introduced a raft of its own measures aimed at slowing China’s ability to develop advanced semiconductors. Congress also passed legislation to target what lawmakers say are Chinese human rights abuses, and to bolster US chip manufacturing.

‘Existential Threat’

“This is a battle for technology supremacy,” said Mike Burns, a partner at Murray Hill Group, a private-equity and venture-capital firm that focuses on semiconductors. It doesn’t necessarily entail a wider trade rift, he said, because the two countries have different goals – tech leadership for the US, tech autonomy for China – and they’re not mutually exclusive. 

But there is a risk that they end up on collision course, Burns said: “The US has to be careful that in protecting its leadership, it does not create an existential threat to China by eliminating their ability to move toward semiconductor independence.”

The increasing political tension over recent years may have had more impact on fixed-capital flows than on trade. 

US companies have slowed new investments in China. For many, “the risk/reward calculation has tilted against continuing to operate in China,” said Thilo Hanemann, who tracks US-China direct investment for the Rhodium Group. 

Businesses are concerned about the growth outlook for China itself, as well as the rising geopolitical tensions, he said. “We are definitely seeing evidence that investors are withdrawing.”

Rhetoric and Reality

Some are relocating to places like Vietnam and Mexico, which could help those countries grab a bigger share of the US import pie at China’s expense – although Chinese firms may also find ways to operate in those economies, and keep selling to the US.

Meanwhile, Chinese investment in the US has slowed dramatically since a surge in the mid-2010s. Hanemann attributes that peak to a tweak in Chinese law around 2014, which gave domestic firms more freedom to pursue projects abroad, and resulted in a glut of purchases of US companies and real estate.

Still, there are plenty of large companies with big capital investments in China that are showing signs of staying for the long haul — and plenty of global firms willing to keep plowing money in.

“The rhetoric around decoupling continues to outpace the reality,” said Ali Wyne, a senior analyst at Eurasia Group and author of a recent book on the US-China relationship. The US and China “will find it difficult, if not impossible, to sever their economic linkages entirely.”

–With assistance from Alex Tanzi and James Mayger.