The United States has accused China of leveraging an unfair advantage in trade relations and is threatening the imposition of substantial new tariffs. This raises two fundamental questions: are the accusations brought forward by president Donald Trump well-founded?
The principle of free markets has historically served as a powerful driver of global economic growth — a dynamic that has undeniably benefited China. It will likely continue to do so, even when conflicts about technological leadership play a big role. Technology and knowledge cannot be contained by trade barriers or tariffs.
China has undoubtedly reaped significant benefits from globalization but the relative weight of its exports to the United States has been declining since 2001 — the year of China’s controversial admission to the World Trade Organization (WTO), which took place with the decisive endorsement of the United States.
After reaching a peak of 22% of total U.S. imports in 2002, China’s share has steadily declined to 13% as of December of last year. Chinese imports now represent approximately 1.6% of total U.S. GDP (compared to a peak slightly above 2.5%). From China’s perspective, the share of exports directed to the U.S. economy has also seen a marked decline, falling from 7% of Chinese GDP in 2005 to just 2.6% today. The bottom line is that the U.S. trade deficit with China currently stands at around 1% of GDP — it was 2% in 2018.
These figures suggest that it is not accurate to assert that the United States has been the primary engine of China’s economic ascent, nor that the trade deficit has inflicted substantial damage on U.S. economic growth.
To gain a more nuanced understanding of the evolving dynamics between the two nations, it is necessary to distinguish at least three distinct phases in the recent history of Sino-American trade relations.
- The First Phase of Export Expansion (1978–1989)
This period was characterized by Deng Xiaoping’s economic reforms and privatizations. Such reforms, alongside the establishment of Special Economic Zones (SEZs) aimed at liberalizing the Chinese economy, spurred rapid export growth. Between 1978 and 1989, exports increased from 4.5% to 14% of GDP. By 2001, exports had risen to 20% of GDP. - WTO Accession and Rapid Global Integration (2001–2005)
China’s accession to the WTO in 2001 inaugurated a brief but intense phase of export-driven growth. In just four years, the export-to-GDP ratio surged to 38%. This period laid the foundations for many of the structural US-China tensions that persist to this day. - Gradual Normalization and Diversification (2006–2024)
Since the mid-2000s, the relative weight of exports in China’s GDP has steadily declined, returning to 20% by 2024 — mirroring the downturn in Chinese exports to the United States. Since 2005, Xi Jinping’s economic policies have shifted from a focus on rapid, export-oriented growth to a more balanced approach that prioritizes technological innovation, self-reliance, and a “new national system” for resource allocation, pursuing “common prosperity” and more equal income distribution.
The roots of this escalation, therefore, cannot be found solely in the size of the trade deficit, but rather in the qualitative transformation of Chinese exports.
To better comprehend this shift, we may look to the Economic Complexity Index (ECI), developed by Harvard’s Growth Lab, which measures a country’s stock of productive knowledge. According to this metric, nations enhance their ECI rankings by increasing both the range and sophistication of the products they successfully export.
Over recent decades, China’s ECI ranking has climbed from 38th in 1995 to 15th in more recent assessments, while the United States has declined from 10th to 14th. Put simply, the technological content and quality of goods produced and exported by China are now comparable to those of the United States — and compensate for the relative decline in trade volume.
The perceived threat to U.S. technological and economic leadership is therefore understandable. However, preserving such leadership cannot be accomplished through tariffs alone.
Photo by Doug Nealy
