What’s at stake for the world’s top two economies as Biden and Xi meet

By Juliana Liu, CNN Business

When President Joe Biden took office in January 2021, there were expectations on both sides of the Pacific that he would back away from the trade war his predecessor started with China nearly three years earlier.

Frustrated by China’s huge trade surplus and accusing it of stealing US intellectual property, former President Donald Trump slapped tariffs on $50 billion of Chinese goods in June 2018. Beijing countered with its own tariffs, and the spiral continued until a so-called truce was agreed in 2020.

Instead of rolling back those measures, Biden has quietly intensified the trade conflict. In October, his administration imposed sweeping new curbs designed to curtail China’s access to technology critical to its growing military power.

Against this backdrop of rising competition, and amid fears of a global recession, the leaders of the world’s two biggest economies will meet on the sidelines of the G20 summit in Bali, Indonesia on Monday.

Speaking with reporters in Bali, US Treasury Secretary Janet Yellen said the meeting was intended to stabilize the relationship and expressed hopes that it would lay the groundwork for bilateral economic engagement.

The stakes are high for both sides, as well as the rest of the world. China, with its nearly $18 trillion economy, has in recent years been the main driver of global growth. But Covid lockdowns and a real estate crisis have slammed the brakes on its expansion this year.

While expectations for the meeting are low, it’s crucial for the two sides to re-engage, Mattie Bekink, the Shanghai-based China director of the Economist Intelligence Corporate Network, told CNN Business.

For decades, regular lines of communications existed between US officials and their Chinese counterparts, but most of those avenues were cut off after House Speaker Nancy Pelosi visited Taiwan in July.

“It’s important for heads of state to speak directly,” she said. “There is a lack of trust in this relationship. If Xi and Biden send the signal that it’s time to resume communications, hopefully this will trickle down to the lower levels.”

Besides trade, it was important for the two sides to work together on topics such as climate change and food security, she said.

Not backing off

Stabilizing a US-China economic relationship that sits at such a low ebb will be tough given dashed expectations on both sides, according to Dexter Roberts, a senior fellow with the Atlantic Council’s Asia Security Initiative, who publishes a newsletter on US-China business and economic relations called Trade War.

“First of all, it was a big deal that Biden didn’t try to find some way to reduce the $300 billion in Trump-implemented tariffs, which many expected him to do,” he told CNN Business. “Much to the shock and distress of Beijing, Biden has made things even more uncomfortable on the trade side.”

Biden’s measures included: October’s limit on the sale of advanced chips and chip-making equipment, a ban on all goods produced in China’s Xinjiang region, blacklisting some Chinese companies, and sanctioning dozens of Chinese and Hong Kong officials over Beijing’s crackdown of the special administrative region.

In 2018, the Trump administration levied a series of tariffs on hundreds of billions of dollars in Chinese goods such as solar panels, washing machines, steel and aluminum. China responded by slapping tariffs of its own on iconic American products like Harley-Davidson and Jack Daniel’s.

The US-imposed taxes and subsequent trade war helped to slow China’s economy, but they also cut into American companies’ bottom lines, resulting in job cuts, higher prices, and hits to household budgets, as economic analysis would later show.

In the “truce” of early 2020, Trump signed a “phase one” trade agreement with China under which Beijing promised to purchase $200 billion more in American exports than in 2017. China, however, did not follow through and “bought none of the additional $200 billion of US exports committed under the deal,” according to a report from the Peterson Institute for International Economics.

When Biden came into office, he kept the Trump tariffs in place in part because China still hadn’t met those goals, despite pressure from American businesses that argued for rollbacks. However, as inflation started to climb to historic highs, US officials including Yellen have had discussions with China to potentially lift some tariffs to help tame price hikes.

Tech curbs

Bekink said she did not expect any dramatic shifts in trade flows to emerge as a result of the Biden-Xi meeting. And the surplus in China’s favor hasn’t gone away.

In the first ten months of this year, China’s exports to the United States rose 6.6% to $495 billion, compared to the same period in 2021, according to the latest Chinese customs data. China’s imports of American goods rose just 0.3% in the same period to $145 billion.

The two leaders are, however, expected to discuss the Biden administration’s efforts to ramp up domestic production of semiconductor chips, which he noted last month has already raised concerns for his Chinese counterpart.

“I’ve heard from Xi Jinping that he’s a little concerned about that,” Biden said at an event in Syracuse, New York, where he touted a $100 billion local investment in semiconductor manufacturing.

The pandemic shone a spotlight on the downside of America’s decades-old dependence on foreign chip production. Lockdowns and factory closures in Asia, followed by a global surge in demand for microchips, led to a crippling shortage of the crucial semiconductors needed for American industries ranging from auto manufacturers to cybersecurity to medical equipment.

The ensuing production pauses at auto plants contributed to the skyrocketing price of new and used cars, fueling the inflation that remains at the highest level since the 1980s.

The United States has called the chip shortage a “national security” issue, and in August President Biden signed into law the $200 billion CHIPS and Science Act, a five-year plan to boost domestic chip manufacturing, lower costs, and reduce dependency on the global supply chain.

US imports of semiconductors from China are 26% lower than before the imposition of 25% tariffs, according to Peterson. The newest restrictions in October have further escalated the growing tech arms race.

“The bigger question is on the future of the tech rivalry,” said Bekink. “I don’t think the US will back down from its strong stance on containing China’s tech prowess. The trade war was always a tech rivalry.”

— Lucy Bayly and Alicia Wallace contributed reporting.

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