On May 12, high-stakes economic and trade talks between China and the U.S. concluded in Geneva, Switzerland, culminating in a joint statement. The statement was widely acclaimed as a dramatic breakthrough and was warmly received globally.
The temporary easing of tensions resulting from the talks is as much a result of serendipity as it is a reflection of the inherent logic of the China-U.S. economic and trade relations. In the wake of the announcement, the U.S. stock market experienced a dramatic rebound. The S&P 500 index rose to 5,968.61 points on May 19, marking a cumulative increase of more than 23.4 percent from its April 7 low of 4,835.04 points.The U.S. market's perception of the trade relationship has become more rational. America's persistent large trade deficit was fundamentally caused by inherent institutional constraints, including a strong dollar. Its trade deficit with China represents a transfer of labor welfare from China to the United States. If the Trump administration's ambitious manufacturing plans are to materialize, the U.S. must draw on China's sophisticated industrial support and therefore needs to embrace a more pragmatic approach.
To maintain the hegemony of the U.S. dollar hegemony while having a trade balance is a case of having your cake and eating it, too.
A strong dollar has deep implications for the U.S. external trade balance. The United States cannot simultaneously sustain dollar hegemony and have a balanced trade relationship — it's an inherent paradox.For a typical trading country, external trade imbalances can be effectively repaired through exchange rate fluctuations. Under market mechanisms, currency depreciations can help rebalance trade by curbing imports and boosting exports. However, as the international reserve currency, the dollar is subject to rigid global demand for reserve assets, which results in a prolonged run on the U.S. dollar by other currencies in the international markets — yielding long-term overvaluation. This makes it hard for the U.S. to improve its trade balance through exchange rate adjustments.
Stephen Miran, chairman of National Economic Advisors, in his November 2024 publication “User's Guide to Restructuring the Global Trading System,” argues that the dollar's reserve currency status leads to overvaluation, which then inflates the costs of its manufacturing and trade sectors and drives long-term U.S. trade imbalances. His analysis touches on the cost structure of U.S. manufacturing, noting that maintaining the dollar's global reserve currency status is an important element in the U.S. strategy to maintain dollar hegemony.Since the collapse of the Bretton Woods system, the United States has employed a variety of measures, including the petrodollar, the Treasury bond market and other financial instruments to maintain U.S. dollar dominance. The long-term overvaluation of the dollar, a consequence of its status, has resulted in a lack of exchange rate flexibility, thereby significantly diminishing America's capacity to adjust trade balances. The United States cannot simultaneously achieve monetary hegemony and trade balance. The U.S. trade deficit with China is therefore essentially a transfer and loss from Chinese producers to U.S. consumers.
Inflation remains a significant concern for U.S. economic development.
While the Miran report blames the dollar's reserve status for exacerbating trade imbalances, it overlooks how this status reduces consumption costs, curbs inflation and enhances social welfare. The academic community is still debating why high inflation faded in the early 1980s. Even amid U.S. deindustrialization, supply contractions and monetary expansion have not spurred significant inflation, despite persistent trade deficits and an excessive money supply. This anomaly defies economic norms and highlights the need to study how China's low-cost imports may have helped mitigate U.S. inflationary pressures.
Ever since the 1980s and 1990s, China's rapidly rising exports to the U.S. helped contain U.S. inflation. Going into the 20th century, despite crises such as the dot-com bubble and the subprime mortgage crisis, the U.S. core inflation rate remained low at 2.0 to 2.5 percent. A study from the Chinese University of Hong Kong found that, since 1994, imports from China had reduced U.S. core inflation by 1.3 percentage points annually, saving U.S. consumers an average of $623 billion per year (12 percent of annual non-oil consumption spending). Without Chinese imports, the U.S. CPI in 2017 would have been 27 percent higher.
China's trade surplus with the U.S. essentially represents a shift of costs from Chinese producers to American consumers. U.S. buyers, in a dominant position, continually compress Chinese producers' profit margins. This dynamic of relations between producers and consumers ultimately squeezes the welfare of Chinese workers while transferring benefits to U.S. consumers. For instance, Walmart's Chinese suppliers often operate on razor-thin profit margins of 3 to 5 percent, with some even selling at a loss. This margin-suppressing export model has led to losses for Chinese workers and is not viable in the long term.As domestic industrial restructuring in China lags and competition intensifies, mid- to low-end industries face further challenges. Despite these sacrifices, Chinese producers' losses are not appreciated by the United States. Instead, Chinese businesses face harsh scrutiny in the guise of “subsidies” or “dumping.”
America's reindustrialization process relies heavily on China's industrial system support.
After nearly half a century of deindustrialization, major Western developed countries have felt the pinch and have virtually all introduced reindustrialization strategies in recent years. The Trump administration introduced high tariff policies to create an edge for the development of domestic manufacturing by raising barriers for manufactured products sent into the US market. However, as a policy concept from the early stage of industrialization, high tariffs are ill-suited to the age of global industrial chains. In our day, the U.S. cannot produce all intermediate products domestically through protectionist means. Outdated protectionism will only derail its own industrialization prospects.
Unlike the traditional industrialization process of developing countries, the current reindustrialization process in developed countries faces multiple cost challenges. Typically, developing countries form a “core and periphery” — a division of labor relationship with Western countries — by accepting the transfer of low- and mid-range industries. Under this model, limited competition occurs within developed economies at similar stages of development.Now, the world has entered an era of synchronized industrialization. The U.S. industrialization process will face cost competition pressure from developed economies such as Europe and Japan, as well as from China and the global South. In this era featuring a global industrial division of labor, the cost-effectiveness and technological advantages of intermediate product manufacturing will determine the market competitiveness of final manufactured products.
There is abundant evidence underlying China's core competitiveness in key intermediate products and sophisticated industrial production capabilities in all industrial sectors, as well as significant growth potential around many new technologies and industrial fields. The U.S. needs to adopt more pragmatic measures to achieve effective reindustrialization. In an increasingly competitive global market, China's full-fledged industrial system emerges as the most cost-effective and competitive option. China, in turn, seeks long-term coexistence with the U.S. by rebalancing industrial and production capacity.
