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Aug 1810 min read

Economic Hostility: United States vs. China

A Great Power Competition Report

 

Strategy Central

By Monte Erfourth – August 18, 2024





















 

THE COMPETITION REPORT SERIES

The Strategy Central Great Power Competition report series details the United States and China’s great power competition in the first half 2024. It offers an analysis to help strategists grasp the current rivalry between these two superpowers regarding national power, economics, military power, and diplomacy.  This is the second of five segments covering each aspect of great power competition and will focus on economic competition.  

The economic aspect of great power competition between the United States and China is the most dynamic dimension of their rivalry. It has far-reaching implications for global stability and the balance of power. This article delves into the economic hard edges that define this competition, examining how each nation leverages its economic strengths and addresses its vulnerabilities to outmaneuver the other. The analysis covers the strategies both nations employ, including trade policies, technological advancements, and investment initiatives, and how these efforts shape the global economic landscape.

The ongoing economic tensions between the two superpowers, including the imposition of tariffs, export controls, and investment restrictions, will also be examined. These measures reflect a broader strategy by both the United States and China to secure critical resources, dominate key technological sectors, and influence global markets. The great powers’ pursuit of resources impacts other nations, particularly in the Indo-Pacific region, where the competition between China and the United States is most intense.

Ultimately, this article aims to provide a comprehensive overview of the economic strategies and policies driving the great power competition between the United States and China. By examining the strengths and weaknesses of both nations' economies and the broader geopolitical implications of their rivalry, the article offers insights into the future trajectory of global power dynamics and the potential outcomes of this ongoing competition.

 

ECONOMIC REVIEW

Ongoing and escalating tensions have marked the economic relationship between China and the United States over the past decade. One significant issue in the first half of 2024 was the continuation of trade disputes, with both countries imposing tariffs and trade restrictions. China retaliated against U.S. trade measures by threatening to sell U.S. Treasuries and controlling exports of critical minerals, which could impact global supply chains—the last seven months also heightened scrutiny of China's economic policies, such as its ambitious and distortionary industrial strategies, particularly in sectors like electric vehicles and high technology. These strategies have prompted the U.S. and its allies to implement measures to reduce dependency on Chinese goods and technology, contributing to further friction.

 

Between January and July 2024, the United States implemented several measures to prevent China from accessing critical technology, particularly in sectors deemed vital for national security and technological leadership.

 

  • Export Controls and Investment Restrictions

The U.S. has continued to expand its export controls on critical technologies. These controls, first significantly revised in October 2022, have been further tightened to restrict the export of advanced semiconductors, semiconductor manufacturing equipment, and AI-related technologies to China. The Biden administration has built on these measures by restricting outbound investments in vital technological sectors, including semiconductors, quantum computing, and AI. This comprehensive approach aims to prevent the transfer of technology that could enhance China's military capabilities and its high-tech industry.

 

  • Sanctions and Cybersecurity Measures

In response to persistent cyber threats, the U.S. Department of the Treasury, in coordination with other agencies, sanctioned Chinese entities and individuals linked to state-sponsored cyber activities targeting U.S. critical infrastructure. For example, in March 2024, the Treasury sanctioned Wuhan Xiaoruizhi Science and Technology Company, Limited, and associated individuals for their roles in cyber operations against U.S. infrastructure. These sanctions are part of broader efforts to disrupt malicious cyber activities and protect U.S. national security.

 

  • Collaboration with Allies

The U.S. has actively sought to harmonize its technology control measures with those of key allies. Agreements with countries like Japan and the Netherlands have been crucial, particularly in limiting China's access to advanced lithography equipment essential for semiconductor manufacturing. This coordinated approach helps close loopholes that could allow China to bypass U.S. restrictions by sourcing technology from other advanced economies.

 

  • Policy and Legislative Actions

The U.S. has also leveraged legislative tools to bolster its technology control framework. The Export Control Reform Act of 2018 and subsequent updates under the Biden administration have provided a robust legal basis for restricting technology exports. Additionally, the Department of Commerce has added numerous Chinese entities to its Entity List, requiring U.S. companies to obtain licenses for exporting specified technologies to these entities. This strategy aims to limit the transfer of technologies that could contribute to China's military modernization and strategic ambitions.

 

Cooperation

During the first half of 2024, the United States and China made several notable strides in economic collaboration despite ongoing tensions. Their commitment to renewing the U.S.-China Science and Technology Cooperation Agreement was a significant achievement that fostered joint research and development in various scientific fields. Additionally, both nations agreed to expand renewable energy efforts and reduce carbon emissions, reflecting a shared interest in addressing climate change. These agreements underscore the mutual benefits of economic collaboration and the necessity of cooperation in global sustainability efforts.

 


2024 China Economic Performance

China’s GDP growth in Q1 2024 reached 5.3%, surpassing both consensus expectations and the 5.2% reading from 2023, suggesting that the country's 4.6% growth forecast for 2024 is attainable, with potential for upward revision. Despite this, the economic structure remains unbalanced, with a more robust supply-side overshadowing weaker demand. The recovery's foundation is still shaky, mainly due to the ongoing real estate adjustments and economic imbalance. Key risks include real estate, local government debt, deflation, supply chain shifts, and geopolitical tensions, though systemic financial risks appear manageable. In response, China continues implementing expansionary monetary and fiscal policies, emphasizing fiscal stimulus to bolster recovery amid weak economic sentiment and ineffective monetary easing.

 

2024 USA Economic Performance

In 2024, the United States displayed a robust economic performance, marked by steady GDP growth and strong labor market indicators. 2024 GDP for Q1 increased at an annual rate of 1.6%, and 2.7%  in Q2, according to the World Bank. Consumer spending remained a key driver, buoyed by rising wages and low unemployment rates. Inflation pressures eased compared to previous years, allowing the Federal Reserve to maintain a balanced monetary policy stance. The tech and healthcare sectors led gains in corporate earnings, while manufacturing showed signs of resilience despite global supply chain challenges. However, concerns about fiscal sustainability persisted amid elevated government debt levels, and geopolitical uncertainties posed potential risks to economic stability. The U.S. economy demonstrated resilience and adaptability in a complex global landscape.

 

2023 Lowey Asia Economic Capability Rating

Unsurprisingly, China and the United States are economically equivalent.  Even with the divisions of allies and partners, China and its network have about the same economic power compared to the U.S. and its allies and partners.


Economic Analysis

The United States has employed a multi-faceted strategy to prevent China from accessing critical technology. This includes stringent export controls, sanctions on cyber actors, collaboration with international allies, and robust legislative measures. These efforts reflect a broader U.S. strategy to maintain technological leadership and safeguard national security in the face of growing competition from China. A significant achievement was made in the commitment to renew the U.S.-China Science and Technology Cooperation Agreement, which fosters joint research and development in various scientific fields. 

 

In 2024, China's economic growth is projected to slow to around 4.1%, influenced by structural challenges and external pressures. Despite robust export growth to ASEAN countries and Latin America, trade with Western economies has remained strong. Domestically, the Chinese government is prioritizing wage increases and consumer spending to boost economic growth, transitioning from an investment-driven model. However, the effectiveness of these measures remains uncertain, and the country faces significant risks, including a downturn in the property sector and weakened global demand.

 

China's decades-old, debt-fueled model of relying on real estate and infrastructure investments to drive its domestic economy is still facing its most severe challenge. The real estate sector, which accounts for 25–30 percent of the country’s GDP, is in crisis, with property developers losing the capacity to buy land, purchase construction materials, pay contractors, and deliver housing units. This has led to defaults on dollar-denominated bonds by 34 of 50 developers and pushed the two largest companies toward bankruptcy. Similarly, infrastructure construction, comprising another 15 percent of GDP, is under pressure. The property crisis has drastically reduced local government revenue from land sales, which traditionally accounted for one-third of their revenue, impacting essential public services.

 

With approximately 70 percent of household wealth tied up in real estate, falling property sales and prices have shifted consumer focus to reducing household debt, raising deflation risks. Despite two decades of official statements on boosting consumption, household consumption as a share of GDP dropped to its lowest level in nearly a decade in 2022, with only a slight rebound in 2023. This forces China to rely on exports to sustain growth, distorting global markets. The failing real estate model has caused systemic financial stress, with rising property loan defaults and declining asset sales and prices creating broader financial instability. Banks face shrinking profit margins and consumer deposit rates while carrying increasing nonperforming loans. The Chinese Communist Party (CCP) faces the dual challenge of addressing local debt accumulation while managing financial risks and maintaining foreign investor confidence amidst an overall debt-to-GDP ratio that exceeded 300 percent in 2023.

 

In 2024, the U.S. economy showed a mixed performance with moderate growth amid persistent challenges. The real GDP growth rate is projected to average around 2.4% for the year, supported by robust consumer spending and a strong job market. However, this represents a slowdown from the previous year's growth due to elevated interest rates and geopolitical tensions impacting trade and investment. Consumer spending continued to be a significant driver, growing at 2.3%, buoyed by households leveraging savings and new debt. However, this growth is expected to decelerate as savings deplete and borrowing reaches its limits.

 

Inflation remained a key concern, with the Federal Reserve maintaining higher interest rates to combat price increases, impacting borrowing and investment activities. The labor market remained resilient, with a low unemployment rate of around 3.9%, contributing to sustained economic activity despite external pressures. Defense spending saw an uptick due to geopolitical conflicts, providing an economic stimulus that partially offset some of the downturns from international tensions and higher oil prices. While the U.S. economy demonstrated strength and resilience, it faced significant headwinds that moderated its growth trajectory.

 

The short-term projection for the U.S. economy for the remainder of 2024 and early 2025 suggests moderate growth amidst persistent challenges. GDP growth is expected to average around 2.4% for the year, driven by robust consumer spending and a strong job market. However, this represents a slowdown compared to previous years due to elevated interest rates and ongoing geopolitical tensions impacting trade and investment. Inflation pressures will likely ease somewhat, allowing the Federal Reserve to maintain a balanced monetary policy stance.

 

Despite these positive indicators, several risks persist. The U.S. faces challenges from trade deficits, higher inflation rates, and vulnerabilities in global supply chains, particularly for critical minerals and high-tech components. Defense spending is anticipated to rise due to geopolitical conflicts, which will provide some economic stimulus and strain the budget. While the U.S. economy is expected to demonstrate resilience, it must navigate significant headwinds that could moderate its growth trajectory in the short term.

 

Summary

The economic competition between China and the United States is marked by strengths and vulnerabilities, shaping the broader geopolitical environment and influencing global power dynamics. China's economic strengths lie in its robust export markets, particularly in ASEAN countries and Latin America, and its strategic investments under the Belt and Road Initiative (BRI), which continue to secure economic influence and open new markets. China also faces significant structural challenges, including an aging population, youth unemployment, and ongoing issues in its real estate sector, which undermine its long-term economic stability. Additionally, China's dependency on exports, coupled with increasing external pressures from trade tensions with the United States and other Western economies, adds further risk to its economic outlook.

 

On the other hand, the United States maintains its economic edge through innovation and technological leadership, particularly in sectors such as artificial intelligence and renewable energy. The U.S. also benefits from a resilient consumer market, which has remained strong despite inflation and global supply chain disruptions. However, the U.S. is not without its economic vulnerabilities. Persistent trade deficits, inflationary pressures, and a heavy dependency on global supply chains for critical minerals and high-tech components pose significant risks to its economic security. Moreover, geopolitical tensions, particularly with China, have led to increased defense spending, which, while providing short-term economic stimulus, could strain the U.S. budget in the long run.

 

The competition between these two economic giants revolves around technological supremacy, access to critical resources, and the ability to influence global markets. Both nations are heavily invested in securing technological advancements, particularly in emerging fields like semiconductors, AI, and quantum computing. The U.S. has implemented strict export controls and investment restrictions to prevent China from accessing critical technologies that could enhance its military capabilities and high-tech industries. This has led to a broader strategy of economic decoupling, where both nations seek to reduce their dependencies on each other, leading to the fragmentation of global supply chains and the re-alignment of international trade partnerships.

 

This economic rivalry significantly shapes the geopolitical landscape, particularly in the Indo-Pacific region, where China and the U.S. vie for influence. China's economic initiatives, such as the BRI, are designed to expand its geopolitical footprint by securing trade routes and resource access across Asia, Africa, and beyond. Meanwhile, through its alliances and economic measures, the United States seeks to counterbalance China's growing influence by bolstering partnerships with key regional players and ensuring its technological and military dominance.

 

Conclusion

While both nations exhibit considerable economic strengths, the United States holds an economic edge due to its innovation, technological leadership, and resilient consumer market. However, this advantage is not absolute and is subject to the persistent challenges of inflation, supply chain vulnerabilities, and geopolitical tensions. The outcome of this economic competition will largely depend on how each nation addresses its weaknesses and adapts to the evolving global environment.



 

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