Introduction

Escalating trade tensions between the US and China threaten to disrupt the global economy.

The US is pursuing a slate of trade investigations, including a Section 232 national security review of steel imports – an action that would disproportionately hit China, the world’s largest steel exporter, whose shipments rose 378% from 2009 to 2015.

Another review targets the 16 countries with the largest bilateral trade surpluses with the US. China, with a nearly US$350 billion surplus, is at the top of that list. President Trump and his key trade officials regularly frame trade deficits as economic “faults” requiring correction through tariffs or other measures.

China, for its part, has adopted policies that foreign firms interpret as hostile: more regulatory scrutiny, growing favoritism toward domestic competitors, and a narrative that foreign companies have already “served their purpose.” China denies this, yet skepticism among US companies is rising – and with it, support for a tougher US stance.

Chinese state media has signaled that the country will respond decisively to any new US sanctions. China’s capacity to pursue retaliatory trade actions has increased as its economy grew: It now has an advanced anti-dumping and countervailing duty system, strong WTO litigation capacity, and multiple levers to tilt markets away from foreign firms.

With both sides prepared to act and multiple flashpoints emerging, the risk of a prolonged period of conflict is rising. This makes it essential to understand how mutually beneficial the bilateral trade and investment relationship has been.

FDI as a driver of trade growth

Beginning in the 1980s, China deliberately opened to foreign direct investment (FDI) in controlled stages to import capital, technology, and management expertise. The strategy transformed China from an agricultural backwater into a manufacturing – and increasingly, tech – superpower, all while maintaining state control over key sectors.

The contribution of foreign firms to this transformation is often underestimated. In Shanghai’s technology sector, foreign invested enterprises (FIEs) accounted for 83% of output in 2004, rising to 90% in 2013, despite a decade of “indigenous innovation” policies aimed at strengthening domestic players.

For China, the rationale for reducing bilateral tensions is therefore straightforward: foreign firms remain indispensable to its economic evolution. For US companies, the logic is just as clear – they now depend on China not only as a production base but as a core market and strategic center of talent and innovation.

Big and getting bigger: The importance of the Chinese market

Although China’s per capita income levels continue to lag behind the US, its consumer base is rapidly expanding.

As of 2015, the Chinese middle class – 109 million strong – had surpassed that of the United States. Disposable incomes rose 6.3% in 2016, fueling a consumption boom as online sales hit US$750 billion, more than double those of US consumers.

In category after category – athletic shoes, smartphones, automobiles, semiconductors – the Chinese consumer is now the global growth driver. With each transaction, foreign firms become more reliant on Chinese demand.

Boosting the bottom line

China’s impact on corporate America’s bottom line is profound:

Apple: China grew from 2% of revenue in 2009 to 25% by 2015. One in four iPhones is sold in China.

General Motors: China is GM’s largest market for the fifth straight year, with 3.8 million vehicles sold in 2016, or over 10,000 per day.

Ford: Sold 1.27 million vehicles in China in 2016, a 9% increase from 2015. Global sales of the Mustang rose 44% since its introduction to the Chinese market.

NIKE: Greater China is NIKE’s fastest-growing region, with 23% revenue growth and 44% directly-to-consumers sales growth in 2016.

Intel: Generated US$14 billion in China revenue – its largest market globally.

Qualcomm: 57% of revenue comes from China, up from US$2.3 billion in 2009 to US$13.5 billion in 2016.

Texas Instruments: China represents 45% (US$6 billion) of total revenue in 2016.

For some companies, booming China sales are directly offsetting declines in the US. Cummins posted US$4 billion in China sales even as North American revenue fell 13%. DuPont’s China sales rose 6% in 2016 while US sales declined 3%.

Beyond revenue, China has become a global innovation hub for foreign companies. An example is a DuPont product called YO-MIX yogurt, designed to satisfy Chinese consumers’ love for yogurt drinks but lack of guaranteed cold storage. The product has since expanded to emerging markets in the Middle East and Africa.

Foreign companies propelling China’s growth

At the same time, China gained considerably from FDI from FIEs. According to research by Michael Enright, a leading expert on international competitiveness, FIEs contributed 33% of China’s gross domestic product and 27% of China’s total employment from 2009 to 2013, when accounting for their direct operations, supply chains, and employee spending.

In addition, FDI in China has resulted in a number of positive spillover effects that are often difficult to quantify, including the modernization of Chinese industries, improved management and environmental standards, stronger universities and research institutes, and increased access to international financing.

Foreign firms have also elevated China’s technological capabilities. Apple’s planned research and development (R&D) centers in Shanghai and Suzhou – the completion of which will bring Apple’s total R&D investment in China to 3.5 billion RMB (US$505 million) – exemplifies how multinationals continue to embed advanced skills and innovation capability inside China.

The conclusion of Enright’s research is unambiguous: China’s economic rise could not have occurred so rapidly without foreign-invested enterprises.

The partnership moving forward

The partnership between US companies and China is at a critical inflection point.

Despite FDI inflows leveling off, the contribution of foreign firms remains central to China’s next development phase. Yet a growing number of foreign executives believe China sees them as “no longer needed.” According to the American Chamber of Commerce in China, 81% of US firms feel “less welcome”, a figure that has been steadily rising for years. This perception, if unaddressed, could undermine the very FDI China still needs to meet its goals.

In the US, anti-globalization sentiment causes many to interpret the partnership not as a success story but more of a cautionary tale – a textbook example of how greater interconnectedness has hollowed out the US economy, while enriching others.

There will be contentious issues to tackle as US and Chinese policymakers seek to navigate their way through this fraught new chapter in the trading relationship. The starting point should be a fact-based understanding of the extent to which they have mutually benefited from the relationship thus far – and the need to preserve it moving forward.

[This report is based on an extended research effort undertaken by the Hinrich Foundation, which included interviews with scores of multinational corporations’ (MNC) executives doing business in China, as well as an analysis of publicly available financial data for 22 MNCs with substantial business operations in China. Our objective is to provide a firmer factual basis for a discussion of the US-China economic relationship.]

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