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The Effect of the Crisis on the U.S.-China Economic Relationship
China's Economy, China, Global Economics, Global Financial Crisis, U.S. Economy
Eswar Prasad, Senior Fellow, Global Economy and Development
U.S.-China Economic and Security Review Commission
Trade and Financial Linkages between the U.S. and China

Trade between the two economies has continued to increase in volume and the U.S. remains one of China’s major export markets. Chinese exports to the U.S. rose from $100 billion in 2000 to $338 billion in 2008, while imports rose from $16 billion to $71 billion. Interestingly, however, the share of China’s exports going to the U.S. has actually declined over time, from about 22 percent in 2000 to 19 percent in 2007, roughly the same share as that of the European Union.[1] China’s bilateral trade surplus with the U.S. has risen from about $84 billion in 2000 to nearly $266 billion in 2008 (about 1.9 percent of U.S. GDP).

The Effect of the Crisis on the U.S.-China Economic Relationship
China's Economy, China, Global Economics, Global Financial Crisis, U.S. Economy
Eswar Prasad, Senior Fellow, Global Economy and Development
U.S.-China Economic and Security Review Commission

To combat the effects of the slowdown, the Chinese government recently announced an aggressive fiscal stimulus. The net effect of this package in terms of new spending is likely to be on the order of 4-5 percent of GDP, much smaller than the headline number that was announced (about 16 percent of GDP) but still quite impressive. Much of this expenditure will go towards investment projects and partly towards strengthening the social safety net. It is a package that tries to blend together short-term stimulus with longer-term objectives of developing infrastructure in underdeveloped parts of the country (particularly the provinces in the west) and boosting consumption.

However, Chinese household savings have been on a trend increase in recent years and the economic uncertainty is likely to increase saving for precautionary purposes.[7] Thus, the fiscal stimulus could end up actually worsening the balance of growth by tilting it even more towards growth led by investment and exports rather than private consumption. The reliance on exports is, as noted earlier, because it is a key source of job growth.

Even if China continues to rely on exports for growth, the recession and the rebuilding of household balance sheets in the U.S. implies that Chinese exports to the U.S. will almost certainly decline during 2009. Thus, the overall volume of trade between the two economies is likely to fall in tandem with the sharp fall in global trade. The U.S. bilateral trade deficit with China could still remain in the range of about $200 billion in 2009, especially if the U.S. fiscal stimulus generates a gradual recovery in U.S. domestic demand. China’s overall current account balance, which is estimated to be about $370 billion (roughly 9 percent of GDP) in 2008, could well remain in the $300-350 billion range; the recent collapse in exports has been offset by an even sharper decline in imports.