If you follow the news, you know that tensions between the United States and China are rising, deteriorating commercial relations between the two largest trading nations on earth.
But amid ominous headlines about a possible “decoupling” between the United States and China, you might be surprised to learn just how strong and close the financial ties between the two countries remain.
Many of America's largest companies depend on China for a significant portion of their revenue and also rely on Chinese suppliers and factories for their products. The two economies are closely intertwined, and as someone who has been involved with China for many years, I think that's a good thing. It means that there is plenty of incentive to step back from the brink of serious conflict, even if relations between the two countries deteriorate further.
Consider that U.S. companies listed on the S&P 500 derive almost 60% of their revenue domestically, but their biggest source of overseas sales is China. That's according to estimates from financial data firm FactSet, which said China accounted for 7.1% of S&P 500 revenue in the 12 months ending in December. The second-largest source of overseas sales was Japan at 2.6%, followed by Germany and the U.K. at 2.2% each, and Taiwan at 1.8%.
These figures are crucial in assessing U.S.-China relations, Dale Copeland, a political scientist at the University of Virginia, said in an interview. “Expectations of future benefits are an important but often ignored element in international relations,” he said. Copeland is author of “A Safe World for Commerce: U.S. Foreign Policy from the Revolution to the Rise of China.”
“History shows us that when a great power suddenly cuts off business and resources, future commercial prospects become bleak and war becomes much more likely,” he added. “Fortunately, that hasn't happened so far between the U.S. and China. A larger conflict, or even war, is not inevitable. There are still many opportunities for business in the future, and I think that is and should be an intentional part of current U.S. policy.”
Counterargument to China
Corporate earnings offer just one perspective on a complex issue, but they are striking because they seem to run counter to a succession of confrontations and restrictions between the United States and China.
The Biden administration has cracked down on China, from tariffs to tech bans to concerns about TikTok, accusing it of exploiting long-standing commercial ties, directly and indirectly subsidizing local industries, illegally acquiring U.S. intellectual property, and fundamentally threatening U.S. national security. U.S. intelligence estimates that China has “capabilities to compete directly with the United States and U.S. allies” and, without resistance, could “shift the rules-based world order” in its favor.
This is a US presidential election year, and the country's new China policy builds on a shift that began during the Trump administration. Donald Trump's advisers have said he would seek a complete “decoupling” from China if re-elected, but Trump's rhetoric has been inconsistent. He recently questioned the need to force TikTok's Chinese owners to sell the app or suspend its service in the US, but as president he tried to force the sale.
China's response to the latest U.S. measures has been muted, but further reactions are likely as the U.S. continues to push for a trade alliance aimed at preventing Chinese factories from exporting large quantities of low-cost goods such as electric cars, solar panels and steel that could hurt domestic industries and cause disruption in many countries.
Porous Barrier
The toughest targeted tariffs are on products that aren't imported into the U.S. in large quantities, like the new 100% tariff on Chinese-made electric vehicles, meaning Biden's new tariffs aren't likely to change the big picture much, suggests an analysis by independent research firm Oxford Economics.
Ryan Sweet, the firm's chief US economist, said in an email that the US's trade-weighted average tariff on products from all countries “has risen to 3.1% from just 1.6% before the Trump trade war.” Before Biden's latest tariffs, the average US tariff was 2.7%, but the new tariffs “add a permanent 0.14% to the effective tariff rate,” he said.
But as companies figure out how to avoid the Trump/Biden tariff hikes, he predicted that effective tariffs would fall below 2.3% over the next decade — assuming the tariff war doesn't escalate.
According to World Bank calculations, the global average tariff rate was 2.6% in 2017, before the US-China conflict began. This means that while the US is no longer reducing trade barriers to lower costs for consumers, it is still not an exception globally. For now, there are still huge opportunities for profitable commerce between the two countries, as US corporate earnings reports show.
Chip Wars
What surprises me is that even companies that design, manufacture and create the tools for advanced silicon chips continue to derive significant revenue from China.
Recall that in 2022 the United States began imposing export controls on companies in the country that use US technology. At the same time, the United States began subsidizing the construction of domestic semiconductor factories through the Chip Act, effectively copying the efforts China had started earlier.
I spoke with Chris Miller, a historian at the Fletcher School at Tufts University and author of “The Chip Wars: The Battle for the World's Most Important Technology.”
U.S. regulations are geared toward shipping even some advanced chips to China, he said. “The ones they're really going after are the chips that are crucial for AI. Everything else gets through.”
Nvidia, a world leader in designing chips that enable artificial intelligence, has been barred from shipping cutting-edge products to China, hurting the company's business there. Nvidia Chief Executive Jensen Huang said on an earnings call last week that Nvidia's business there has declined “due to limitations in our technology.” FactSet projects that China will be Nvidia's third-largest market in 2023, accounting for 16.6% of total sales, behind the U.S. (44.3%) and Taiwan (22%).
In fact, all of the semiconductor companies I looked at (Nvidia, Broadcom, AMD, Intel, Taiwan Semiconductor, Samsung, Lam Research, KLA, Tokyo Electronics) will derive significant revenue from China in 2023. China is in each company's top three markets and in most cases is ranked number one. For example, Intel derives 26.8% of its revenue from China.
The story of Dutch company ASML, which makes the lithography machines needed to etch circuits on the smallest, most advanced chips, is instructive. ASML Chief Financial Officer Roger Dassen said on an earnings call in April that the U.S. ban could cut sales in China by 10% to 15%.
Still, he said, “we expect strong sales in China this year.” FactSet estimates that ASML will get 25.8% of its revenue from China in 2023, compared with just 11.4% from the U.S.
Take Apple. Not only will China account for 17.8% of the company's sales in 2023, second only to the U.S., but Apple also imports and exports huge amounts of cutting-edge, small semiconductors to and from China. “The regulations were put in place to enable this,” Miller said.
The iPhone 15 in my pocket contains a 4-nanometer chip designed by Apple in California, manufactured in Taiwan, sent to China for assembly, and then shipped back to consumers like me in New York. The iPhone 15 Pro already uses a 3-nanometer chip, and Apple is preparing to incorporate a more advanced 2-nanometer chip from Taiwan Semiconductor. Both of these chips are smaller than China can commercially produce. Apple did not respond to a request for comment.
Last week, China conducted military drills in the waters around Taiwan, issuing a “stern warning” against any moves toward independence for the island. China also demonstrated its ability to cut off access to the advanced silicon chips that power the global stock market's jet fuel.
Globalization may have peaked, but peaks come and go. It's the long-term trends that matter.
It's in everyone's interest for the United States and China to coexist peacefully, and companies around the world, in their pursuit of profit, continue to explore ways to make that happen.
