Over the last decade, China’s large holdings of US debt have helped the Bank of China keep the value of the renminbi artificially low. This strengthened China’s competitive position in the global markets, allowing for cheaper Chinese exports and contributed significantly to China’s large trade surplus, which now accounts for about half of the total US trade deficit.
US President-elect Donald Trump has accused China of currency manipulation, threatening to impose tariffs of 45 percent on Chinese imports. It is important to note, however, that over the past two years China has supported its currency to prevent it from depreciating against the dollar. Instead of buying US treasuries, China has recently operated as a net seller.
As the world’s two largest economies, the United States and China have established deep economic and trade ties. Trade of goods between the two countries accounted for $600 billion in 2015, with the United States being China’s largest export destination and China being the third largest export market for the United States. Interestingly, US services exports to China increased by over 300 percent between 2006 to 2014, in comparison to an average increase of 90 percent of US services exports to the rest of the world.
The case of Apple, the world’s largest information technology company and publically traded corporation, which houses a large portion of the production of its iPhone in China, underscores how interlinked the US and Chinese economies are. Apple’s decision to design the iPhone in the United States but assemble it in China is indicative of the competitive advantage the company enjoys by running parts of its operations in China, particularly due to the skilled Chinese labor force, beneficial tax regime, and rich natural resources. If newly erected trade barriers force Apple to move all of its iPhone production to the United States, the tech giant will face substantial manufacturing cost increases of about 15 percent. Of course, Apple would pass these cost increases on to US and global consumers, who, as always, would have to foot the bill for protectionist trade policies.