Question: When is $40 billion with no value beyond a year worth more than $180 billion with returns possibly stretching many years? Answer: never. Implication: There is not now — and there never has been — a US-China “economic war.” Instead, America is providing increasing support to the Chinese economy and must be careful about providing more.
Start with our tariffs. They apply to goods and don’t matter much. President Trump, the AFL-CIO, and other conventional protectionists cite the trade deficit in goods as crucial. At $311 billion, the 2020 goods deficit was only 10 percent lower than in 2016. When services are included, the deficit was 7 percent lower than 2016, at $288 billion.
Without the pandemic, the 2020 goods deficit would have been higher. It’ll be higher this year, despite tariffs. The best spin on the trade “war” is the US cut its one-time annual goods trade payment by $36 billion in 2020 versus 2016. All other figures, including the four-year average trade deficit, show less downshift or expanding Sino-American trade.
Direct investment is said by the Department of the Treasury to require “a degree of influence over the management of a business enterprise in another country.” The cutoff used is at least 10 percent ownership. Annual US direct investment in the PRC peaked in 2008. The stock at the end of 2019 (latest) was $116 billion, $19 billion more than 2019. Direct investment can include valuable technology, but quantities are not exciting.
The trade and direct investment changes from 2016 to 2020 got crushed. Investment below 10 percent ownership is portfolio investment. The primary measurement is Treasury’s US holdings of foreign long-term securities. At the end of 2016, American holdings of Chinese securities were short of $104 billion. At the end of 2020, they were $287 billion (climbing to $303 billion in January).
Investment dollars can bring a return and are worth more than trade dollars, which are one-time payments. President Trump and others say the trade deficit sends tens or even hundreds of billions to China. Comparing 2016 to 2020, the PRC faced a $36-billion drop in one-time trade payments and a $183-billion rise in American funds still boosting its economy. If only our personal finances were subject to that kind of war.
And that’s not the half of it. Treasury reports the top recipient of US portfolio investment, by far, as the Cayman Islands. The amount rose from $1.26 trillion at the end of 2016 to $2.47 trillion at the end of 2020 ($2.62 trillion in January 2021). Offshore financial centers like the Caymans are just a conduit to true destinations, including China. The true amount of US investment in the Caymans is precisely $0.
An independent research project tries to determine where this money ends up. The project is as yet only complete through 2017. Estimating how much money routed through the Caymans ended up in the PRC through 2017 and applying to 2020 gives about $700 billion mislabeled and American portfolio investment into China near $1 trillion. That number is more likely to be too low than too high. Either way, it’s rising fast.
There are many implications, most of them unpleasant. First, it’s no longer acceptable for Treasury to pretend the US invests trillions in the Caymans. We need to know where money is actually going. Then we need to know what Chinese sectors and companies American funds are supporting.
Those companies may be involved in genocidal acts in Xinjiang. They may be working intensely with the People’s Liberation Army. They may have broken American law, say by receiving stolen intellectual property. These problems are being discussed in Washington, but talk doesn’t stop more American money from heading for China each month.
Congress and the Biden administration will soon make US investment in the PRC an even bigger issue. The administration is in the process of asking for trillions more in US spending — “build back better” — while bending over backward to cite China as an important reason. Senator Schumer is poised to ask for hundreds of billions in spending along the same lines.
Put aside whether the individual programs are wise — we’re going to borrow trillions more and raise taxes in part to compete better with China. At the same time, hundreds of billions in American capital is going to support China competing with us? This is a very serious domestic fiscal plan. Without addressing the large and growing amount of US investment heading across the Pacific, it’s not at all a serious China plan.