Our love-hate relationship with China

@CNNMoney February 13, 2012: 5:09 PM ET
International relations: U.S. President Obama meets China's Vice President Xi Jinping at an airport in Beijing in 2009.

President Obama meets Chinese Vice President Xi Jinping at an airport in Beijing in 2009.

NEW YORK (CNNMoney) -- President Obama has a date with China's Vice President Xi Jinping on Valentine's Day, and despite tensions between the world's two largest economies, they're both likely to put on a happy face.

Like it or not, the economic fates of both countries remain closely intertwined.

Here's a breakdown of the often heated relationship:

Our second largest trading partner

Second only to Canada, China is America's next largest trading partner, and the relationship has always been more give, than take. Since communist China opened up its economy in the 1980s, the U.S. has always imported more Chinese goods that it exports to the country.

That imbalance obviously has its pros and cons. As China gained jobs and started to industrialize, America's manufacturing sector struggled to compete with cheaper wages abroad. Robert Scott, a trade and manufacturing expert at the Economic Policy Institute, estimates the U.S. trade deficit with China cost America 2.8 million jobs between 2001 and 2010 alone.

Despite the job losses though, Americans were quick to welcome China's cheaper products, and not just on Walmart shelves. Contrary to popular belief, the profits don't go entirely to China. Research by the San Francisco Fed estimates that for every dollar spent on an item labeled "Made in China," about 55 cents go to services produced in the United States.

That 55 cents goes to the companies that transport the goods and the U.S. retailers that sell them.

World's second largest economy

The U.S. economy chugged along at a slow pace of 2.8% growth per year, in the last three months of 2011 while China's economy remains the envy of the developed world. It grew at an 8.9% annual rate in the fourth quarter.

It's no surprise then that economists predict China will soon become the world's largest economy within the next decade. The International Monetary Fund predicts it will surpass the U.S. in 2016, after adjusting for exchange rates.

That said, fears have risen that China's economic growth is slowing. Some of that was intentional, as the government tried to slow a rapid real estate boom and tame high inflation. But a slowdown in exports, attributed partially to declining demand from Europe, was not necessarily part of their plan.

The IMF predicts a sharp downturn in Europe could cut China's economic growth rate nearly in half. If that were to come true, the U.S. economy would certainly feel some pain through the ripple effects.

China is America's third largest market for exports after Canada and Mexico. U.S. businesses exported a record $104 billion in goods to China last year, nearly double the amount they exported just five years earlier.

Growth in exports to China is critical to President Obama's plan to double exports overall by 2015, a move he says will create jobs at American manufacturers.

Our second biggest creditor

China is funding a good part of America's Social Security and Medicare checks, not to mention other forms of government spending.

After the Federal Reserve, China is the next largest holder of U.S. Treasury securities, owning about $1.1 trillion -- or roughly 7% -- of government debt.

The investments come as China has run up a massive surplus through trade.

That surplus is partly due to China's policy of keeping its currency, the yuan, undervalued against the dollar -- a sore point for American lawmakers.

While President Obama's administration has tried to talk tough on this issue, China's leaders argue they are allowing their currency to rise, albeit very slowly. Plus, they say, the Federal Reserve's policies could similarly be blamed for artificially weakening the dollar.

Let the finger pointing begin

Obama and Xi's meeting will not be without tension. The currency issue will be a touchy subject, but so will human rights, intellectual property violations, barriers to foreign investment, and China's opposition to U.S. sanctions on Iran.

Obama had tough words for China in his State of the Union address in January, saying he wants to level the playing field for trade.

"I will not stand by when our competitors don't play by the rules," he said, announcing the launch of a trade enforcement unit designed to bring cases against countries with unfair trade practices, including China.

Labor unions and Democratic lawmakers are currently calling for Obama to take stronger action against the growing imports of auto parts from China. They claim the undervalued yuan and China's subsidies to its manufacturers, make it harder for American products to compete.

Meanwhile, the U.S. China Business Council, which represents roughly 240 American companies doing business in China, is encouraging Obama and Xi to focus on adopting deterrents against counterfeiting and reducing restrictions on U.S. businesses expanding in China.

To operate in China, the government there requires U.S. companies to partner with Chinese ventures and share some of their intellectual property.

"There's U.S. concern about protection of intellectual property rights, and China is starting to acknowledge that," said Dwight Perkins, professor of economics at Harvard University. "If you don't protect property rights, it means inventors in your own country also can't protect their own property. Eventually, there will be enough Chinese pressuring their own government on this issue."

Meanwhile, Xi may argue the U.S. hasn't exactly been open to investment from Chinese companies. In one of many deals shot down for national security concerns, the Commerce Department in October blocked Chinese telecom giant Huawei's bid to build a new wireless network for first responders.

"Chinese firms are hoping to invest, but are being discouraged or disapproved by the U.S. government," said Shang-Jin Wei, director of the Chazen Institute of International Business at Columbia University. "There's a perception in China, that U.S. foreign investment policy is not as open and transparent as the U.S. government claims."

After his stop in Washington, DC, Xi will be accompanied by a large delegation to Muscatine, Iowa and then Los Angeles. In both places, he is expected to focus on striking business deals with local companies. To top of page

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