Balancing Act: How California Can Influence U.S.-China Relations Amid Economic Shifts
Golden Gate Bridge in San Francisco, California
By Ben Makarechian
As U.S. foreign policy increasingly focuses on managing technological, economic, and geopolitical competition with China, a rare bi-partisan consensus has emerged on the necessity of competing effectively with Beijing and protecting U.S. interests as the international geopolitical landscape shifts. Despite this agreement, lawmakers in Washington remain divided about how the U.S. should weigh the economic benefits of promoting bilateral trade and investment with China with the national security concerns raised by the country’s technological development and disregard for international economic norms. After his election to the presidency in 2016, and later as a presidential candidate in 2024, Donald Trump pushed for policies, such as a blanket 60% tariff on Chinese imports, that would lead to a broad “decoupling” of the two economies and decrease U.S. reliance on Chinese manufacturing should conflict erupt. On the other hand, the Biden administration has advocated for continued economic engagement with China while protecting U.S. access to a smaller set of critical technologies by enacting harsh tariffs and incentivizing domestic production.
It is unclear which strategy the U.S. will ultimately adopt in its competition with Beijing, and it is impossible to predict exactly what its economic relationship with China will look like in the future. However, it is a safe bet that the far-reaching benefits Chinese foreign direct investment (FDI) and access to China’s consumer market were predicted to bring to the U.S. economy before tensions increased in the mid-2010s will not come to fruition.
More than any other state, California seemed poised to enjoy vast economic benefits from increased engagement with China. Now, it has the most to lose from an economic decoupling. Thanks to its position on the West Coast and its status as the gateway to the U.S. for trans-Pacific trade, California has a uniquely beneficial economic relationship with China. In 2016, California received more Chinese FDI than any other state. Additionally, China was its largest trading partner, with two-way trade valued at over $177 billion annually. The relationship was especially lucrative for California’s agricultural industry, whose trade with China, the world’s largest importer of agricultural goods, led the country to become California’s third-largest export destination, behind only neighboring Mexico and Canada.
California’s economic interconnectedness with China is a valuable source of stability in a U.S.-China relationship that has become increasingly troubled. Although “de-risking” economic relations with China, the process of moving production of critical technologies to reliably accessible locations to decrease supply chain disruptions during conflict, has gained popularity in Washington, the very interconnectedness that lawmakers are trying to decrease is itself a source of stability in the bilateral relationship. Deep economic ties incentivize diplomacy as a means of resolving disputes by raising the economic cost of conflict.
It is certainly in California's best interests to limit the extent to which the U.S. and China’s economies decouple through any means it can. Recently implemented federal restrictions on bilateral investment between the two countries have already resulted in Chinese FDI in the U.S falling to $5 billion in 2022 from its $46 billion peak in 2016, depriving California and other U.S. states of an abundant source of capital and stunting growth. Moreover, a recent study conducted by researchers at the University of California, Davis predicted that the removal of China’s permanent normal trade relations status, as some legislators have proposed, could cause it to implement retaliatory tariffs that could cost California’s agricultural industry up to $1 billion in lost trade annually. Such policies would also contribute to the overall deterioration of U.S.-China relations by lowering the cost of conflict, making implementing policies that would further limit California’s ability to engage with China more likely.
Even if California is unable to influence the U.S.’ overarching economic policy in its competition with China, it still has other means of nudging U.S.-China relations to a trajectory more closely aligned with its interests. In the event that the U.S. and China’s national governments drift apart, continuing and expanding California’s global engagement through subnational diplomacy will be essential for managing hostilities and preventing complete economic divorce.
First, California can ensure issues of high salience to Californians are addressed on the world stage by expanding its engagement and leadership in subnational agreements and understandings, even if these issues don’t align with the policy being pursued by Washington. For example, statewide surveys conducted by the Public Policy Institute of California show that over three-fourths of Californians view the state’s international leadership in addressing climate change as very or somewhat important to them. Even as U.S. climate policy has fluctuated over the past two presidential administrations, California engaged in subnational agreements to indicate its enduring commitment to enacting policies to combat climate change. When the Trump administration called for the U.S. to leave the Paris Climate Accords in 2017, California led a coalition of cities and states committed to adhering to the goals laid out in the agreement despite Washington’s withdrawal. More recently, California has launched an initiative to reduce methane emissions along with 15 other subnational jurisdictions from 10 different countries, and has signed memoranda of understanding with South Korea’s Gyeonggi province and China’s Shanghai municipality to expand trade and address climate concerns in shipping, respectively. Even as the prospect of comprehensive U.S.-China collaboration on climate action becomes less likely and economic regionalization gains popularity, California is able to assert its interests through engagement in subnational agreements.
Second, California’s leadership can continue to make diplomatic visits to China to ease tensions between national governments and investor concerns about future conflict. In 2023, Governor Gavin Newsom took a week-long trip to China focused on addressing climate change that culminated in a meeting with President Xi Jinping, becoming the first American governor to visit the country in four years. In April, San Francisco Mayor London Breed visited China with a delegation of Asian Pacific Islander business leaders focused on expanding tourism and bolstering cultural ties between the U.S. and China. The ability of subnational officials to focus specifically on areas of agreement while ignoring the more contentious topics that must be addressed in higher-level meetings helps them refocus bilateral dialogue when tensions between the two countries are high. Additionally, these visits maintain a long tradition of diplomacy between California and China, which was previously successful at decreasing investor concerns about hostilities between the two countries. While federal policy may limit the economic impact of future visits, Californian leaders should continue to visit and engage with Chinese leaders to bring more attention to common goals and decrease hostility.
The size and strength of California’s economy give its leaders some sway in facilitating economic exchange with China even as it is discouraged at the federal level. Should its efforts to protect economic engagement fail, California can still work to independently address other issues important to its citizens by engaging in subnational initiatives with like-minded jurisdictions. California’s interests must be considered in crafting an overarching strategy to compete with China. If they are not, the state must leverage its international prestige and economic prowess to ensure Californian concerns are addressed.
Ben Makarechian is a 4th-year undergraduate student at the University of Virginia’s Batten School of Leadership and Public Policy, majoring in public policy and international economics and minoring in Chinese. He is currently a Junior Fellow at the Pacific Council for International Policy. Originally from Los Gatos, California, his interest in US-China relations stems from the five years he spent living in Singapore and was deepened during the two months he studied Chinese in Beijing during the Summer of 2024. His writing about China has been published in UVA’s Virginia Journal of International Affairs.
The views and opinions expressed here are those of the author(s) and do not necessarily reflect the official policy or position of the Pacific Council.
