It’s a common misconception to pinpoint the United States’ most critical international relationships solely through the lens of trade deficits or military strength. However, a significant deficit lies in understanding the intricate web of global connections that truly define America’s standing in the world. Misjudgments in politics, economics, and media, stemming from this knowledge gap, can negatively impact American consumers, businesses, workers, and families.
Commercial ties are a prime example of this misunderstanding. While cross-border trade in goods remains a frequently cited metric for international commerce, this benchmark is outdated. In today’s globalized economy, characterized by extended supply chains, rapid technological advancements, and evolving strategic rivalries, focusing solely on goods trade provides a misleading picture.
Why is this the case? Because international commerce is far more multifaceted than just the exchange of goods. It encompasses trade in services, an often-overlooked aspect by commentators and policymakers. Although services constitute a smaller portion of overall global trade compared to goods, they are experiencing faster growth. Crucially, a larger number of American jobs are dependent on the service sector than on goods-producing industries, highlighting the service sector’s competitive advantage for the U.S.
American and British flags flying together, representing strong US-UK trade partnership
Furthermore, just as trade extends beyond goods, international commerce goes beyond simple trade flows. Investment represents a deeper and more enduring form of commercial connectivity. Many U.S. companies prioritize establishing operations closer to their customer base in foreign markets rather than merely exporting goods or services across long distances. This trend has been ongoing for over a century, and companies from numerous nations have joined this approach. Consequently, America’s investment relationships with many countries now hold significantly greater value than its trade relationships when strictly considering goods.
Beyond trade and investment, other flows are equally vital. Cross-border data flows are not just a major contributor to global economic expansion, exceeding even goods trade; they underpin and facilitate virtually every other type of international exchange. The United States stands as the world’s premier hub for international trade in products delivered digitally through data flows. International exchanges of research and development, along with talent migration, have also become critical for knowledge-based economies like that of the United States. Today, numerous companies invest comparable amounts in intangible assets related to knowledge flows as they do in tangible capital like machinery, equipment, and buildings. Considering all these diverse flows is essential for accurately interpreting economic data and identifying the most significant commercial partners of the United States.
For instance, U.S. commercial ties with China are often portrayed as the most crucial. In reality, they are more akin to a heavily congested two-lane highway primarily used for goods transportation. While these lanes are indeed busy, any disruption, such as the supply chain issues during the COVID-19 pandemic, the U.S.-China tariff disputes, or current restrictions on raw materials from Beijing and semiconductors from Washington, can severely disrupt traffic. Services between the two nations utilize much narrower “bike lanes,” while data and knowledge flows resemble restricted pedestrian walkways—slow, limited, and frequently constrained. Investment, representing a potentially more substantial lane, has been under construction for years but is riddled with obstacles due to increasing regulations from both Beijing and Washington. China experienced a substantial decline in foreign investment in 2023, and estimates from JPMorgan Chase suggest that approximately half of the $250 to $300 billion in international capital that flowed into Chinese bonds since 2019 has now departed. Chinese foreign direct investment (FDI) in the U.S. also remains quite modest: with only seven deals valued at $1.8 billion in 2023 and five deals at $2.6 billion in 2022.
Companies seeking to mitigate risks associated with China tensions and supply chain vulnerabilities are actively diversifying their sourcing, sales, and investment strategies. Mexico has emerged as a notable beneficiary of this shift. Recent news reports have highlighted Mexico surpassing China as the top goods trading partner of the United States in 2023. However, these reports typically focus solely on goods trade. When services are included, Mexico has actually been America’s leading trading partner for a longer period. U.S.-Mexico trade in goods and services already exceeded that between the United States and China in both 2021 and 2022.
While trade relationships with both China and Mexico are significant, neither country holds the position of America’s top commercial partner overall. That distinction belongs to the United Kingdom. U.S.-U.K. goods trade volumes are considerably smaller than those with China or Mexico. However, U.S.-U.K. services trade surpasses the combined services trade of the U.S. with China and Mexico, reaching nearly $156 billion in 2022, compared to $76 billion with Mexico and approximately $68 billion with China.
Comparison of US trade partners, highlighting EU and UK investment dominance
The true divergence, however, lies in the massive scale of mutual investment. At $1.74 trillion, U.S.-U.K. investment stock is more than 11 times greater than U.S.-China investment stock ($154.8 billion) and over 10 times larger than U.S.-Mexico investment stock ($164.1 billion). U.S. FDI in the U.K. alone exceeds U.S. FDI in the entire Asia-Pacific region. Sales by American and British affiliates within each other’s markets in 2021 ($1.4 trillion) exceeded the combined sales of U.S. affiliates in all of Latin America (including Mexico) and Latin American affiliates in the United States ($1.1 trillion) by 21 percent. These investments also translate into job creation: U.K. companies are the largest source of onshored jobs in the United States, mirroring the fact that U.S. companies are the largest source of onshored jobs in the U.K.
Perhaps the most vital commercial partner for the United States is not a single nation, but the European Union (EU). Comprising 27 member states, comparisons to individual countries like China, Mexico, or the U.K. might seem unbalanced. However, EU member states have delegated trade authority to the European Commission, which acts and negotiates on behalf of the entire union. The Commission also manages the EU’s Single Market, facilitating commerce with minimal internal tariffs or restrictions, unlike agreements like USMCA or trade relationships in East Asia.
The commercial connection between the EU and the United States is far more substantial than a simple two-way street; it resembles a 12-lane Autobahn. Beyond wider lanes for goods and fewer restrictions than with China, this transatlantic highway includes extensive lanes for services, investment, and affiliate sales. Trans-Atlantic digital pathways carry 75 percent of global digital content. Innovation channels for research and development flows are most intense between the U.S. and EU compared to any other international partners. Job creation through these connections involves over 16 million Americans and Europeans.
China’s emergence as a global goods powerhouse can easily lead to the conclusion that it is the primary trading partner for both the United States and the EU. This perception is inaccurate. U.S.-EU goods trade in 2023 (approximately $946 billion) was 39 percent higher than U.S.-China goods trade ($575 billion) and 15 percent greater than EU-China goods trade ($805 billion). U.S.-EU services trade reached $411 billion in 2022, six times greater than U.S.-China services trade ($68 billion) and 3.6 times more than EU-China services trade ($122 billion).
Combining goods and services, U.S.-EU trade totaled $1.3 trillion in 2022. EU-China trade, at $1.06 trillion, was only about 82 percent of this volume, and U.S.-China trade, at $758.4 billion, was just 58 percent as large. While German officials and business leaders often cite China as Germany’s top trading partner, China-Germany trade in goods and services ($348.45 billion) was approximately 12 percent less than U.S.-Germany trade ($394.15 billion) in 2022. Furthermore, both U.S.-China and EU-China trade weakened in 2023, while U.S.-EU trade strengthened.
The disparity becomes even more pronounced when considering investment. U.S. investment stock in the EU in 2022 ($2.7 trillion) was over 21 times larger than U.S. FDI stock in China ($126.1 billion). EU investment stock in the United States in 2022 ($2 trillion) was double the investment from all of Asia ($1 trillion).
Comparisons with USMCA partners are also insightful. U.S. goods and services trade with USMCA partners Mexico and Canada totaled $1.76 trillion in 2022, exceeding U.S. trade with the EU ($1.3 trillion). However, as noted, businesses often favor establishing a local presence over cross-border trade. Mutual investments between U.S. and EU firms, along with the jobs, sales, and wealth generated in each other’s markets, significantly outweigh U.S., Mexican, and Canadian investments within North America, and are far greater than any trade flows. U.S.-EU foreign affiliate sales of $4.1 trillion in 2021 were three times greater than USMCA foreign affiliate sales of $1.4 trillion. The combined U.S.-EU investment stock of $5.1 trillion in 2022 was four times larger than the combined U.S.-Canada-Mexico investment stock of $1.3 trillion.
In conclusion, when examining the full spectrum of U.S. commercial relationships globally, it becomes evident that the United States and the EU are each other’s most important commercial partners, a relationship that has persisted for decades. While specific sectors within each economy may rely on China and other nations for essential raw materials, these dependencies have become a source of concern due to geopolitical tensions. The robust commercial linkages uniting the U.S. with the EU, the U.K., and other European democratic market economies provide a strong geo-economic and geostrategic foundation for addressing these concerns. By maintaining solidarity and exploring avenues to further leverage their combined potential, these transatlantic partners will be better equipped to navigate future global challenges.
