China’s Economic Collision Course

China’s economy has barely grown in the past two years. The immediate causes, including a decline in property construction and ham-fisted “zero COVID” policies that tanked private-sector investment, are well known. But the roots of the stagnation are systemic, and firms and analysts inside China, as well as governments and businesses around the world, have waited with anticipation for Beijing to clarify its plans to put the country’s economy on a more stable track. Between 2010 and 2019—not long ago—China’s annual GDP growth averaged 7.7 percent, but today the basic policy reforms necessary to support even three or four percent growth are proving difficult for Beijing to achieve.

Domestic and foreign observers pinned their hopes on the biggest policy event on China’s calendar, the National People’s Congress (NPC), for signs of an overdue change in direction. China has run an annual trade surplus for more than two decades, but in 2022 and 2023, a slowdown in China’s domestic demand pushed the country’s exports to exceed its imports by a shocking $1.7 trillion. A year earlier, in 2021, President Xi Jinping had declared that China had become a “moderately prosperous society”—a reference to a concept defined more than two millennia ago in the Chinese poetry collection known as the Book of Songs. In modern economic terms, Xi was taking credit for China’s rise to middle-income status. This transition should come with a policy pivot. After over two decades of strong investment-led growth, China now needs consumption-led growth. Further investment will have diminishing returns unless China can consume more at home. Yet over the past two years, the opposite has happened. Unable to sell goods to domestic buyers, Chinese companies are exporting their excess production abroad.

The United States, the European Union, Japan, and other advanced and developing countries worry that this trend will continue—that China is preparing to export its way out of the economic slowdown. Beijing has declined to prioritize domestic demand and openly denigrated consumer stimulus proposals, and it has promised to sustain support for the very industries that are driving China’s export growth. These policies will result in larger Chinese trade surpluses and foreign deficits, undercutting competition abroad and threatening to put Western firms out of business and their workers out of jobs.

The outcome of the NPC, which concluded on March 11, will heighten rather than allay foreign countries’ legitimate worries. Faced with an economic situation that calls forstructural reform to enhance productivity and bring domestic demand more in line with production, China’s leaders have instead put forward a policy mix that will delay necessary changes and deepen the economy’s reliance on foreign sources of demand. To protect their own economies from the damage caused by inexpensive Chinese exports, foreign governments will increasingly turn to antidumping tools, which typically include tariffs on Chinese goods produced below cost.

Worsening trade conflict is an inevitable outcome of current Chinese policies, and it will not be limited to China’s relationships with advanced economies. Trade disputes are already arising between Beijing and several other members of the multilateral forum known as BRICS, for Brazil, Russia, India, China, and South Africa. Earlier this month, Brazil initiated antidumping investigations into Chinese steel imports. India has introduced more antidumping orders than any country in the world in its efforts to restrict imports from China. South Africa’s trade commission recently completed an assessment of Chinese imports and confirmed that dumping was taking place. While developed and developing economies alike push back against China’s high export volume, Beijing appears to be simply ignoring the problem.

And as Chinese overcapacity drives foreign governments toward ever-harsher countermeasures, the resulting confrontation is something neither the Chinese economy nor the global trade system can afford.

This is not the first case of broad international objection to a single country’s trade practices. Advanced economies also took issue with Japan’s refusal to address its trade imbalances in the 1970s and 1980s. The United States intervened by holding direct talks with Japan in 1984–85 to compel Tokyo todeal with the root of the problem: structural policies that disadvantaged foreign products and undervalued Japan’s currency. As a result, Japan agreed to “voluntary” export restrictions. The Plaza Accord of 1985 and the Louvre Accord of 1987, both signed by France, Germany, Japan, the United Kingdom, and the United States (with Canada joining the latter agreement), codified further arrangements to reduce trade imbalances by allowing exchange rate adjustments to strengthen the yen against the dollar. These coordinated efforts to change Japanese economic practices were controversial at the time, eliciting complaints that Washington and its partners were being heavy-handed. But in the end, the measures did not impede Japan’s economic development. In fact, bydealing with legitimate concerns about trade imbalances, they laid a foundation of trust in globalization that would benefit many countries—none more than China—in the ensuing years.

Today, the question is whether Beijing will agree to correct its policies, as Japan did, forestalling a campaign by G-7 countries to impose more aggressive restrictions on the growing volume of Chinese exports. But trade policies would be only a temporary expedient. China’s trade surplus will persist until its domestic demand meaningfully grows or investment growth slows significantly. To alleviate the problem in the short term, Beijing would need a strong fiscal stimulus. And to fix it in the long term, China must transfer resources from the state to households—either directly through cash payments or shares in state-owned enterprises, or indirectly through changes in tax policies or subsidies for housing, retirement, medical care, and other services.

If China had such steps in mind, its intentions would have been apparent in the policy messaging that came out of the NPC. But no such evidence has emerged. In fact, Beijing’s economic targets show not only that it remains committed to its old export- and investment-led development model but also that it may even be planning to expand Chinese manufacturing capacity to further increase exports.

The industries China seeks to champion are exactly the ones that threaten to undermine competitors abroad.

Consider that Beijing’s new fiscal policy package includes no direct support for household consumption or incomes. China’s formal budget deficit target of three percent of GDP in 2024 is largely in line with its 2023 target, which, taking into account the current combination of government spending and bond issuance, means that Beijing will not be implementing the kinds of fiscal policies that spur domestic growth. Most important, China continues to channel credit and fiscal resources into local investment rather than making direct transfers to households to boost their spending. In the past, Xi has derided such payments as “welfarism,” but China cannot sustainably expand household consumption as a share of the economy only using supply-side measures. Eventually, fiscal resources must move from the state to the household sector, and there are no signs now of that transfer taking place.

This industrial policy is particularly unwelcome to the rest of the world. China’s official government work report for 2024 identifies the electric vehicle, battery, and solar cell industries among the “new productive forces” that will boost the country’s overall productivity growth. An entire section of the report describes how the government “will actively foster emerging industries and future-oriented industries” with an aim to “consolidate and enhance [China’s] leading position” in several of them. But the industries China seeks to champion are exactly the ones that are threatening to undermine competitors in developed and developing economies.


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