The Economic Policy China Will Not Adopt
- Journalisme
- Dec 18, 2024
- 8 min read
Article de Noam Smuha
The Economic Policy China Will Not Adopt: Turning to Its Home Market and Consumer Base
Abstract
The late 2010s and early 2020s have been marked by a significant shift in financial geopolitics. Whereas the advent of the 21st century was hoped by many to be a harbinger of a new liberal world order led by the United States (with thinkers like Francis Fukuyama declaring the “end of history”), this hegemony has been challenged. The rise of the People’s Republic of China (China) and the recent trade disputes between these two superpowers have reshaped global dynamics. These “tariff” or “trade” wars can be understood as a rise in protectionism, with China heavily subsidizing its export industries to enhance competitiveness in foreign markets, while the United States imposes tariffs on Chinese goods to make them less competitive in the domestic market, responding to what it perceives as unfair trade practices. As a result of this conflict, other nations and international organizations have become increasingly aware of their vulnerabilities regarding dependence on foreign imports, unfair trade practices, or reliance on exports.
In short, we are currently witnessing a global rise in both multipolarity in geopolitics and protectionism in international trade. As the world’s largest exporter, China will need to rethink its growth model in response to these shifts, as it is becoming less profitable to be a major exporter due to the global rise in trade barriers. There is, however, an apparent solution for the Chinese Communist Party: replace its foreign consumers with domestic ones, allowing the Chinese people to buy the goods they produce. Despite this seemingly straightforward Keynesian policy solution, the Chinese government appears reluctant to implement such a demand-side strategy, instead continuing to seek supply-based solutions to what is fundamentally a demand issue.
Section 1: Historical Economic Overview
Although the People’s Republic of China is nominally led by a communist party, the nation has developed an export-oriented growth model since Deng Xiaoping’s reforms in the late 1970s. These reforms aimed to transition China from a planned socialist economy to a more open market economy, enabling faster growth, increased government revenue, and the lifting of hundreds of millions of Chinese citizens out of poverty. In 2000, U.S. President Bill Clinton welcomed China into the World Trade Organization (WTO), hoping that opening its markets would lead to political liberalization. While the latter scenario has not materialized, the economic leap China has made in the last forty years is undeniable. The nation has integrated itself into the global market and, since the 2000s, has become the world’s largest exporter of goods. Furthermore, it boasts a trade surplus of $1.57 trillion, compared to the USA’s trade deficit of $1.17 trillion.
Among the most important factors in this economic growth are the relatively low wages and currency valuation, as well as heavy government investment, including massive subsidies to local industries and the creation and management of large state-owned enterprises.
1.1: China's Economic Shift in the 1980s
Before Mao Zedong’s death in 1976, China had endured a rather dismal economic situation for a century, often referred to as the “century of humiliation.” From the Opium Wars against the United Kingdom in the mid-19th century to the Second World War, China suffered massive losses in population, infrastructure, and economic stability. The centralized planned economy established after the Chinese Communist Party (CCP) came to power in 1949 failed to address these challenges effectively, and some scholars argue that it even hindered the country’s rebuilding efforts.
However, China’s economic fortunes began to change dramatically in 1978 when Deng Xiaoping assumed power and implemented substantial policy reforms. Instead of focusing on continued class struggle, the goal of policy shifted to promoting economic growth across the nation. This was achieved through opening China’s markets to foreign investment and leveraging the country’s comparative advantage in international trade: its vast and cheap labor force. Private investment, alongside government subsidies or tax breaks for key industries, helped China achieve an average growth rate of 9% per year since 1978. The World Bank estimates that these reforms have lifted over 800 million people out of poverty.
By 2009, China had become the world’s largest exporter of goods, and as of 2022, the total value of Chinese exports was $3.71 trillion. Today, China exhibits many attributes of a fully developed economy, with significant investment banks, some of the world’s most valuable companies, and burgeoning automobile and electronics industries, among others. However, some aspects of its economy suggest that China is still a developing nation.
Philippe Benoit, director of research at Global Infrastructure Analytics and Sustainability 2050, describes China as a “hybrid superpower.” While some regions still suffer from persistent poverty, the sheer scale of the nation’s economic influence makes many other countries’ economies dependent on trade with China. For instance, China’s demand for raw materials drives industries in many developing nations. In the Global West, China is often seen as a threat due to the dependence on importing goods from China, whereas in developing nations, the focus is on dependence on exporting raw materials to China and reliance on Chinese foreign direct investment for infrastructure and economic growth.
1.2: Geopolitical Ambitions
China’s financing of foreign infrastructure is best exemplified by the Belt and Road Initiative (BRI), a project launched in 2012 by the Chinese government to build infrastructure worldwide, facilitating the trade of Chinese goods in the global market. While this article is not intended to discuss the impacts of the BRI in detail, it is worth noting that since its launch, most of the world’s developing economies have gravitated toward China. As a result, they have become increasingly influenced by decisions made by Chinese officials or companies, thereby granting China immense hard and soft power globally and making it easier for Chinese goods to be exported worldwide.
Section 2: Global Reaction and Protectionism
2.1: Awareness and Alarm
The rise of China as a global power in the late 2010s triggered a domino effect of “realist” reactions. Both the EU and USA are wary of competing with cheap Chinese products in the global market, but they are also frustrated by the difficulty Western industries face in competing with Chinese producers in the Chinese market due to significant barriers to entry. Together, the Western bloc has invested in a counterproject to the BRI called Global Gateway. Its stated objective is to provide developing countries with financial means to aid their development while offering better terms for investment than the BRI. How the rivalry between these projects will unfold remains to be seen.
India, though less economically competitive with China, sees itself as a regional adversary. It seeks to mitigate Chinese influence along the String of Pearls (the BRI’s Indian Ocean projects) and counter the rise of China’s military prowess. Both nations have ongoing border disputes, and China’s strong partnership with Pakistan, India’s chief political rival, exacerbates tensions. As a result, India has gravitated toward the USA for military aid and cooperation, forming the “Quad” with Japan and Australia. This strategic partnership aims to secure common interests in the Indo-Pacific, chief among them containing Chinese influence.
2.2: Protectionist Legislation
The fragmentation and polarization of geopolitics became explicit during the 2016 U.S. presidential election when Donald Trump campaigned heavily on China’s unfair trade practices. Once in office, he imposed a wide array of tariffs on imported Chinese goods and banned certain Chinese companies from American markets, accusing them of spying for the Chinese government. Although Trump lost the 2020 election, his successor, Joe Biden, continued the antagonism toward Chinese imports, expanding tariffs to include Chinese electric vehicles and semiconductors. As antagonism toward China appears to resonate well with the electorate, it is unlikely that either Democrats or Republicans will back down from the increasingly significant confrontation with China.
The EU is also wary of Chinese competition but has been less confrontational than successive U.S. governments. It has imposed tariffs on certain Chinese goods, though it began doing so several years after the USA. Moreover, both China and the EU are cautious about escalating tensions, as they remain economically reliant on each other. The EU is China’s largest single export market, and Chinese officials hope for the EU to serve as a middle ground and counterweight to U.S. hegemony.
Section 3: Internal Struggles and Economic Challenges
3.1: Internal Economic Challenges
The goal of these so-called “Tariff wars” is to make it harder for Chinese firms to export their products or, at the very least, make them less competitive. For an economy where almost 20% of GDP comes from exports (with imports accounting for 17%), any hindrance to the ability to export could have disastrous consequences. If the Western world stops buying Chinese goods, an overproduction crisis could occur, severely impacting the profits of Chinese firms and, by extension, the Chinese government’s revenues. This would make investing in China’s economy more costly for the government, and it is important to note that investment accounts for a whopping 42% of GDP.
The fact is that although China is the world’s largest goods manufacturer, most Chinese people are unable to purchase the goods they produce.
3.2: The Proposed Solution
One should never assume that history or economic development is linear, but there are several lessons from the industrialization of Europe and the USA that the CCP seems unwilling to emulate: the empowerment of the working class, not only as producers of goods and services but also as consumers. Keynesian theory suggests that governments should encourage their citizens to consume the goods they produce to reduce the risk of overproduction and to lessen dependence on foreign markets. This is the path that Western economies took after World War II. While the post-war economic boom in Europe was indeed driven by investment, such as through the Marshall Plan, the profits from these investments eventually trickled down to the workers who rebuilt Europe. These workers, in turn, spent their earnings on consumer goods, sustaining the economy in a partially circular manner. This empowerment of European workers is also exemplified by the rise of the service industry, which generally requires better-trained and better-paid employees.
Section 4: The CCP's Reluctance and Alternative Strategies
4.1: Reluctance to Rely on the Domestic Market
Chinese wages remain very low despite the country's substantial exports to the rest of the world. If Chinese workers could use the income from these exports to purchase goods within their own country, it would boost domestic consumption and demand, potentially offsetting the decline in exports over time. However, the CCP appears reluctant to rely on its own population for economic growth. Instead, in recent years, it has focused on reviving its export capacity by providing massive subsidies to its major export industries. This policy is not only short-sighted but has also further angered China’s global competitors, who see it as a continuation of unfair trade practices. Why, then, does the CCP persist with this export-driven growth model?
The primary reason is that the CCP does not trust its citizens to spend their earnings. Chinese workers tend to save rather than spend, especially in light of the recent property crisis. Additionally, while social welfare programs have grown immensely in recent decades, they still have not developed enough to allow Chinese citizens to spend their money on other services. Funding such programs is costly, and if the government divests from its manufacturing industries, revenues will further decline, making it even harder to boost overall consumption.
Xu Gao, the Chief Economist and Assistant President of Bank of China International, has proposed sharing the dividends of the government’s many state-owned companies with the country's citizens. In short, he suggests creating state-owned investment funds that would hold the equity of state enterprises. Shares of these funds would then be distributed to the population.
However, such solutions are not politically appealing to any Chinese head of state, least of all Xi Jinping, as they would dilute government-held assets and weaken China’s firms. Even if the transition from investment to consumption were eventually successful, it is expected that China’s overall GDP would have to contract at some point, despite an increasing share of household consumption.
4.2: Conclusion
While in a democracy, leaders are at least partially accountable to their constituents through frequent elections, China’s leaders are accountable to their colleagues in the CCP, many of whom are heavily invested in the current growth model, particularly in the finance and real estate sectors. Not only do party members want to participate in the nation’s lucrative enterprises, but private investors also see the benefits of aligning with the nation’s politics. For example, when the Chinese investment bank CICC started fearing a loss in profits, its leaders eagerly joined the CCP to influence the government to save the firm. This trend is becoming increasingly common in China and will likely continue to focus the government’s attention on ensuring companies’ short-term profits while neglecting the long-term stability offered by a service-based welfare economy.
Bibliography :
Comments