As US tariffs rise, could Chinese consumers take up the export slack?
-
Ann Scott Tyson Staff writer
| Beijing
China鈥檚 export-fueled growth strategy is facing a major roadblock as tariffs threaten to wall off America 鈥� by far China鈥檚 biggest overseas market 鈥� which absorbs about $400 billion worth of Chinese goods each year.
President Donald Trump warned that he could raise U.S. tariffs on China to more than 100% on Wednesday if Beijing doesn鈥檛 back down from tit-for-tat levies. 鈥淐hina will fight to the end,鈥� shot back China鈥檚 Ministry of Commerce.
The escalating U.S.-China trade war will exacerbate the mounting global glut of Chinese manufactured goods, raising the question, Where will all these goods go, if not to the United States?
Why We Wrote This
China has long relied on exports of manufactured goods to drive economic growth. But as the United States and other nations shut China out, some argue that Beijing should rely more on consumers at home.
The world is already facing what some analysts call a second 鈥淐hina shock,鈥� as shiploads of Chinese-made cars, steel, and other goods flood into foreign markets.
鈥淎ny indicator you look at just shows an enormous increase in China鈥檚 exports,鈥� says Brad Setser, a senior fellow at the Council on Foreign Relations and former U.S. treasury official who specializes in global trade. Last year, China鈥檚 export volume grew about three or four times faster than global trade overall, he notes. Imports, meanwhile, remained flat.
鈥淚t鈥檚 been a very asymmetric pattern,鈥� he says, designed to make China less dependent on the world, while making the world more dependent on China.
Even before Mr. Trump鈥檚 tariff blitz, many countries in Europe and beyond were pushing back on this strategy, trying to lessen their dependence on Chinese goods with targeted tariffs; that suggests that redirecting exports from the U.S. may not be so easy. To protect China鈥檚 long-term economic growth 鈥� on which the Communist Party government鈥檚 legitimacy lies 鈥� China鈥檚 leader Xi Jinping may have to change course, and take bolder steps to boost consumption at home.
鈥淴i鈥檚 choices become ... more stimulus directed at households, or another downturn in the Chinese economy,鈥� says Dr. Setser. 鈥淔aced with that choice, I think Xi may reevaluate.鈥�
Growing dominance in world manufacturing
In recent decades, China has leaped ahead in global manufacturing, boosting its share of world manufacturing output from 9% in 2004 to some 29% in 2023, according to the (CSIS). Overall, China now accounts for more manufacturing output than the U.S., Germany, Japan, and India combined.
Today, Mr. Xi鈥檚 top priority economic strategy is to promote Chinese advanced, high-tech manufacturing, and he is pouring massive government investment into this task. In 2019 alone, China spent an estimated equivalent of 1.7% of its gross domestic product on industrial policy 鈥� four times that of the U.S., according to a CSIS study.
Such investments have led to successful Chinese innovation in key industries such as electric vehicles, and green energy transition products such as solar power equipment and lithium-ion batteries.
This dominance serves China鈥檚 goal to create a dense web of bilateral trade and investment ties that bolster its wealth and influence, while maintaining China as a fortress of industrial and technological self-sufficiency, says Arthur Kroeber, head of research at the financial services company Gavekal and author of 鈥淐hina鈥檚 Economy: What Everyone Needs To Know.鈥�
鈥淭hey want to have leverage over the rest of the world, which they think is best achieved through very deep economic ties,鈥� he says. 鈥淚f countries have a lot of eggs in the China basket, it鈥檚 less easy for them to rely on the U.S.鈥�
China鈥檚 retaliation against Mr. Trump鈥檚 tariffs last Friday 鈥� imposing 34% in additional tariffs on all imports from the U.S., starting April 10 鈥� shows that Beijing is calling Mr. Trump鈥檚 bluff, he says. After the first U.S.-China trade war launched by Mr. Trump in 2018, Beijing spent years fortifying itself against U.S. pressure and developing various retaliatory tools.
鈥淭he government believes China can sustain the pain longer than the U.S. consumer can ... and the U.S. will cave first,鈥� he says. As a result, in Beijing the plan is not to let Mr. Trump dictate the terms with his off-and-on tariffs.
鈥淚f you are China,鈥� he asks, 鈥渄o you have to play that game?鈥�
China鈥檚 steely resolve
Beijing may consider more drastic steps, such as devaluing its currency to make its exports cheaper, says Mr. Kroeber. Indeed, on Tuesday China鈥檚 central bank set its reference rate for the Chinese yuan at the lowest level since September 2023 鈥� a move considered a warning signal to Washington.
Beijing鈥檚 propaganda apparatus is working overtime to signal resolve.
A statement issued by China鈥檚 Foreign Ministry slammed the U.S. tariff policy, saying it marks an attempt to 鈥渟ubvert the existing international economic and trade order鈥� and 鈥渁dvance U.S. hegemonic ambitions.鈥�
China鈥檚 state television broadcasts on Tuesday night were filled with reports condemning the U.S. for 鈥渂lackmailing鈥� and 鈥渂ullying鈥� through economic coercion 鈥� while casting Beijing as the protector of the world trading system.
One program even broadcast a video of the late U.S. economist Milton Friedman extolling the virtues of free trade by describing the far-flung materials needed to produce a pencil 鈥� the same video posted on Monday by Elon Musk, who has opposed Mr. Trump鈥檚 tariff policy.
Still, if Europe, Latin America, and other parts of the world resist absorbing the 鈥淐hina shock,鈥� Beijing may ultimately be forced to take stronger measures to strengthen domestic demand as a driver of its economic growth.
In fact, such a pivot to domestic consumption could create a significant strategic advantage for China, experts say.
鈥淭he opportunity for China 鈥� if China is willing and able to do it 鈥� is to replace the U.S. as a source of demand, particularly for some of its Asian neighbors,鈥� says Dr. Setser. 鈥淭o really displace the U.S., it has to show it鈥檚 willing to be a source of demand, not just a source of supply.鈥�
