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Weekend Reads
As the United States and China square off in the most consequential trade war in nearly a century, many critics hope President Donald Trump will stand down on his tariff plans amid rising pressure. But Beijing is more vulnerable than it appears.
In the New York Post, Thomas Duesterberg argues that the economic effects of Trump’s tariffs could accelerate social unrest in China. Read his key points below.
Key Insights
1. Xi’s plan to maintain the steady growth of the Chinese economy depends on exports to the US.
In sharp contrast with the US and most other developed economies, China’s household consumption only accounts for about 40 percent of its gross domestic product, while fixed capital investment in infrastructure and factories hovers around one-third. Last year exports represented 18 percent of China’s GDP. China continues to invest in new goods manufacturing instead of consumption: Its capacity in steel, autos, and solar panels is at least 150 percent of its domestic consumption of these products, which makes Chinese firms dependent on exports.
2. Xi’s opposition to “welfarism” prevents him from taking steps to boost domestic consumption.
China’s anemic social welfare system compels its citizens to save for elder- and childcare, education, and medical emergencies rather than spending on consumer products. “Eating bitterness”—suffering in the name of the national cause—has therefore become China’s daily reality. Much of the Chinese economy’s apparent modernization benefits not its own people, but the rest of the world through subsidized exports. Many indicators of public sentiment, including government surveys, show growing discontent among young and old alike. Low birth and marriage rates point to a lack of confidence in the future, and the youth phenomenon of “laying flat” (dropping out) is another sign of disillusion. Trump’s tariffs add stress to an already teetering Chinese economy beset by deflation, declining tax revenues, massive layoffs, and consistently high youth unemployment.
3. Trump has advantages in the trade war—if he chooses to use them.
Given China’s internal weaknesses, Trump should consider cultivating cooperation with US allies, instead of confronting them with tariffs. Joint action could weaken Beijing’s trade-war resolve. But the tenor and substance of Trump’s criticism of allies thus far poses a real impediment to their assistance. Still, Xi’s ideological opposition to improving social welfare and increasing domestic consumption, and his insistence on relying on exports for China’s economic growth, put him at a disadvantage in this battle.
Go Deeper
On The Foreign Affairs Interview, Nadia Schadlow discussed Trump’s second-term approach to Ukraine, Asia, and global trade, and she laid out a vision of what a successful Trump foreign policy might look like.
High debt levels burden Chinese local governments, and shrinking revenues, declining birthrates, falling marriage rates, and aging populations further fuel the deterioration of government finances. Thomas Duesterberg and Alexander Aibel lay out how these factors damage the Chinese people’s trust in their government.
In The Wall Street Journal, Thomas Duesterberg explains how smart US trade policy could undercut China’s ability to exploit American innovation—especially in cutting edge fields like artificial intelligence.
