China’s economy has grown slightly over the past two years. The immediate causes, coupled with declining housing structure and competitive zero-COVID policies that have led to a drop in investment in the personal sector, are well known. But the roots of the stagnation are systemic, and businesses and analysts in China, as well as governments and businesses around the world, are eagerly waiting for Beijing to explain its plans to put the country’s economy on a stronger path. Between 2010 and 2019 – so long ago – China’s annual GDP expansion averaged 7. 7%, but today, the basic policy reforms needed to sustain even a 3 or 4% expansion are proving difficult for Beijing to implement.
Observers at home and abroad have pinned their hopes on the biggest political event on China’s calendar, the National People’s Congress (NPC), for signs of a long-awaited change of direction. China has had an annual industrial surplus for more than two decades, however, in 2022 and 2023, a slowdown in Chinese domestic demand has led to the country’s exports exceeding its imports by a staggering $1. 7 trillion. . A year earlier, in 2021, President Xi Jinping declared that China had a “moderately filthy rich society,” referring to a concept explained more than two millennia ago in the collection of Chinese poetry known as the Book of Songs. In fashionable economic terms, Xi took credit for China’s rise to middle-income country status. This transition deserves to be accompanied by a change in policy. After more than two decades of strong investment-led growth, China now wants consumption-led growth. New investments will have diminishing returns unless China manages to consume more at home. However, in the last two years the opposite has happened. Unable to sell their products to domestic buyers, Chinese corporations export their excess production abroad.
The United States, the European Union, Japan, and other complex and emerging countries are concerned that this trend will continue and that China will prepare to export as a way out of the economic crisis. Beijing has refused to prioritize domestic demand and has blatantly scorned customer stimulus proposals, vowing to defend the very industries that are driving China’s export growth. These policies will lead to an accumulation of external surpluses and deficits of Chinese industry, undermining the foreign festival and threatening to bankrupt Western corporations and endanger their out-of-work staff.
The effects of the AFN, which ended on March 11, will increase rather than dispel the valid concerns of foreign countries. Faced with an economic scenario that calls for structural reforms for productivity and greater alignment of domestic demand with output, China’s leaders have instead proposed a policy mix that will delay mandatory adjustments and increase the economy’s dependence on necessary foreign resources. To protect their own economies from the harm caused by reasonable Chinese exports, foreign governments will increasingly turn to anti-dumping tools, which usually come with lists of values of Chinese goods produced at less than cost.
The worsening of industrial conflicts is an inevitable result of China’s existing policies, and will not be limited to China’s relations with complex economies. Trade disputes are already emerging between Beijing and several other members of the multilateral forum known as BRICS, namely Brazil, Russia and India. Earlier this month, Brazil launched anti-dumping investigations into imports of Chinese metals. India has filed more anti-dumping orders than any other country in the world in its efforts to limit imports from China. The South African Trade Commission recently completed an assessment of Chinese imports and showed the lifestyles of dumping. While evolved and emerging economies oppose China’s increased volume of exports, it turns out that Beijing simply forgets about the problem. And while China’s overcapacity is pushing foreign governments to adopt increasingly harsh measures. countermeasures, the result is one that neither the Chinese economy nor the global trade formula can afford.
This is not the first case of foreign objection to the industrial practices of a single country. Advanced economies also questioned Japan’s refusal to address imbalances in its industry in the 1970s and 1980s. The United States intervened through direct negotiations with Japan in 1984-1985 to force Tokyo to address the root of the problem: structural policies. that deprived foreign products and undervalued the Japanese currency. As a result, Japan agreed to “voluntary” export restrictions. The Plaza Agreement of 1985 and the Louvre Agreement of 1987, signed through France, Germany, Japan, the United Kingdom and the United States (with Canada acceding to the latter agreement), codified other agreements aimed at reducing industry imbalances by allowing exreplace types. settings. to the yen against the dollar. These coordinated efforts to replace Japanese economic practices were debatable at the time, prompting court cases claiming Washington and its partners were authoritarian. But ultimately, those measures did not hinder Japan’s economic development. Indeed, by addressing valid considerations about industrial imbalances, they laid the foundation for a confidence in globalization that would reap benefits for many countries – especially China – in the years to come.
Now the question is whether Beijing will agree to pursue the right kind of policy, as Japan has, thus avoiding a crusade through the G7 countries to impose more competitive restrictions on the growing volume of Chinese exports. But industrial policies would only be a transitional dossier. The industry’s surplus will persist until its domestic demand for particular increases or the expansion of investment slows particularly. To ease the challenge in the short term, Beijing would want strong fiscal stimulus. And to address this in the long run, China wants to divert resources from the state to families, either directly through banknotes or shares in state-owned enterprises, or through adjustments in fiscal policies or subsidies for housing, retirement, health care and other services.
Had China taken such steps, its intentions would have been evident in the political message emanating from the NPC, but no such evidence has emerged. Indeed, Beijing’s economic goals show not only that it remains committed to its old export- and investment-oriented growth model, but also that it may even be contemplating expanding China’s production capacity to further increase its exports.
It should be noted that Beijing’s new fiscal policy program does not include any direct expenditure on income or household income. China’s official target of a budget deficit of 3% of GDP in 2024 is largely in line with its 2023 target, which, given the current mix of government spending and bond issuance, means Beijing will not put in place the kind of fiscal policies that spur domestic growth. More importantly, China continues to channel credits and tax resources toward local investment rather than direct transfers to households to increase spending. In the past, Xi has derided such bills as “welfarism,” but China cannot sustainably increase household income as a percentage of the economy by employing supply-side measures alone. from the government to the family sector, and there is no indication that this will happen.
This trade policy is not well received in the rest of the world. The Chinese government’s official activity report for 2024 identifies the electric vehicle, battery, and solar mobile sectors among the “new productive forces” that will drive the country’s overall productivity growth. A segment of the report describes how the government will “actively inspire emerging and forward-thinking industries” with the aim of “consolidating and editing [China’s] leading position” in several of them. But the industries that China seeks to protect are exactly the ones that threaten to harm its competition in both evolved and emerging economies.
China’s fiscal profit targets also mean it is targeting stronger export-led growth. These figures include types of taxes collected, as well as discounts on export taxes. Although the Ministry of Finance forecasts that overall fiscal gains will accrue at just 3. 3 percent this year, in line with the penny, spending on export tax discounts is expected to rise to as much as 9. 9 percent. At the same time, the ministry expects taxes on imports from China to increase by only 4. 1 percent. They aim to increase exports, but at least they show that Beijing does not foresee any relief in its industrial surplus in 2024.
Defense spending is also expected to grow much faster than overall government spending or profit generation. China has planned a 4. 0% increase in overall spending, but has projected a 7. 2% expansion in the defense budget. The signal to the rest of the world is that Beijing is willing to prioritize its military over investments in sustainable family development or human capital.
Before China revealed any of those policies, EU officials embarked on a broad outreach crusade to urge Beijing to recognize the threat its exports posed to European industries and jobs (and the threat of ruining a long-standing pro-trade European policy environment with China). During a stopover in Beijing in early February, U. S. Treasury Department officials conveyed a similar message. But the NPC’s plans show no sign that China will heed those demands from Western governments.
The NPC’s optics didn’t help. Normally, at the end of the congress, the Chinese premier holds a press conference. This year, the event has been canceled, not only for 2024 but also for years to come. The press conference was organized, with questions sent in advance and answers. But by canceling the occasion, China’s leaders give the impression that they now see convergence with the practices of evolved economies as not vital, or at least not as vital as the behind-the-scenes policies that drove the cancellation.
Not only does Beijing appear unwilling to address domestic economic imbalances, but it may also lack the capacity to do so. This is of particular concern. For decades, economists have called on China to opt for domestic consumption by coping with the constraints of individual spending, adding inadequate household incomes. To rebalance the national economy and reduce the country’s industrial surplus, Beijing wants to inspire consumption in addition to slowing investment in real estate and infrastructure.
But China is now in no position to make such a change. The state collects only about 14% of GDP in the form of tax revenues (a figure that increases by four to six percentage points if other gains, such as social security contributions, are increased). included), well below the Organisation for Economic Co-operation and Development’s average of 34 per cent. More importantly, much of this profit comes from value-added taxes on production and other taxes on corporations, rather than from taxes on non-public sources of profits. and domestic consumption. Thus, under the existing tax system, a transition to a consumption-driven economy would lead to a dramatic decline in tax gains, undermining Beijing’s ability to enforce its policy.
The need for tax reform is obvious; Xi himself laid out the challenge in his policy platform announced in 2013. The fact that no such reform is in sight is further evidence that Beijing is redoubling its efforts on its superseded expansion model. Each year, as with all countries, the International Commission on Economic Policy consults with Chinese officials on economic policy, makes recommendations, and then reports on Beijing’s outlook on the proposed changes. In previous years, Chinese officials agreed with the IMF on the need for fiscal reform. But this year, Beijing told the IMF that a “fundamentally good enough tax formula has been established” and that Beijing’s goals point to high-quality progression “rather than directly expanding tax revenues. “China rejects not only express reforms that would facilitate a more sustainable industry that matches the rest of the world, but also the need for any reforms.
China also faces constraints when it comes to updating its trade policies. Even if Beijing were to bow to foreign pressure and make concerted efforts to limit investment in electric cars and batteries, solar cells and other industries, corporations and production services that have benefited from previous government subsidies. Moreover, a central government crusade is unlikely to replace credit decisions on the ground, given that local officials are mandated to look after jobs and ensure monetary stability.
It would be difficult for China to temporarily reduce its next industrial surplus, and no one expects the country’s leaders to find a solution overnight. But it is alarming that Beijing does not appear to have made any significant effort to correct this imbalance. By allowing policies to remain as they are, China is preparing for an evolved and emerging economy.
Beijing deserves to recognize the valid reasons of foreign countries for introducing protective industrial policies, at least until China carries out structural reforms in its country. Instead, Chinese officials described the U. S. industrial measures as “reaching mind-boggling degrees of unfathomable absurdity. “Failing to recognize the true economic damage that these policies seek to avoid, there is no starting point for a discussion with the leaders of complex economies. The G7 countries will eventually formulate responses among themselves, rather than joining China.
Chinese officials say Beijing is not pursuing an industrial surplus in a planned way. Planned or not, China’s industrial imbalances are unsustainable for the rest of the world, and China does not deserve to be surprised if foreign governments begin to respond more aggressively. Beijing will most likely reject measures similar to those adopted through the United States and its partners in the 1980s to address Japan’s industrial imbalances, such as an exchange rate agreement similar to the Plaza Accords or the Louvre Agreements. Tariff increases on Chinese imports, or some other policy that may be applied to foreign governments, would likely only provide temporary relief; When the Trump administration imposed such taxes, many Chinese suppliers were able to circumvent those regulations by shipping their products through third countries before reaching their final destination in the United States. With few effective policies and a reluctant negotiator in Beijing, Western governments in particular will consider increasingly draconian restrictions on Chinese industry. This surprise would possibly be mandatory for China to get serious about its structural reforms, for the sake of its own economic fitness and in the hope of avoiding an irreparable fracture in global industry.
This essay has been updated to explain the volume of tax revenue, expressed as a percentage of GDP, that China collects.