Daniel H. Rosen and Logan Wright
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 for structural 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.
NO CHANGE ON THE HORIZON
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 to deal 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, by dealing 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.
China’s fiscal revenue targets, too, imply that it is aiming for stronger export-led growth. These figures include various types of collected taxes as well as rebates on export taxes. Although the Ministry of Finance projects that overall fiscal revenue will rise by just 3.3 percent this year, it expects that spending on export tax rebates will increase by 9.9 percent. Meanwhile, the ministry expects that the taxes China collects on imports will rise by only 4.1 percent. These forecasts do not necessarily indicate an explicit intention to boost exports, but at the very least they show Beijing does not anticipate any reduction of its trade surplus in 2024.
There is no sign of China taking requests from Western governments into account.
Defense spending is also set to rise much faster than overall government spending or revenue generation. China has planned for only a 4.0 percent increase in total expenditures, but it has mapped out a 7.2 percent expansion of the defense budget. The signal to the rest of the world is that Beijing is prepared to prioritize its military over investments in sustainable household development or human capital.
Before China unveiled any of these policies, European officials engaged in extensive outreach to urge Beijing to consider the threat its exports posed to European industries and employment—and the risk of spoiling a European political environment that had long been favorable to trade with China. On a visit to Beijing in early February, officials from the U.S. Treasury Department delivered a similar message. But the NPC's plans show no signs of China taking these requests from Western governments into account.
The optics at the NPC did not help. Typically, at the conclusion of the congress, China’s premier gives a press conference. This year the event was canceled—not only for 2024 but for future years, as well. The press conference was always a staged affair, with questions submitted in advance and answers prepared. But by calling off the event, China’s leadership is showing that it now sees convergence with the practices of developed economies as unimportant, or at least not as important as whatever backstage politics were behind the cancellation.
DOUBLING DOWN
Not only does Beijing appear unwilling to address domestic economic imbalances, but it may also lack the capacity to do so. This is especially concerning. For decades, economists have called for China to shift toward domestic consumption by addressing constraints on individual spending, which include insufficient household income. To both rebalance the domestic economy and reduce the country’s trade surplus, Beijing must encourage consumption in addition to slowing investment in property and infrastructure.
But China is now poorly positioned to engineer such a shift. The state collects only around 14 percent of GDP in tax revenues, far below the Organization for Economic Cooperation and Development average of 34 percent. More important, a large part of those revenues comes from value-added taxes on manufacturing and other taxes on businesses, rather than from taxes on individual income and domestic consumption. Under the current tax system, therefore, a transition to a consumption-led economy would result in a dramatic decline in tax revenues, undercutting Beijing’s ability to execute policy.
The need for tax reform is clear; Xi himself acknowledged the problem in his policy agenda announced in 2013. The fact that no such reform is in sight is thus additional evidence that Beijing is doubling down on its antiquated growth model. Every year, as it does with all countries, the International Monetary Fund consults with Chinese officials on economic policy, makes recommendations, and then reports on Beijing’s view of 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 suitable tax system “has been basically established” and that Beijing’s goals would focus on high-quality development “rather than directly increasing fiscal revenue.” China is rejecting not only the specific reforms that would facilitate a more sustainable trade relationship with the rest of the world but the need for any reform at all.
China’s trade imbalances are not sustainable for the rest of the world.
China faces limits when it comes to updating its industrial policies, too. Even if Beijing were to yield to foreign pressure and make concerted efforts to restrict investments in electric vehicles and batteries, solar cells, and other industries, the companies and manufacturing facilities that benefited from earlier government subsidies would not disappear. A central government campaign, moreover, is unlikely to change lending decisions on the ground, given that local officials face mandates to maintain employment levels and ensure financial stability.
It would be difficult for China to quickly reduce its widening trade surplus, and no one expects the country’s leadership to deliver a fix overnight. But it is alarming that Beijing seems to have made no meaningful effort to right this imbalance. By idly allowing policies to remain as they are, China is setting itself up for confrontation with developed and developing economies alike.
Beijing should recognize foreign countries’ valid reasons for introducing protective trade policies, at least until China achieves structural reform at home. Instead, Chinese officials have described U.S. trade measures as “reaching bewildering levels of unfathomable absurdity.” If Beijing is unable to acknowledge the real economic harms that these policies seek to avoid, there is no starting point for a discussion with the leaders of advanced economies. G-7 countries will end up formulating solutions among themselves, rather than working with China.
Chinese officials often say that Beijing does not deliberately seek a trade surplus. Deliberate or not, China’s trade imbalances are not sustainable for the rest of the world, and China should not be surprised if foreign governments start to respond more aggressively. Beijing is likely to reject measures similar to those the United States and its partners adopted in the 1980s to address Japan’s trade imbalances, such as an exchange rate arrangement resembling the Plaza Accords or Louvre Accords. Tariff hikes on Chinese imports, another policy available to foreign governments, may only provide temporary relief; when the Trump administration imposed such levies, many Chinese suppliers were able to skirt these regulations by shipping goods through third countries before they reached their final destinations in the United States. With few effective policy options and an unwilling negotiator in Beijing, Western governments in particular will consider increasingly draconian restrictions on Chinese trade. That shock may be what is necessary for China to take structural reforms seriously, for the sake of its own economic health and in the hope of avoiding an irreparable split in global trade.
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