The deflationary situations in China are spilling over negative externalities to the rest of the world, building tensions in international economics and diplomacy. More Chinese businesses are intending to dump low-cost goods into the rest of the world. Post-covid recovery in China has been weak due to a lack of demand-driven stimulus in the domestic markets, due to its demographic crisis[1], lower housing investment and weak estate sector[2], and rising youth employment. Local governments are also cutting their spending on routine expenditures like salaries to their employees[3]. There has been no increase in transfers or financial support from the government to households to increase their consumption capacity.
As per a recent exchange between China and the US, Treasury Secretary Janet Yellen of the latter called out China for flooding global markets with artificially cheap Chinese products. She pointed out that the exports from heavily subsidized Chinese industries like solar power and EVs are putting jobs and companies at risk, not just in the US but for all the advanced and emerging economies[4].
Chinese high-tech industries are struggling with over-production resulting from over-investment in the high-tech sector and over-subsidizing by the government. Due to the gradual slowing of the Chinese economy, there is not enough domestic demand, compelling producers to dump cheap Chinese imports into other countries. Skeptics might argue that it is just an outcome of free trade. However, there is a significant difference between how free trade works and how excessive government interventions disrupt gains from trade for trading partners. Chinese trade practices have been predatory for the manufacturing sector and jobs in other countries due to its over-capacity. This is an anomaly in the normal functioning of free trade as Beijing has been over-subsiding the high-value technology-oriented industries. Hence, low consumption demand, which is a domestic problem for China, is looming rapidly into a global economic problem as China finds other countries as dumping havens.
In this scenario, China, with its state and media houses, is again pulling off its classic go-to “gaslighting” and victim-blaming strategy, calling out the concerns of the US as “protectionist tendencies.” China has also been notorious for flouting trade restrictions, as it often sends its components for further processing in Vietnam, Malaysia, and Mexico. The final product is thus not made in China, thus allowing Beijing to enter the markets that are trying to restrict it. Besides, China is becoming an export surplus economy, not just by boosting its exports but also by successively reducing its import bill from Western countries under the pretext of national security and economic development[5].
Experts suggest that Washington and Brussels need to safeguard their nascent green industries against Chinese exports. If China refuses to keep itself in check by reducing the impact of its over-capacity on the rest of the world, particularly the West, it may face serious retaliations. Other countries may restrict China from accessing their markets[6]. This would not be a clean move, as it may lead to a slippery slope, where China would retaliate further, leading to a trade war on other industries as has happened in the past.
It is important to send a signal to China. One recent retaliatory act was taken up by India, where it imposed anti-dumping duties on three Chinese products, namely wheel loaders, gypsum tiles, and industrial laser machinery. The EU claimed in March this year that it has found substantial evidence that the Chinese state is subsidizing the export sector, and hence, it will impose tariffs on Chinese EVs, apart from considering import restrictions on Chinese wind turbines and solar panels.[7] China is also known for engaging in emission-intensive manufacturing processes, which blatantly defy the global goals of converting progressively to cleaner and greener production techniques. To tackle this problem, the EU has proposed a carbon border adjustment mechanism, a tax to restrict trade with China. The US has attempted to counter the predatory practices of Beijing by reforming its trade rules in order to make unfair trade practices less viable by denying access to the US and allied markets. However, there is a scope to implement exclusion against companies propagating unfair trade practices[8].
With excessive subsidy-backed exports, China is ignoring the principles of trade egalitarianism. It is crucial for Chinese policymakers to openly acknowledge that China’s current export-led growth model is not sustainable. Any decline in foreign demand for Chinese exports due to innovation in technology or geopolitical relations will handicap the nation’s economy. The problem clearly lies in low-demand-driven growth in the territory of China. There are speculations that the deflationary pressure on prices will remain persistent for a long, while others fear that China will fall prey to a debt-deflation spiral[9]. In such a scenario, until China commits to boosting household spending through government transfers, export-driven growth would be a quick fix, not applicable in the long term. The solution lies in expanding Chinese domestic demand by implementing demand-side measures to absorb the excess supply by following income transfers to households and boosting households’ incomes. Its abnormal over-capacity and the resulting dumping practices are predating industries and employment opportunities for the masses in other countries, which may eventually lead to a rising distaste for Chinese products in foreign markets in the future, and nations may start resorting to more protectionist measures. The current scenario is just a recipe for a global backlash against China and an impending trade war.
[1] https://www.reuters.com/world/china/china-targets-2024-gdp-growth-around-5-government-work-report-2024-03-05/
[2] https://www.bloomberg.com/news/articles/2024-04-15/china-real-estate-crisis-private-builders-face-553-billion-gap-to-finish-homes
[3] https://www.livemint.com/economy/deflation-worries-deepen-in-china-11705053147001.html
[4] https://www.csmonitor.com/text_edition/World/Asia-Pacific/2024/0408/Free-trade-or-flooding-the-market-US-warns-China-against-surplus-exports
[5] https://economictimes.indiatimes.com/small-biz/trade/exports/insights/chinas-exports-are-surging-get-ready-for-the-global-backlash/articleshow/108420507.cms?from=mdr
[6] https://www.atlanticcouncil.org/blogs/econographics/sinographs/chinas-manufacturing-overcapacity-threatens-global-green-goods-trade/
[7] https://economictimes.indiatimes.com/small-biz/trade/exports/insights/chinas-exports-are-surging-get-ready-for-the-global-backlash/articleshow/108420507.cms?from=mdr
[8] https://itif.org/publications/2022/11/21/how-to-mitigate-the-damage-from-chinas-unfair-trade-practices/
[9] https://www.livemint.com/economy/deflation-worries-deepen-in-china-11705053147001.html