Chinese President Xi Jinping applauds at a ceremony of signing bilateral documents during a meeting with Russian President Vladimir Putin (not pictured) at the Great Hall of the People in Beijing on May 16.Sergei Guneev/Reuters
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Joe Biden’s imposition of steep tariffs on imports of Chinese electric vehicles may look like the latest salvo in a trade war between the United States and China. However, it’s more than an attempt to out-Trump Donald Trump in an election year. Unlike the former president, who used tariffs to keep Chinese goods out of the U.S., Mr. Biden is going head-to-head with China in a race to capture the global markets of the future.
Expect to see more of this, and it could get interesting because China is betting on a new industrial revolution – one that could catapult it to true parity with the West, or that may end in tears.
After China’s breakneck economy began slowing in recent years, the country’s policy elite faced a dilemma in how to respond. Although recent annual economic growth rates in the 5 per cent to 6 per cent range still look pretty good in comparison to Western countries, China nonetheless stands far back from its Western rivals. With a per-capita income less than a third of that in the U.S., and a population that is aging quickly, China started running the risk of growing old before it grew rich. So the country’s policy makers, eager to escape the so-called middle-income trap, began looking for ways to jump-start the economy.
Broadly speaking, two cures to China’s malaise have been floated. Western economists, along with some of their Chinese peers, see the fundamental problem as a structural imbalance. With a savings rate close to 50 per cent – which is to say that nearly half the country’s output is invested rather than spent – China has raised its output at an astonishing pace. But incomes are not rising fast enough to buy all the stuff being produced. The result is a slowdown. The solution, therefore, is to reduce investment and raise consumption, and use that to move the economy into a new growth phase.
Such a strategy would pose obvious risks for the ruling Communist Party. Mindful of how the Soviet Union’s experiment in giving its citizenry more power ultimately caused the collapse of the regime, China’s rulers are reluctant to gamble on such a major change in the country’s political economy. Instead, sticking with the devil they know, they’re making another bet – which may be no less risky.
Rather than change their economic model, they’re looking to advance into a higher stage by developing new industries at the frontiers of the economy – especially renewable energy and artificial intelligence. To do this, the government is allocating generous subsidies and support to those sectors to enable them to rapidly ramp up production. The result has been a dramatic expansion in industrial capacity, with the country now producing half of the world’s automobiles and 90 per cent of its solar panels.
It’s not just quantity that China is expanding rapidly, it’s quality. Corporate executives visiting China after just a couple of years away report themselves amazed at the pace of progress in the country’s technology. Chinese EVs are now considered to be superior to what Western producers are engineering. Faced with this renaissance, Western companies are themselves outsourcing production to China, to take advantage of the support they get there.
Amid the flood of Chinese exports resulting from this subsidized competition, governments elsewhere have a choice. They can continue to import inexpensive products from China, saving their consumers money but watching their industrial jobs disappear, or they can fight back. The U.S. has opted to do the latter. The Europeans, despite their divisions, look likely to follow suit. And already some major developing economies, such as Mexico and Brazil, have imposed tariffs of their own.
As trade barriers go up, China can do two things to fight back. It can do end runs around the protectionism by moving plants from China to countries that have freer access to Western markets, such as Mexico. It can also pick up the pace of its overseas development program, expanding its Belt and Road Initiative to build new markets in the developing world. In fact, the two responses dovetail: Outsourcing to other developing countries will raise their growth rates, thus expanding their markets for Chinese goods.
It therefore seems likely that China will deepen its presence in the developing world, accentuating its intensifying competition with the West there.
But the greater risk to its strategy could come not from geopolitical rivalry but from internal dangers. Some observers have noted the similarities between what China is doing today and what the former Soviet Union tried to do in the 1960s, when its own industrial expansion began to slow. Rather than reform domestically, which would have been politically disruptive, the Soviet elite then tried to use the country’s scientific prowess to develop new industries. That strategy ultimately failed.
The rest is history. If China doesn’t manage to pull off this new industrial revolution, its governing class may ultimately face a fate as troublesome as that which befell its Soviet predecessors.