US President Donald Trump’s readiness to use coercive tariffs presents a profound threat to the postwar economic and political order, introducing an unpredictability to global commerce that makes it difficult for trade partners to know how to react — and next to impossible for businesses to plan.
But he is not the danger the world economy faces and may not even be the biggest.
That may be President Xi Jinping of China, whose more strategic and calibrated industrial and economic policies are fundamentally distorting and harming global trade.
Trade usually refers to the combination of imports and exports.
But Xi has upended that idea, radically changing China’s trade interaction with the rest of the world, at least when it comes to manufactured goods.
Over the past six years, China’s imports of such goods increased by an average of only $15 billion a year, essentially no change at all when inflation is taken into account.
Its manufactured exports, on the other hand, have grown more than 10 times as fast, by over $150 billion a year.
When it comes to manufactured goods, trade with China is virtually a one-way street.
China now dominates global manufacturing, and its trade surplus dwarfs the biggest run by Germany and Japan during their eras of postwar export supremacy.
Countries around the world get cheap Chinese products, but they can’t sell nearly as many of their own to China.
Their export sectors are hurting, especially Germany.
Why is Xi doing this?
To make up for the Chinese government’s mismanagement of its domestic economy.
The roots of the problem go back to the global financial crisis of 2008.
The crisis caused Chinese exports to fall.
The government could have offset this by strengthening the ability of Chinese consumers to buy the country’s products through policies that support household incomes and by reducing the hefty taxes on low-wage workers and domestic consumption that finance China’s state.
This would have helped China transition to a more sustainable economic model that is balanced among industry, trade, investment and consumer spending.
Chinese leaders opted instead to funnel the country’s huge household savings into an immense investment boom.
Pretty bridges, roads, airports and apartments were built, and all of that construction and related economic activity allowed China to rely a bit less on exports for growth.
But this created a real estate bubble, and when Xi responded by cracking down on the housing sector in 2020, he triggered a deep property slump that has persisted.
Xi’s response to the COVID pandemic also played a role.
To cushion the pandemic’s economic shock, advanced economies around the world opened up their government checkbooks to support consumer spending.
The one major economy that didn’t take significant steps to stimulate its economy and support households was the country where the virus first took hold: China.
He is ideologically opposed to cutting government checks or anything else that smacks of welfarism, believing that consumer stimulus — unlike investment — generates no lasting value.
So while consumers in the United States and elsewhere began spending again, including on Chinese imports, China was able to recover on the back of other countries’ stimulus checks while throwing everything into building out its manufacturing sector to replace the growth that property wasn’t providing.
In other words, Xi is making China’s trade partners and competitors pay for the government’s misplaced bet on real estate and its longer-term failure to strengthen the spending of Chinese households.
China does import commodities and natural resources, such as oil and iron ore, as well as advanced semiconductors that it hasn’t figured out how to engineer.
But China’s dominance in manufacturing and exports cannot be overstated.
Take automobiles, the anchor of so many industrialised countries’ manufacturing sectors for the past century.
Around 20 years ago, China was a nonfactor in automaking.
By 2018, it had the capacity to produce 40 million petrol-powered cars per year, far more than the 25 million its economy needed.
Since then, it has added, thanks in part to substantial government subsidies for the industry, the capacity to make 20 million electric vehicles annually, a number that may soon rise to 30 million.
Annual global automotive demand is 90 million cars; China has the capacity to produce around two-thirds of that.
This pattern is replicated in sector after sector.
China routinely produces more than half of the global supply of steel, more than half of the world’s aluminum and more than half of the world’s ships.
In clean technology sectors such as solar cells and batteries, China can produce many multiples of current global demand, and there are fears that it could replicate these successes in memory and automotive chips.
What’s more, China has partly made up for the fall in domestic steel demand (caused by the housing implosion) by subsidising the building and equipping of new factories that use domestic steel in churning out yet more manufactured exports for overseas markets.
All told, Chinese export volume is growing three times as fast as global trade.
This means China’s success is directly coming at the expense of manufacturers in other countries, which increasingly cannot compete and face pressure to abandon sectors that China targets.
With China’s real estate market still in the doldrums, the pattern shows no signs of changing.
This points to a world economy in which China has no need for the industrial inputs of other countries while leaving those countries dependent on Chinese-made goods — and vulnerable to Beijing’s political and economic pressure.
Trump’s tariffs compound the problem.
It isn’t so much the tariffs themselves that pose a threat.
Even a big change in US policy such as the universal 20 per cent tariff on imports that he proposed during the presidential campaign probably wouldn’t fundamentally upset global trade.
American consumers would face higher prices (but ultimately, a system that encourages competition and balance will help keep prices down – for full story, check out my column “The great capitalist experiment” on Feb 12), and US exporters would face retaliation from other countries.
But the United States would continue to import a great deal, manufacturers around the world could fill some of the markets lost by US exporters, and trading partners could plan for it all.
But Trump’s unpredictability makes that kind of planning extremely difficult.
And if he cuts the United States off from world trade, there are no other countries that can reasonably absorb all of China’s exports.
Europe’s economy is stalled, and big emerging economies like India and Brazil are worried that Chinese imports are undercutting their manufacturing sectors.
Without the outlet that global markets provide, China would be stuck.
The only way out would be for Xi to make the sort of fundamental changes to China’s economy that he seems dead set against.
Xi has a one-way vision of trade.
Trump often sounds as if he doesn’t believe in any ‘subsidised’ trade. Between the two of them, the global economy is in for a rough ride.
So beyond China, what should a new trading arrangement look like, and what is the objective?
Any structure that will increase public welfare across the globe must be based on a long-term trade balance, and the new system should enforce an equilibrium.
Countries with democratic governments and mostly free economies should come together and create a new trade regime.
This system could enforce balance by having two tiers of tariffs.
One higher level would apply to countries outside the group.
These would be nondemocratic countries as well as those that insist on using beggar-thy-neighbour, aggressive industrial policies to run large surpluses.
Those tariffs over time would reduce those surpluses.
The countries within the new regime would pay lower tariffs, and they could be adjusted over time to ensure balance.
When a country in the group begins to run substantial surpluses, the other countries could increase their tariffs on it.
Those new higher tariffs would be reduced when the surpluses were eliminated.
This equilibrium would not necessarily be with each country in the group or for every year.
The objective would be to have balance within the entire group and over time — perhaps a running three-year period.
The details would be negotiated.
For example, developing countries that may want to run temporary deficits to facilitate investment and industrialisation would be permitted to do so.
There are alternatives to tariffs to enforce balance and offset systemic unfair practices, but tariffs have advantages.
Almost every country in the world already has a legal and administrative structure to deal with them. And they are flexible and straightforward and would have relatively fewer collateral effects.
Such a new trading system would create a large subset of the global economy that is balanced.
It would lead to greater economic growth and a fairer distribution of the true benefits of trade.
Since the basic commitment — balance — can be measured objectively, there would be little need for a dispute resolution mechanism to adjudicate differences. This system would also leave sufficient room for a country to adopt the policies required to deal with particular needs in its economy.
Finally, holding out the possibility of joining this new system would incentivise democracies outside of it to correct their policies.
In the long run, balance encourages efficiency.
The industrial policies of the chronic surplus countries are what is distorting the global market-driven allocation of resources.
It is time to try something different.
Medecci Lineil has over a decade of experience leading a niche-focused team within Goldman Sachs’ investment banking division (IBD). His expertise extends beyond the bank, having been instrumental in establishing consultancy firms in Kuala Lumpur and Singapore, where he serves as a founding board member.
