Global Economic Stability at Risk: Xi Jinping’s Policies Pose a Greater Threat Than Trump Tariffs

Treasury official warns of the implications of China's manufacturing focus on global trade / AFP via Getty Images

Treasury official Brad Setser has raised significant concerns regarding the current state of global trade, emphasizing that Chinese President Xi Jinping's industrial policies may pose a greater threat to the global economy than the tariffs imposed by President Donald Trump. Setser, a senior fellow at the Council on Foreign Relations and a deputy assistant secretary at the Treasury Department during the Obama administration, argues that while Trump's aggressive tariff strategy has created unpredictability in trade relations, the real issue lies in China's trade practices and export-driven economy.

Setser's perspective highlights the stark imbalance in trade flows between China and its global partners. Over the past six years, China’s imports of manufactured goods have barely increased, growing by an average of only $15 billion annually after adjusting for inflation. In stark contrast, the country's exports have surged by more than $150 billion during the same period. This significant disparity indicates that trade with China has become increasingly one-sided, adversely affecting economies that rely heavily on exports, such as Germany and Japan.

The core of the problem, according to Setser, is China's refusal to restructure its economy in the aftermath of the global financial crisis. Instead of shifting its focus towards consumer-driven growth, Beijing opted to stimulate investments in real estate and infrastructure. This approach, while initially successful, has led to an overproduction crisis as demand for Chinese goods could not keep pace with the rapid increase in manufacturing capacity. Xi's decision to restrict stimulus to consumers during the pandemic, unlike many other nations that boosted consumer demand, exacerbated the situation, leading to an overabundance of goods without sufficient domestic or international demand.

Today, China's manufacturing capabilities are so extensive that it can meet two-thirds of the global demand for automobiles and produces over half of the world's steel, aluminum, and ships. This production capacity has led to a situation where China's export growth is outpacing that of global trade, raising concerns that other nations could become overly reliant on Chinese-made products while simultaneously facing economic pressure from Beijing.

Setser warns that Trump's tariffs might not provide the intended remedy for these trade issues. While the imposition of tariffs may appear to be a strategic move, they are unlikely to shift the fundamental dynamics of trade flows. The unpredictability of Trump's trade policy adds another layer of complexity, making it challenging for businesses to adapt and plan effectively. For instance, Trump has previously threatened to extend tariffs to Europe, citing the perceived unfairness of their value-added taxes on American exports, while also considering additional tariffs on automobiles, semiconductors, and pharmaceuticals.

The combined effects of Xi's industrial vision and Trump's erratic trade policy create a precarious environment for the global economy. Setser emphasizes that Xi's approach to trade lacks reciprocity, while Trump's stance seems to reject the concept of trade altogether. This dynamic poses a significant risk to economic stability worldwide, as both leaders’ policies may lead to increased tension and volatility in international markets.

Concerns about China's overcapacity and its prioritization of manufacturing over consumer demand are echoed by other experts in the field. Zongyuan Zoe Liu, a China scholar at the Council on Foreign Relations, notes that China's production in key economic sectors often exceeds both domestic and foreign market absorption capacity. This surplus not only threatens global trade stability but also endangers the Chinese economy itself, as it could lead to deflation, increased insolvency, factory closures, and substantial job losses.

Overall, the combination of Xi Jinping's strategic yet potentially damaging industrial policies and Donald Trump's unpredictable tariff approach paints a concerning picture for the future of the global economy. As these dynamics unfold, the world must grapple with the implications of an increasingly intertwined yet volatile trade landscape.