When President Trump and his team climbed down from the first round of high tariffs that were imposed on China back in April, I cautioned that capitulating without tangible results would be bad for the administration and for America.
The president’s recent announcement of 100 percent tariffs on imports from the People’s Republic of China, beginning November 1, following China’s export controls on rare earth metals, also plays into China’s hands.
Beijing wants, above anything else, to project strength and to have the world focus on its supposed dominance of the tech economy rather than on its macroeconomy, which is quite weak. By responding to the challenge of China’s export controls on key high-tech enablers rather than pushing harder on the enduring soft spots of the Chinese economy, Trump is actually encouraging Xi to become more belligerent.
China’s boldness follows Beijing’s assessment that Trump is in a weak position because of the alacrity with which his negotiators agreed to compromises the first time around. Trump’s own continued overtures about how much he and Xi get along, and his eagerness for a meeting, is only encouraging further Chinese audacity. CCP demands now include U.S. concessions on Taiwan and the relaxation of semiconductor controls that the U.S. has imposed on China, technology on which China depends for its AI development.
This is not an argument in favor of the Trump tariffs. These have led to higher costs for Americans as inflation continues to drift upward. The job growth they are intended to stimulate will take time to materialize, if it ever does. But meanwhile, jobs in unprotected industries will be lost as other countries retaliate. This is the way of trade wars, and it is already underway in agriculture and other sectors.
Moreover, the Trump administration seems to lack conviction regarding its own trade policy. As bad as the tariffs are, the on-again, off-again approach is worse. China really felt the initial round of actions, but before it was even pressured into concessions, the U.S. blinked. Since May, when Trump backed down, China has diverted exports otherwise intended for the U.S. to Europe and to the members of the Association of Southeast Asian Nations (ASEAN). This has led to charges of dumping by some of the affected countries. The PRC has also been able to get the world to focus not on its endemic macroeconomic weaknesses but on the narrow part of its economy that is driven by technology investments. Beijing has convinced the world — and evidently Donald Trump himself — that its tech industry is dominant and the world must fear retaliation.
As always in the case of China, it is important to look beyond government propaganda. Few nations have ever been as skillful, and consistently successful, as China is at shaping global perceptions. (Remember when we all persuaded ourselves that giving China concessionary status in the World Trade Organization was the right thing to do because, after all, it just wanted to be like us and open access to global trade would help it get there faster? Remember when we all believed that Hong Kong would remain autonomous until the middle of the 21st century?) Beijing’s latest attempted sleight-of-hand is to convince the world that it presides over a technologically dynamic, economically unstoppable nation, poised to challenge the U.S. for global tech supremacy.
There is no doubt that the Chinese government has prioritized the flow of resources into the country’s tech sector, and we see the results in terms of advanced weapons systems, telecommunications, clean energy, and artificial intelligence. But this relatively small segment of total Chinese economic activity should not obscure what has become all the more evident since the pandemic: China faces deep, structural challenges across its macroeconomy that will not be undone by technological advancements however profound they may one day be. China has a per capita GDP of about $13,000, one-sixth that of the U.S., at $84,000. In fact, China is a mostly poor country, where whatever affluence exists is in the hands of the relatively few. It is the macroeconomy on which most of China’s 1.3 billion people depend, and it is falling far short of what is needed.
We see it in China’s shrinking workforce and growing unemployment, in government debt that is more than three times the Chinese GDP, in ecological disasters that are driven by the pursuit of advanced technology, in price deflation, and in underconsumption by Chinese consumers who face an uncertain future. The tech economy does little if anything to drive overall economic growth and increases in per capita income. While the CCP has been successful in making the world believe that it presides over a high-tech behemoth, the actual size and impact of China’s tech sector on the country’s domestic economy is limited. China’s own National Bureau of Statistics estimates that the “new economy,” for which the bureau provides a, well, bureaucratic description, accounts for just 17 percent of GDP. This is almost certainly overstated given the customary unreliability of official Chinese data.
To be sure, investment in technology and related activities are having some noticeable results. There is little doubt, for example, about China’s dominance in electric vehicles. Even so, auto sales account for less than 4 percent of China’s GDP, a level that has been flat for several years according to a recent RAND Corporation analysis. It would be a mistake to accept Chinese propaganda about how its tech economy is on the verge of a global breakout that the world should fear. Unfortunately, that perception seems to be exactly what is behind the Trump administration’s vacillations on its own policies.
The glorification of the tech sector by the CCP, intended to obscure much larger challenges, follows a pattern. Shine a spotlight on a sector as long as possible, and when it fails, move on and create fanfare around something else. We saw this in the case of the Chinese real-estate sector, which was highlighted as a driver of growth for years before its spectacular collapse. Move on. Infrastructure development: China was erecting supercities, transportation systems, bridges, you name it. But now, we see that China overinvested, including in such things as high-speed trains into the desert, and that these enterprises need to be propped up by the government. Move on. Remember the great fanfare of the Belt and Road Initiative, which was going to cement China as a global leader and investor? Many of those projects have gone bust, created severe labor and other problems in the target countries, or led to downright confiscation of key assets by China through its pernicious debt diplomacy. No one is competing for BRI investments these days. Let’s just move on.
This is not a new pattern. Prior to China’s accession to the World Trade Organization, about 25 years ago, Beijing already had an active program of industrial overproduction as a means of juicing economic growth and distracting global attention from the country’s more serious macroeconomic and structural problems. The overproduction of television sets during that era is one example. Government planners accepted inefficiency and losses to gain global market share. In the 1990s, China faced a series of anti-dumping investigations by the European Union. In 1991, the EU imposed punitive tariffs on small-screen TVs from China. By 1998, the EU had imposed duties of 45 percent as well as import quotas. China’s accession to the WTO shortly thereafter limited the EU’s ability to impose punitive measures. Today China controls perhaps as much as a third of the market in Europe. Over the years, Beijing has applied the same approach to iron, steel, basic metals, and LCD panels. It is producing at volumes well in excess of what its own economy can absorb given massive underemployment, weak consumer demand, and an aging population.
From the outside looking in, however, the response pattern of Western analysts, businesses, and government leaders remains unchanged: they oblige the CCP’s desires and focus on the glitz while ignoring the reality underneath, which is China’s failing macroeconomy and structural soft points.
This time, the shiny object is the technology economy. It is wrong to believe that China’s AI push, it’s dominance in 5G, or the growth of its electric vehicle and battery capabilities will reverse the country’s demographic decline, erase trillions in debt, or uplift the hundreds of millions of Chinese citizens who are trapped in low-productivity work in the informal economy. Not only is the tech economy a relatively small part of China’s overall GDP; most of its output is exported and doesn’t even benefit its people. Without doubting many impressive aspects of China’s tech sector, it is clear that this will not save the macroeconomy. The world is pursuing the wrong strategies in response to China’s supposed tech dominance, including continued deference to China’s increasingly unreasonable demands in matters of trade and national security.
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China’s state-driven overproduction strategy helped fuel decades of growth but at a high cost of inefficiency and dependence on foreign markets, and it avoided the macroeconomic structural reforms needed to sustain it. As global demand slows and China’s labor force contracts, that model has no obvious replacements except for radical automation. But that would sow the seeds for even more negative outcomes because of its likely impact on labor, which is one of China’s most profound social, demographic, and economic challenges. What to do with all the people who are looking for jobs if technology makes those jobs redundant?
Besides the country’s debt load — the result of decades of deliberate investment in excess capacity — and contracting labor force, China faces other closely related macroeconomic challenges too, which cannot be addressed piecemeal. The property market collapse, the crisis in youth unemployment, and price deflation all stem from a few profound structural imbalances that cannot be easily reversed.
The first of these, as already mentioned, is demographic. For those tempted to believe that the CCP has a deep reservoir of strategic thinkers, consider that it’s the same party that thought the one-child policy made sense. China’s aging population and the past-its-peak working-age population are serious challenges. Government attempts to reverse the demographic trend through incentives for child-bearing-age families and other programs are simply too late.
Second, China is caught in the middle-income trap. Per capita income has grown (though it’s still a fraction of what it is in the U.S. and in other developed economies), but economic growth has slowed for more than a decade, in large part because of declining consumption and foreign investment. The level of education available for much of the population is inadequate to result in an increase in labor productivity. Stanford professor Scott Rozelle and others have shown that half of Chinese workers lack a high-school education. Rozelle estimates further that some 30 to 40 percent of rural children may suffer from cognitive delays that limit their learning potential, caused by many factors, including poor diet and health as well as inadequate stimulation at an early age by family members. As many as 700 million working-age people in China have a grade school education or less. The West tends to fixate on China’s elite universities in the cities and on those students fortunate enough to get a visa to study abroad and return as tech entrepreneurs. That is small portion of the population. Simply put, the number of skilled workers China would need in order to deliver on the tech opportunities at a scale that could seriously affect the overall economy is out of reach.
Third, China is challenged by its informal economy, by far the largest in the world. By some estimates, China’s off-the-books economy is nearly the size of India’s or the United Kingdom’s economies, at $3.6 trillion. At about 20 to 30 percent of China’s economy, this informal sector may be twice the size of its tech sector. This income is off the grid. These workers cannot access government services (hospitals, schools, social services). They are not taxed. Rozelle’s research suggests that these workers are mostly in low-wage, low-productivity jobs.
These structural forces are much stronger than, and working against, the CCP’s tech push. They have so far resulted in three interrelated problems that characterize China’s economy more accurately than does the country’s progress on AI or EVs: the property market collapse, deflation, and youth unemployment.
The property market collapse in China has been well examined. Seventy percent of Chinese household wealth is tied up in real estate, as people believed that the real estate market would be ever rising. Many tens of millions of middle-class families have seen their net worth collapse over the past several years. In the cities, prices have fallen between 20 and 40 percent. There is more pain to come. In the United States, the real estate crisis led to a painful adjustment in property prices and to consumer refinancing, where possible, and people moved on. In China, the massive oversupply of inventory cannot be absorbed by a declining population, so prices cannot stabilize.
This is the primary reason why Chinese consumption is so weak. People feel poorer and spend less. This cycle is a core driver of the macroeconomy, leading to higher government debt and stimulus programs to try to resuscitate demand. Layoffs and pay reductions throughout the economy are exacerbating consumer demand. As Chinese household savings reach 30 percent of disposable income, the country is in a deflationary spiral. The mood of the country — notwithstanding the hype around AI, robotics, EVs, and other tech sector sideshows — is characterized by anxiety, caution, retreat.
This is having a particularly devastating impact on employment. University graduates are not finding opportunities that were available during the go-go years of juiced growth. Urban unemployment of university graduates is approaching 30 percent, according to estimates by the Rhodium Group and Nomura. This means that 3 or 4 million jobless university graduates a year are pouring into cities looking for work. They are finding low-paying civil service jobs or gig jobs, or they are dropping out of the economy altogether in a phenomenon known in Chinese social media as “lying flat.” Family formation is also stunted; with no job prospects, who wants to get married? Besides, because of the demographic disaster of the one-child policy, these unemployed, educated job seekers are the precious only children that their aging parents rely on. It’s one thing, and certainly worrisome, to see falling marriage and birth rates in wealthy countries, but in a low-to-medium-income country such as China, it is a death spiral.
The growth in China’s tech economy simply cannot make up for these other profound challenges the country faces. And its focus on the tech sector may be damaging to other facets of China’s economy and its society. China’s rapid industrialization, urbanization, and resource extraction have left deep environmental scars. Government policy continues to destroy air and water quality, contributing to dangerous levels of soil contamination, desertification, and loss of biodiversity. All of this is exacerbated by higher average temperatures and other long-term climate shifts.
Quite apart from its push for energy independence through heavy spending on alternative sources of energy, China accounts for about a third of global greenhouse gas emissions. While the Western left loves to tout China’s progress on alternative energy, any such progress is due not to the CCP’s giving a whit about the environment but to its seeking energy independence. But this pursuit, alongside the country’s growing thermal coal usage in absolute terms, is making life more challenging for the hundreds of millions of underemployed, undereducated masses. Total air pollution is estimated to cause 2 million deaths annually, while 700 million people a day consume drinking water that contains poisonous levels of human and animal waste. China’s investment in semiconductors and AI and green tech is amplifying these ecological challenges. Water consumption for data centers and semiconductor fabrication is worsening the water scarcity problem, which affects the region as the government in Beijing continues to redirect the flow of international rivers to its advantage. Many of China’s large new data center projects are in regions already struggling with drought and desertification. A single semiconductor fabrication plant can use 60,000 tons of water per day. Three liters are discarded for every liter used. Chip-making produces wastewater that contains acids, solvents, fluoridated compounds, and heavy metals. Much of this water is impossible to treat. Lithium- and cobalt-processing — for battery production and other purposes — leaches acid and heavy metals; waterways near tech hubs become industrial sewers, toxic and unsafe.
All of this calls into question just how much China’s tech economy improves its international negotiating position. It is too small a part of the Chinese macroeconomy to offset the many challenges the country faces. It contributes to air, water, and food source degradation for a population already ravaged in terms of wages and employment. Xi Jinping’s hand is very weak, even if he is playing it quite well, and President Trump should be more confident in applying consistent pressure on China. First, the president should order the delisting of Chinese companies from the U.S. securities exchanges. The Chinese companies don’t play by the rules of transparency and disclosure, and U.S. investors shouldn’t have to figure out what is real and what is propaganda. If the Chinese government wants to control a choke point, such as critical minerals, it is quite appropriate for the U.S. to deny Chinese-government-controlled companies access to the deepest, most liquid capital markets in the world. Second, the president should stop playing around on TikTok and just ban it in the U.S. If he’s worried about bereft U.S. universities and their liberal tilt, President Trump surely should be at least as concerned about the way the Chinese use TikTok to push CCP propaganda in the U.S.
China’s economic, social, and political circumstances have changed fundamentally since President Trump was last in office. What happened? Covid, which broke open the long-standing inconsistencies in the Chinese economy and society. It was nearly a disaster for the CCP. Chinese GDP as a percentage of U.S. GDP fell from 66 percent in 2019, pre-Covid, to about 62 percent last year. Put another way, since emerging from Covid in 2021, U.S. GDP has grown nearly 30 percent; the PRC’s barely 10 percent. Even those who most believed that China had built a new economic model and could not be stopped have had to climb down from that assessment. The U.S. is outpacing China, even if we have pressure points of our own (critical minerals processing, for instance). China hit a wall in 2020–21, and the Trump administration seems not to realize that.
As the Trump administration seeks a grand bargain with China, likely to include matters beyond trade and markets, it’s important for it not to get distracted by the chimera of Beijing’s supposed tech supremacy. China is facing stagnation and relative decline. The world is fascinated by a thin veneer of tech investment that barely conceals the teeming challenges beneath. China’s economy is falling behind, not leaping forward. The U.S. and the world would benefit by a clear-eyed Trump administration that sees the full mosaic of Chinese reality rather than one or two of its shiny pieces.
