China is getting Trumpy

Your opinion of President Trump's economic agenda is probably linked to your opinion of China. Trump rails against Chinese manufacturing for stealing U.S. jobs. In retaliation, he's used tariffs to cut down on the goods Americans import from China — and, by extension, bulk up the "Made in America" goods they buy. Meanwhile, Trump's critics paint this as an absurd and destructive quest; they assert that our economic entanglement with China is good for the United States.

But what does China itself make of this business?

China may be the antagonist in Trump's trade war. But, ironically enough, unlike Trump's U.S. critics and despite what it says abroad, Beijing probably doesn't see itself as a champion of global trade interdependency. In fact, the country's government has its own downright Trumpian plan to get Chinese consumers to buy more Chinese-made products.

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Quite literally, the plan is called "Made in China 2025." The Chinese government — whose economic policy is a weird hybrid of market liberalization and communist-style state ownership and central planning — announced the plan back in 2015. It encompasses more subsidies for domestic producers, more efforts to both invest in foreign companies abroad and secure their technology, as well as gearing up the country's numerous state-owned or state-backed business giants.

Basically, it's a 10-year industrial strategy to increase China's ability to manufacture high-tech products like superconductors, computer chips, and airplanes. China wants to consolidate those supply chains within its own borders, so its consumers can buy more of those types of goods from domestic producers. Sound familiar?

As big as China's economy is, it's not nearly as wealthy as the U.S. on a per person basis. China is still caught in the "middle income trap." Most of what it exports to the world is low-cost manufactured goods — think clothes, shoes, or consumer electronics — which are low cost because the workers who make them aren't paid a lot. Meanwhile, it imports a lot of those aforementioned high-tech products, which are much more expensive. In fact, what often happens is that the low-cost manufactured items that advanced Western nations like America import from middle-income countries are only parts for high-tech products, which are put together in the advanced economies and then exported back to the middle-income world.

Quite often, this setup traps middle-income countries in perpetual trade deficits. (They're exporting cheap stuff and importing expensive stuff.) That trap drives them into exchange rate crises every so often. China's largely managed to run a trade surplus with the rest of the world despite all this, albeit with the occasional dip into trade deficit. Which is a testament to the intelligence and aggressiveness of Beijing's macroeconomic and trade strategies. But now the Chinese government would like to get the country out of the middle-income trap entirely.

Ironically, here in America, the Made in China 2025 plan isn't the kind of thing that Trumpian critics of free trade or establishment champions of free trade want to see.

Critics of free trade want America to close its own trade deficit by selling more stuff to China, which is obviously in tension with China's desire to produce more domestically. Meanwhile the free traders simply view Made in China 2025 as more of the anti-globalization protectionism they're trying to squash. And neither camp likes the idea of China providing more direct subsidies to its domestic companies, or continuing to grab technological know-how and intellectual property from the rest of the world. The Trump administration actually released a report in 2018 concluding that aspects of Made in China 2025 were "unreasonable and discriminatory." And other European countries have complained about it as well.

Publicly, the Chinese government got a lot quieter about the plan after Trump's tariffs kicked in halfway through 2018. But despite reports that Beijing is shifting strategy, there's no actual evidence the substantive policies have changed. "Spoken or otherwise, there seems to be consensus that the principles behind [Made in China 2025] are alive and well — China just isn't using that name anymore," PBS reported in May.

On that note, Brad Setser of the Council on Foreign Relations just observed that, in terms of who China is buying from, the rest of the world hasn't really benefited from the trade war with America.

As payback for Trump's tariffs on Chinese exports, China jacked up tariffs on American exports. Not surprisingly, China's imports from the U.S. have fallen since 2018. But China's imports from the rest of the world fell by a comparable amount over the same period. It's not that Chinese demand for foreign goods shifted from American producers to other countries — it's that the demand just fell, period. And China's trade surplus with the rest of the world has risen accordingly.

In fact, relative to China's GDP growth, China's import growth has been slowing for most of the last decade. It dropped substantially from 2013 to 2015, leveled off for a bit, then started falling again in 2018. Over the same time period, America's import growth also slowed down relative to its GDP, but by a much smaller amount. Thus, the change in China's case is pretty dramatic. Per Setser, both the European Central Bank and the International Monetary Fund have noted the shift, while France's central bank came right out and said "the recent trade deceleration is closely linked to the shift of China's production towards domestic demand."

Granted, Beijing isn't exactly transparent, and there could be multiple causes for this shift since 2018. But it sure looks like Made in China 2025 in action.

Beijing's riposte is that the plan is not too different from how the United States itself and many European powers grew their economies, especially prior to the 20th century. Which is entirely accurate. Unfortunately though, China's rising trade surplus — a necessary corollary of the Made in China 2025 plan — is also slowing global growth. If the new trade deal with Trump sticks (a big "if") China's additional purchases of U.S. agricultural products could shrink its surplus somewhat in 2020. But that's about it.

Ultimately, for the global economy to keep chugging along, demand has to come from somewhere. But the austerity and free market policies of the modern global trade order create a permanent shortfall in global demand, thus driving a race to the bottom as every country tries to outwit its neighbor and grab more of the demand that remains. Rather than attempt to change that game, both Trump's and China's protectionism are just attempts to be the player who comes out on top.