A Stagnant Economy: The Unending Battle Between China and the US
Tension escalates between United States and China
First off, Chinese officials froze in fear, clutching their positions tightly due to the looming threat of anti-corruption investigations. In 2024, a staggering 889,000 officials faced punishment (that's around 50% more than the average from 2018).
Secondly, spending structures in China weakly stimulate demand, prioritizing financial stability over all else. That means 500 billion yuan will go towards recapitalizing state banks, and another 800 billion towards refinancing regional debts. These moves may not be as effective as buying from the private sector, but they still have some impact.
Thirdly, despite record stimulus efforts, transfers only account for 6% of GDP, which is significantly lower compared to other major economies.
To make matters worse, the escalating trade war between China and the US is creating an avalanche of issues. This fierce battle is motivated by US policies that, whether intentional or not, appear to be an attempt to sever ties between the two economic powerhouses. The trade war has the potential to trigger a global economic crisis, as China accounts for approximately 33% of global production.
Tariffs are at levels not seen since the 1930s, and the risk now is that Trump may resort to even harsher measures. He could potentially limit or prohibit US investments in Chinese companies, or remove Chinese companies from listings on American exchanges.
As China grapples with a significant external demand shock, it's crucial to stimulate domestic demand. Policy has shifted from simply increasing expenditure to supporting consumption. Key measures include: expanding a program of subsidies for the exchange of household appliances; increasing basic pension payments; and preparing subsidies for families with children. However, the scale of the support program is limited; it's too small to be effective and too large to maintain fiscal stability, especially given the aging population. Furthermore, measures beyond direct payments, such as revitalizing the real estate market, are needed.
A 5% GDP target for 2025 seems overly ambitious, especially in deflationary conditions. Achieving this goal requires nominal GDP growth, job support, and consumption expansion, which presents a significant challenge with limited resources.
To circumvent the de minimis rule and access the US market, businesses in China utilize various strategies:
- Goods are imported into the US via Canada and Mexico, labeled as North American.
- Some products are repackaged and shipped through third countries to the US.
- Undervaluing goods allows them to fall under the $800 limit and reduce tariffs.
Weak control makes these schemes effective: one U.S. port employee handles up to 50 containers daily. Only 10% of U.S. Customs staff are port-based. In 2024, the U.S. received 1.25 billion packages - most go unchecked. The trade gap between the US and China exceeds $100 billion, reflecting the scale of circumvention. Small businesses actively use these schemes, and tracking contraband is increasingly difficult without enhanced inspections.
Major bilateral trade relations have effectively ceased. The US is facing inflation growth as replacing China as a production hub is nearly impossible, even with ideal global connections. Shifting production to the US requires materials and processing handled by China. China loses its largest customer. American industry and construction rely on Chinese supplies, while Chinese high-tech production depends on US components. Both economies are deeply integrated into global supply chains, and tariffs will lead to price increases and component shortages, which consumers might not even notice.
Tariffs in the US will mainly affect labor-intensive sectors, potentially undermining support for a tough stance. In China, they will exacerbate short-term losses but accelerate the path to autonomy. The US faces a long-term supply shock. China must boost consumption or find new markets to avoid unemployment growth. Devaluation of the yuan is ineffective due to the risk of capital outflow.
In negotiations, Trump employs a "carrot and stick" approach, but his abrupt turn to tariffs, amidst a falling dollar, treasuries, and US stock market, has significantly limited his leverage. If he raises tariffs again, markets will likely drop, and intra-party support will weaken. Financial sanctions could further depreciate the dollar and bond prices, raising serious concerns.
From a foreign perspective, the US's main attractions were its willingness to provide security guarantees and access to its unique domestic market. However, these guarantees no longer seem unshakable. Moreover, the American consumer will face a challenging period in the coming months: the US economy is heading towards a recession, supply chains are breaking down, and incomes are being eroded by inflation.
Finally, the US's comparative advantage has always been its dominance in the global tech ecosystem. However, this monopoly is becoming increasingly expensive. The US faces serious challenges from around the world, including from China, where companies like Huawei and Xiaomi challenge Apple, DeepSeek challenges OpenAI, and ByteDance challenges Meta.
Meanwhile, the "carrots" offered by China include dominance in virtually all supply chains due to the supply of critical minerals, intermediate products, components, and equipment. None of this can be replaced overnight; leading positions in energy transition technologies; a rapidly developing technological ecosystem; readiness to invest abroad; today cheaper capital than almost any other country; and a vast domestic consumer market that is currently receiving significant stimulus.
Therefore, in the new chapter, the US will have to displace China from the world stage without having either the stick or special carrots that China couldn't match or even surpass. This seems like an overly ambitious task.
It's likely that most countries will decide that prudence is more important than bravery and will refuse, or at least begin to shy away from, the US's offer to join an anti-Chinese coalition.
- The escalating trade war between China and the US, due to US policies, threatens to trigger a global economic crisis in 2024, as China accounts for 33% of global production.
- Tariffs in the US are at levels not seen since the 1930s, and the risk is that Trump may resort to even harsher measures, such as limiting or prohibiting US investments in Chinese companies.
- Despite the Chinese government pouring billions into financial stability, key measures to stimulate domestic demand, like increasing basic pension payments and preparing subsidies for families with children, are too small to be effective and too large to maintain fiscal stability.
- In negotiations, Trump's abrupt turn to tariffs, amidst a falling dollar, treasuries, and US stock market, has significantly limited his leverage, and if he raises tariffs again, markets will likely drop, and intra-party support will weaken.
- In the new chapter, the US will have to displace China from the world stage without having either the stick or special carrots that China couldn't match or even surpass, making it seem like an overly ambitious task.
