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China\u2019s annual trade surplus now stands at $1 trillion, the largest trade imbalance ever accumulated by any single country, which amounts to 1 percent of present-day global GDP. That staggering surplus raises questions about the current structure of the global economy\u2014and the effectiveness of Trump administration policy, given its avowed goal of reducing the U.S. trade deficit with China.<\/p>\n
Is China mercantilist? Is China\u2019s trade surplus good for its domestic economy? And what is U.S. President Donald Trump\u2019s strategy for dealing with China on trade?<\/p>\n
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host,\u00a0Ones and Tooze<\/em>. What follows is an excerpt, edited for length and clarity. For the full conversation, look for\u00a0Ones and Tooze<\/em>\u00a0wherever you get your podcasts. And check out Adam\u2019s\u00a0Substack<\/a> newsletter.<\/p>\n Cameron Abadi:<\/strong> The accusation sometimes made about China\u2019s trade policy is that it\u2019s mercantilist\u2014that the Chinese state is using trade policy to accumulate wealth and weaken its trading partners. Is that a fair accusation?<\/p>\n Adam Tooze: <\/strong>So this is an interesting and entangled sort of historical claim. The concept of mercantilism owes in large part to the influence of Adam Smith writing at the end of the 18th century. Smith, who was famously arguing for a politics of laissez-faire, needed a straw man, something to distance himself from. For him, the old system of the ancien r\u00e9gime was mercantilism, which therefore consisted of a combination of bad politics.<\/p>\n In other words, it was a linkage together of business and government, and it wasn\u2019t just bad in the sense it was monopolistic. It was also bad in the sense it was illogical because it focused on the accumulation of gold bullion and ultimately of financial claims rather than looking at material goods. It was also dangerous because it was tied up with the jealousy of trade and imperial competition. And Smith promotes his own agenda of relatively free trade, of disentangling business and government, and of doux commerce<\/em> (peace through trade) as an alternative to this thing that he labels mercantilism.<\/p>\n It\u2019s easy to see how you would, from a particular optic in the current moment, label China exactly this way. What China is doing is aggressively promoting its industries and penalizing imports and foreign investment from foreign players; it is pursuing an aggressive policy of national assertion through trade and through investment, through empire building, and through its aggression in its immediate environment in the South China Sea. All of this is at the expense of its neighbors in a zero-sum way. So, what we need is a dose of liberalism to get us to a better place.<\/p>\n But this is both uncharitable historically and uncharitable as a reading of China\u2019s position. Sure, China has a large trade surplus, and it actively promotes its industries. Since 2015, it\u2019s been doing this \u201cMade in China\u201d thing, which has had spectacular results. Imports are languishing.<\/p>\n I think the smarter read is that what China is engaged in is not necessarily a coherent strategy of domination through one-sided trade but trying to figure out how you achieve prosperity, stability, and development for your country in a context that only a naive person would describe as a liberal utopia of balanced trade and unrestricted commercial opportunity and peaceful foreign policy.<\/p>\n The more reasonable way of reading China is as rationally responding to what it perceives to be a dangerous global environment. A lot of Chinese thinking about trade goes back to the double act of joining the World Trade Organization in 2001 and then witnessing the Bush administration pursuing the global war on terrorism and the invasion of Iraq. That combination really set the alarm bells ringing in Beijing. You can see the same thing recurring with America\u2019s sanctions policies in the 2010s and down to the present moment.<\/p>\n They know they\u2019re in a hostile environment. It\u2019s a communist regime\u2014they know other people are not friendly to this. China is also an emerging massive nation-state in a world previously hegemonized by America and its Cold War allies. They know they\u2019re up against it, right? So it\u2019s only reasonable for them to pursue this kind of policy.<\/p>\n China is also still a middle-income developing country with a huge population for whom it needs to provide employment. And they are in a world that they correctly perceive as being dominated by a technological race in which winners tend to take it all. Not unreasonably, Beijing puts all these things together and says, \u201cRight, we need a national industrial development policy, and we need to ensure competitiveness,\u201d as we would call it in the West. So they unflinchingly pursue those goals.<\/p>\n If you asked yourself right now who is most in the mercantilist mode, it\u2019s tempting to say the issue here isn\u2019t whether they\u2019re mercantilist and we\u2019re not, so much as who\u2019s winning the mercantilist game that everyone is playing.<\/p>\n The answer is that China is winning. The perverse consequence of that is that the people who end up really wanting to reject other people\u2019s goods are not the Chinese\u2014who, if they substitute foreign imports, do so because they can domestically produce\u2014but rich Western countries that are saying they would rather not have cheap Chinese goods for the purposes of balancing their social contract or avoiding financial obligation to China.<\/p>\n It\u2019s us, in a sense, who are at this point in the more mercantilist mindset, out of a sense of inferiority and the fact that we might be losing this race. Then, of course, we invert this and criticize them for adopting these policies that are putting us in such a difficult position.<\/p>\n CA:<\/strong> Does China\u2019s strategic decision to focus on exporting manufactured goods translate to a better economy for most of the Chinese population?<\/p>\n AT:<\/strong> Well, measured in terms of the conventional metrics of productivity wages, the answer is very unambiguous. Over the last quarter century, the Chinese population has seen an unprecedented increase both in wages and productivity, and wages have moved ahead of productivity so that unit labor costs have gone up very substantially.<\/p>\n China is no longer by any standard in manufacturing a low-wage location. In absolute terms, its wages are comparable to those of middle-income countries like Brazil. They\u2019re substantially higher than in manufacturing zones like in Mexico or Central America. They\u2019re higher than in most of Southeast Asia, let alone in India.<\/p>\n But down the line, I think the questions are threefold. The first is inequality within China. China is experiencing a China shock. It isn\u2019t China on the West; it\u2019s China on China. At the very high end of Chinese manufacturing now, there just aren\u2019t many workers; these are the so-called dark factories where they never turn the lights on because the vast majority of the labor is being done by robots.<\/p>\n The second question then is not whether this process raises wages and ultimately the standard of living for those in that workforce but whether there will be enough jobs as Chinese manufacturing migrates to a more First World model or begins to set the standard globally for efficiency. What does China do with its giant labor force?<\/p>\n Already, most Chinese are not employed in export-oriented manufacturing systems like Foxconn or whatever. They are in largely quite informal work in service sector-orientated jobs. They remain casualized. The real question is about the construction of a Chinese welfare state to support those people on the back of taxes paid by those who are in the high-paying, high-productivity jobs. So China has First World problems. These are the same issues that you see in European and American labor markets.<\/p>\n The third question, the macroeconomic question, is if China is developing productivity on this basis, it of course takes investment. This is where the Keynesian critique of the Chinese model comes in. It clearly raises wages and has done so on a spectacular scale. In the 2000s and 2010s, Chinese manufacturing wages were rising by 10, 15, in some cases 20 percent per annum because the factories are so desperate to get the workers.<\/p>\n From an economic point of view, every time you build a factory, you\u2019re investing, and that investment in macroeconomic terms means not consuming. Is China experiencing the standard of living that the high incomes that people are now earning would potentially entitle them to? And is the trade-off not in terms of labor productivity, which is unambiguously rising, but what economists call total factor productivity?<\/p>\n In other words, the overall bang that you get for all of the resources that you put in\u2014the bucks, the investment, the technology, the foregone hours of leisure, the whole bundle of inputs that go into producing output\u2014how is that doing in China? That\u2019s a much more ambiguous story, where total factor productivity growth was quite rapid at times but has slowed down dramatically.<\/p>\n And again, China isn\u2019t special in this way. Everyone\u2019s total factor productivity growth is much more ambiguous. We all know how to raise labor productivity: You give workers more machines. The question really is at the margin whether in societies that already have high levels of investment in infrastructure and so on it makes economic sense to keep making that trade-off and where you get the technological payoffs.<\/p>\n You don\u2019t have to spend much time in China to realize that the basic argument that they have overinvested in hard infrastructure is powerfully valid. When you put that together with the inequality point, you have this impression of witnessing the construction of the Great Pyramids in real time. The drama of the physical edifice is undeniable, but when you actually see the trade-offs that hundreds of millions of people are making in terms of the diminished standard of living, the very modest levels of consumption that Chinese people have, that\u2019s where the really tough questions are.<\/p>\n And this is where with the authoritarian nature of the regime and its ability to just stamp a vision of modernity on China\u2014also reconstructing all of the cities, tearing down old neighborhoods, this churn\u2014that\u2019s where I think the tough questions are. Not in the more basic economic question, are people\u2019s wages going up? You bet they are. Really, one has to reckon with the fact that China has an upper-middle class whose standard of living and income and financial heft compare favorably with those anywhere else in the world.<\/p>\n