It helps the Federal Reserve fight inflation. But these lower-priced Chinese products could depress sales for U.S. manufacturers, threatening the Biden administration’s hopes of increasing factory jobs in an election year. China’s factory output rose 7% in the first two months of this year compared to the same period in 2023, the Chinese government said on Monday.
“It’s just expanding China’s capabilities in a variety of areas, including some that are strategic and some that are priorities for the United States and Europe. And that’s creating tensions,” the Obama administration’s Treasury Department said. said official and economist Brad Setzer. “Other countries in the world also want to produce industrial products.”
The Chinese government has invested in new factories in recent years to meet demand from U.S. consumers who splurged on imported goods during the pandemic and to foster high-tech industries such as electric vehicles and batteries that Beijing views as essential. .
China’s manufacturing output, already the world’s No. 1, has expanded by about a quarter since the end of 2019, according to London-based Capital Economics. U.S. factory production over the same period was flat, still 7% below its 2007 peak.
As a result, global trade imbalances are widening, according to various measures of China’s trade performance. Secretary Neil Shearing said China’s current account surplus as a share of global output, one broad measure, is higher now than it was before President Donald Trump imposed tariffs on most Chinese imports. Economists at Capital Economics say that the economy is expanding and is at a level close to an all-time high.
“We need a better balance in global trade,” he said.
The second measure, China’s manufacturing trade surplus as a share of the global economy, is nearly double Japan’s in the late 1980s, when many Americans feared Japan’s economy was destined to become the world’s largest. , the paper announced. Setzer calculations.
As China’s global manufacturing dominance grows, the risks are rising, especially for European automakers. In recent years, China has emerged from automotive obscurity and surpassed Germany in car exports.
Chinese factories can produce 40 million cars a year, 15 million more than needed to meet domestic demand. China exported 5 million cars last year, roughly five times the total exports in 2020, and that number could double in the next few years, according to Michael Dunn, a San Diego-based industry consultant. That’s what it means.
Chinese automakers are already Mexico’s top suppliers. China’s BYD, backed by Warren Buffett, sells an electric car model for about $15,000, helping it overtake Tesla late last year to become the world’s largest EV producer.
Tesla CEO Elon Musk said earlier this year that unless faced with new trade barriers, Chinese companies would “put most car companies out of business in the world.”
The struggle for supremacy in the auto industry is just one element of the deteriorating trade environment between China and its major customers in Europe and the United States.
European officials said this month that an ongoing trade investigation has found “sufficient evidence” that China is subsidizing electric vehicle production in ways that could harm European carmakers. announced. A decision on initial tariffs could be obtained by July.
The U.S. auto market is already protected by tariffs. Under the USMCA trade agreement, cars must also meet regional rules of origin, which prohibit Chinese companies from exporting cars made in Mexico to the United States.
But analysts said Chinese cars could eventually land here via South Korea or other countries that have free trade agreements with the United States.
A spokesperson for the Chinese embassy in Washington dismissed concerns about the expansion of the country’s manufacturing industry.
“Excess production capacity is a relative concept. Demand cannot be limited to one country or region, and we need to think about it in the context of economic globalization,” said the head of the embassy’s Information and Public Relations Division. , said Liu Pengyu.
Concerns about China’s manufacturing dominance were heightened last week when the United Steelworkers petitioned U.S. Trade Representative Katherine Tai to investigate China’s shipbuilding industry.
The steelworkers, supported by four other trade unions, say China is adopting “non-market policies” in a deliberate 20-year strategy to dominate the global shipbuilding industry. insisted. Tai has 45 days to decide whether to move forward with an investigation that could give the president the power to impose tariffs on Chinese ships.
China’s economic planners have long supported state-owned enterprises in many industries through cut-rate loans, cheap or free land, reduced electricity bills and other support. The report said the generous aid amounted to more than 1.7% of China’s economy and is more than double the total amount from other countries, including the United States. the study By the Center for Strategic and International Studies.
In 2019, China spent more on industrial subsidies than it did on defense, the report said.
Last month, the International Monetary Fund warned that China’s manufacturing subsidies divert state funds to ventures that offer substandard profits and create “significant domestic challenges.” Such measures could create “overcapacity” and tilt the economic playing field in favor of state-owned companies over private companies, the fund said in its latest report. review About the Chinese economy.
In December, Chinese leaders met at the annual Central Economic Work Conference, citing a lack of domestic demand andOvercapacity in some industries”
China’s economy has typically focused on investment in industrial facilities and real estate development. Personal spending accounts for only 40% of gross domestic product (GDP), compared to about 70% in the United States.
The combination of weak consumer demand and strong factory production means China has a surplus of goods it needs to put on global markets.
The solution to China’s lopsided trade profile lies in increasing the purchasing power of Chinese consumers, allowing them to buy more of what Chinese factories produce. To do so, Beijing will need to channel financial support from politically powerful state-owned enterprises to Chinese households. And there’s no sign of it doing that.
Instead, amid a crashing real estate market and slowing domestic growth, Chinese leaders are betting on exports to pull them out of the economic crisis.
Flooding foreign markets with surplus goods should help ease global inflation. Low-priced Chinese products are likely to reduce U.S. inflation by 0.15 percentage points last year, according to Goldman Sachs, and will remain a relative bargain for U.S. shoppers through the first half of this year.
But Eswar Prasad, a Cornell University economist and former head of the International Monetary Fund’s China division, said the overcapacity threatens some industries key to the administration’s hopes of boosting a manufacturing revival.
China’s rise as a global manufacturing industry in the early 21st century included a wide range of products across numerous industries, including clothing, textiles, electronics, furniture, and industrial equipment. More than two decades later, China has become the world’s top manufacturing country, accounting for 31 percent of global manufacturing value added, according to the United Nations.
The United States is a distant second at 17%.
“China’s economy is much larger than it was a few decades ago. So this shock could be even bigger than the last,” Prasad said.
The irony is that China’s current export boom comes at a time when both Beijing and Washington are pushing for greater independence. The Biden administration is responding to shortages of medical equipment and computer chips caused by the pandemic by using tax credits and government subsidies to boost domestic production. And Chinese President Xi Jinping wants to reduce the economy’s dependence on external demand while increasing the dependence of foreigners on China.
However, after more than 40 years of strengthening ties, diluting commercial ties is proving difficult.
The impact of China’s vast manufacturing industry is being felt in some unexpected ways.
Last year, China opened 17 new factories that convert oil and gas into virgin resin, the raw material for plastic bottles. Steve Alexander, president of the Plastics Recyclers Association, said increased production has driven down global prices, making recycled plastic less attractive to bottle makers.
“It’s a big deal. It’s changed the economic landscape and the effects are just starting to show up in the market,” he said.
A Midwest recycler is considering going out of business after losing two recent contracts to companies that use lower-cost materials. It could be a sign of things to come.
