China’s 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—and the effectiveness of Trump administration policy, given its avowed goal of reducing the U.S. trade deficit with China.
Is China mercantilist? Is China’s trade surplus good for its domestic economy? And what is U.S. President Donald Trump’s strategy for dealing with China on trade?
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, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: The accusation sometimes made about China’s trade policy is that it’s mercantilist—that the Chinese state is using trade policy to accumulate wealth and weaken its trading partners. Is that a fair accusation?
Adam Tooze: 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 régime was mercantilism, which therefore consisted of a combination of bad politics.
In other words, it was a linkage together of business and government, and it wasn’t 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 (peace through trade) as an alternative to this thing that he labels mercantilism.
It’s 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.
But this is both uncharitable historically and uncharitable as a reading of China’s position. Sure, China has a large trade surplus, and it actively promotes its industries. Since 2015, it’s been doing this “Made in China” thing, which has had spectacular results. Imports are languishing.
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.
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’s sanctions policies in the 2010s and down to the present moment.
They know they’re in a hostile environment. It’s a communist regime—they 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’re up against it, right? So it’s only reasonable for them to pursue this kind of policy.
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, “Right, we need a national industrial development policy, and we need to ensure competitiveness,” as we would call it in the West. So they unflinchingly pursue those goals.
If you asked yourself right now who is most in the mercantilist mode, it’s tempting to say the issue here isn’t whether they’re mercantilist and we’re not, so much as who’s winning the mercantilist game that everyone is playing.
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’s goods are not the Chinese—who, if they substitute foreign imports, do so because they can domestically produce—but 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.
It’s 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.
CA: Does China’s strategic decision to focus on exporting manufactured goods translate to a better economy for most of the Chinese population?
AT: 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.
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’re substantially higher than in manufacturing zones like in Mexico or Central America. They’re higher than in most of Southeast Asia, let alone in India.
But down the line, I think the questions are threefold. The first is inequality within China. China is experiencing a China shock. It isn’t China on the West; it’s China on China. At the very high end of Chinese manufacturing now, there just aren’t 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.
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?
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.
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.
From an economic point of view, every time you build a factory, you’re 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?
In other words, the overall bang that you get for all of the resources that you put in—the bucks, the investment, the technology, the foregone hours of leisure, the whole bundle of inputs that go into producing output—how is that doing in China? That’s a much more ambiguous story, where total factor productivity growth was quite rapid at times but has slowed down dramatically.
And again, China isn’t special in this way. Everyone’s 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.
You don’t 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’s where the really tough questions are.
And this is where with the authoritarian nature of the regime and its ability to just stamp a vision of modernity on China—also reconstructing all of the cities, tearing down old neighborhoods, this churn—that’s where I think the tough questions are. Not in the more basic economic question, are people’s 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.
CA: What exactly is Trump’s plan for altering the U.S. trade relationship with China, based on his administration’s new National Security Strategy? And how has that been reflected until now in U.S. policy?
AT: The National Security Strategy is a very interesting document. These documents really do summarize things that are going on. The question it raises is, what kind of relationship politically, geopolitically, do we want to have with China? We’ve seen different iterations of this from the American side, culminating in the Biden administration with an almost forensic input-output diagram, a highly technologically sophisticated mapping of the world economy in terms of what things one is willing to trade with the Chinese and what one is not, as with chip sanctions.
What we’re seeing with the Trump administration appears to be something quite different. The president wants deals, and he likes dealing with Chinese President Xi Jinping, who treats him like the other guy running the world. There’s an element of Trump that likes to please and to be liked, and so he was quite pleased with the latest encounter he had with Xi. And the National Security Strategy is soft on China by most people’s counts, right? It’s ideologically hard when it comes to Europe. It’s presumptuous and domineering when it comes to the Western Hemisphere. And then all of a sudden, when it comes to China, it’s kind of suggesting the possibility of some kind of deal and some kind of compromise.
The upshot after all of U.S. trade policy right now, as far as China is concerned, is that the tariffs on China are lower than those of India. I mean, who’d have thought? On this show over the years, we’ve been discussing the counterbalancing strategy all the way back to the 2000s cultivating trade when relations and investment with India were seen as a vital element of U.S. grand strategy. And we’re now in a situation where after the first year of Trump trade yo-yoing, China has ended up with lower tariffs than what was previously considered to be America’s great counterweight to China.
So it’s very confusing and seems to suggest something along the lines of a kind of division of spheres of interest where the position of trade is not locked tight in the way the Biden administration seemed to be doing: a kind of rationalist construction of a total policy of containment toward China in which you could map every element of the trading connection and financial connection onto a grid of power. That doesn’t appear to be the Trump position at all.
