Why the US and China are unlikely to trade places any time soon

Watching the US election campaign from China, there is a disorienting feeling of viewing an opposite and parallel world. In China, many economists fret that Chinese consumption is too weak. Chinese people are afraid to spend, and that leads to economic stagnation, maybe even deflation, as vendors with nothing left to cut dance on the margins of profitability.

On January 1, my gym in downtown Shanghai abruptly closed; I found another location, and that one closed, too, on January 12. Streets of closed storefronts downtown make it clear that business is not going very well, even as the polluted air implies that somebody somewhere is doing something.

Through this economic gloom, one voice has praised China’s model like no other. “America is falling behind, and China is rising as the world’s technological leader. Its policies are succeeding,” former US trade representative Robert Lighthizer wrote in his memoir. The book was published in June last year, a time when fears over China’s economy were raging.

Lighthizer argues that consumption, which is lacking in the Chinese economy today, isn’t the true measure of an economy’s worth, but that instead it is production. In that sense, China is still strong.

The US economy is largely driven by personal consumption, which accounts for about 68 per cent of gross domestic product. Manufacturing, by contrast, is around 11 per cent. That is one reason US President Joe Biden issued stimulus cheques in 2021, and why a generation ago president George W. Bush implored a shell-shocked country to go shopping after the September 11 attacks.

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An unwinnable conflict? The US-China trade war, 5 years on

An unwinnable conflict? The US-China trade war, 5 years on

In a real way, the United States is the centre of global consumption, which gives US consumers great power. Whatever Americans want is often what the world gets, even though Americans have different ways of life than people in other countries.

But in the wake of the US-China trade war that started on Lighthizer and former president Donald Trump’s watch, US politicians of both major parties are emphasising production and manufacturing over consumption. Biden’s government has a webpage about why Americans should manufacture the products they consume at home.

The US trade deficit with China has become a major source of political friction. Both Republicans and Democrats appear to agree that the US should stop having such an unbalanced trade relationship with China and instead reconfigure the country’s economy so more of the goods Americans consume are made either domestically or in countries with which the US is friendly.

Never mind that the measures Lighthizer is calling for – presumably with an eye on this year’s election – would run the risk of destroying the American way of life and ruin the country’s access to inexpensive goods that families across the income spectrum can afford.

There is a group of Americans who buy locally and prefer antiques or secondhand products to cheap new things from China. These people tend to live in more left-leaning, well-off areas such as Berkeley, California, or Cambridge, Massachusetts. Meanwhile, in more rural and conservative areas in the Midwest and the South, the Walmarts that anchor many communities are vast emporia of Chinese products.

Even as the US moves towards a new political consensus on working towards a self-reliant economy that would make communists proud, many Chinese economists are realising that China’s economy is dangerously tilted towards production. Dual circulation – relying on domestic consumption as well as exports – has been a goal for years.

China must slow down investment if it wants to rebalance its economy

However, the notion of a Chinese consumer-driven economy might be as illusory as hopes of decoupling the US economy from cheap Chinese products. In fact, new government policies might boost Chinese manufacturing even further. Policies that would encourage greater consumption, such as the US stimulus cheques, are distant fantasies, even as the quest for a home-grown Chinese passenger jet has cost hundreds of billions of yuan and the construction of a utopian metropolis near Beijing is estimated at around 610 billion yuan (US$85 billion).

China accounts for 18 per cent of global GDP but 31 per cent of global manufacturing. Some Chinese economists want to make that even higher by dominating electric vehicles, batteries, solar and wind products, semiconductors, pharmaceuticals and aeroplanes.

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Construction in full swing to build China’s ‘city of the future’, Xiongan

Construction in full swing to build China’s ‘city of the future’, Xiongan

Just as Americans might theoretically want to stop being so consumption-heavy and Chinese might want to move towards consumption and services, both economies are doubling down on their core strengths. The US is building some semiconductor projects – although the funding promised in the US Chips and Science Act largely has yet to flow – and consumption continues to rise, substantially contributing to growth.

If Shanghai this January is anything to go by, replacing the US consumer with a new Chinese middle class could take quite a bit of time – if it ever happens at all.

In H.G. Wells’ novel The Time Machine, the hero discovers that London’s middle classes and working classes have split into two different species – the slim, elven Eloi, who subsist on organic food and dance all day, and the pale, furry Morlocks who live underground and tinker with pipes and machinery.

To observers such as Lighthizer, it might seem as though Americans are Eloi, unaware of who is operating the machinery that makes the world work until a Morlock hand drags them down to death. But as long as America produces US dollars and cutting-edge scientific research, the US-China trade dynamic will continue.

It is likely China will continue to be the factory of the world. And the US? It will be the place where rich people from all over, including China, go to spend their money.

Jacob Dreyer is a writer and editor based in Shanghai

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