President Trump's willingness to use coercive tariffs poses a serious danger to the postwar economic and political order, introducing uncertainty into global commerce that makes it difficult for trade partners to respond — and nearly impossible for businesses to plan.
However, he is not the only threat to the global economy, and he may not even be the most significant. That may be President Xi Jinping of China, whose more strategic and measured industrial and economic policies profoundly distort and undermine global commerce.
Trade is commonly defined as the mix of imports and exports. But Mr. Xi has demolished that notion, fundamentally altering China's trading relations with the rest of the world, at least in terms of manufactured goods. Over the last six years, China's imports of such commodities have climbed by an average of only $15 billion per year, representing virtually no growth when inflation is included. In contrast, its manufactured exports have increased more than tenfold, by more than $150 billion per year. When it comes to manufactured goods, trade with China is essentially one-way.
China currently dominates global manufacturing, and its trade surplus dwarfs that of Germany and Japan during their postwar periods of export dominance. Countries around the world benefit from low-cost Chinese products, but they are unable to sell nearly as much of their own to China. Their export sectors are struggling — see Germany — and are not hiring.
Why is Mr. Xi doing this? To compensate for the Chinese government's mismanagement of its own economy.
The problem dates back to the worldwide financial crisis of 2008. The crisis reduced Chinese exports. The government might have mitigated this by increasing Chinese consumers' ability to purchase the country's products through policies that enhance household incomes and by lowering the high taxes on low-wage workers and domestic consumption that fund China's government. This would have aided China's shift to a more sustainable economic model that balances manufacturing, trade, investment, and consumer spending.
Chinese policymakers instead chose to channel the country's massive household savings into an enormous investment boom. New bridges, roads, and, most importantly, apartments were erected, and all of this development and associated economic activity enabled China to rely less on exports for growth. However, this resulted in a real estate bubble, and when Mr. Xi responded by cracking down on the housing sector in 2020, he set off a profound property recession that has endured.
Mr. Xi's approach to the Covid epidemic also had an impact. To mitigate the pandemic's economic impact, advanced economies around the world opened their government checkbooks to encourage consumer purchasing. The one major economy that did not take significant moves to revive its economy and support households was China, where the virus first spread. He is fundamentally opposed to eliminating government payments or anything else resembling welfare, thinking that consumer stimulus, unlike investment, creates no long-term benefit.
So, while consumers in the United States and elsewhere resumed spending, including on Chinese imports, China was able to recover thanks to other countries' stimulus packages while investing heavily in its manufacturing sector to replace the growth that property was not providing.
In other words, Mr. Xi is making China's trading partners and competitors pay for the government's poor real estate gamble and long-term failure to boost Chinese family spending.
China imports commodities and natural resources like oil and iron ore, as well as advanced semiconductors that it has yet to engineer. However, China's leadership in manufacturing and exports cannot be overstated.
Consider autos, which have served as the foundation for many developed countries' manufacturing sectors during the last century. Around 20 years ago, China was a non-factor in automobile manufacturing. By 2018, it has the potential to build 40 million gasoline-powered vehicles per year, greatly beyond the 25 million required for its economy. It has now added, thanks in part to significant government subsidies for the industry, the capacity to produce 20 million electric vehicles per year, a figure that may soon increase to 30 million. The annual worldwide automotive demand is 90 million cars, and China has the potential to produce almost two-thirds of that.
This pattern is repeated in sector after sector. China produces more than half of the world's steel, aluminum, and ships. China can create many times the present global demand for clean technology sectors such as solar cells and batteries, and there are concerns that it will mimic these triumphs in memory and automotive chips. Furthermore, China has partially compensated for the drop in local steel demand (induced by the housing collapse) by subsidizing the construction and equipping of new factories that employ domestic steel to produce even more manufactured exports for foreign markets.
Overall, China's export volume is rising three times faster than global commerce. This means that China's success is directly at the expense of other countries' manufacturers, who are increasingly unable to compete and are under pressure to exit areas targeted by China. The pattern is unlikely to change while China's real estate market remains stagnant. This points to a global economy in which China has little need for other nations' industrial inputs, leaving other countries reliant on Chinese-made commodities and vulnerable to Beijing's political and economic pressure.
Mr. Trump's tariffs exacerbate the issue. Tariffs themselves are not the main threat. Even a significant change in US policy, such as the universal 10% tariff on imports that he advocated during the presidential campaign, is unlikely to significantly disrupt global commerce if he stops there. American consumers would pay higher prices, while US exporters would suffer reprisal from foreign countries. However, the United States would continue to import heavily, manufacturers from throughout the world could fill some of the markets lost by US exporters, and trading partners could plan accordingly.
However, because of Mr. Trump's unpredictable nature, such planning is extremely impossible. And if he isolates the United States from global trade, no other country can properly absorb all of China's goods. Europe's economy has slowed, and major emerging economies such as India and Brazil are concerned that Chinese imports are undercutting their industrial sectors. China would be stuck if it didn't have access to global markets. The only way out would be for Mr. Xi to make substantial adjustments to China's economy, which he appears to oppose.
Mr. Xi has a one-sided view on trade. Mr. Trump frequently appears to be skeptical of all trade agreements. Between the two of them, the global economy is in for a difficult ride.
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