Forbes: China’s export game won’t work this time

Forbes has published an article arguing that in the face of mounting economic challenges, Beijing has turned to exporting green products, particularly electric vehicles, to alleviate domestic demand shortfalls. Caliber.Az reprints the article.

Beijing has decided it can export its way out of its economic problems, substitute overseas sales of electric vehicles (EVs) and other green products for the shortfall in domestic Chinese demand for goods and services. But unlike some 25 years ago, when Beijing so successfully pursued export-driven growth, the world now seems unwilling to cooperate. Beijing’s plan is not working and will not work, however much the country’s leadership in Beijing wants it to succeed.

There can be little doubt that China’s economy needs help urgently. The property crisis that began in 2021 when the developer Evergrande admitted financial failure has only become worse. After a long period of inaction by the Chinese authorities, the crisis has dragged down housing sales and construction activity that were as of February respectively 33% and 30% below year-ago levels. Worse, the crisis has undermined the ability of Chinese finance to support growth by saddling individuals and financial institutions with large amounts of questionable debt. What is more, the shortfall in housing sales has depressed real estate values and accordingly cut sufficiently into household net worth and confidence to restrain consumer spending. And because local governments depend on real estate development for revenues, the crisis has also made it difficult for them to service their debts and in some cases even provide basic services.

In the face of this array of problems, Beijing’s planners have failed. For years, they refused to address the property crisis, allowing it to metastasize. More recent responses are inadequate to address the now long-standing burdens of the property failures. Minor interest rate cuts have failed to get a response for months, making further such action all but futile, not the least because the People’s Bank of China (PBOC) insists on taking baby steps. Nor can relatively small amounts dedicated to the so-called “white lists” of projects to get help from the state-owned banks answer for losses in the hundreds of billions of dollars. A second failure is the present effort to emphasized manufacturing and exports.

True this kind of export-driven growth model worked in the past. Indeed, it propelled great growth for China from the 1990s through the 2010s. Things now, however, are different. Back then, China had little option but to count on exports. It was too underdeveloped to have much consumer demand, and what domestic demand did exist came from building needed infrastructure. There was little outlet for the product of Chinese factories. Most important, world markets then could easily accommodate China’s need. After all, China a the beginning of this drive was barely 2% of global exports, while today China is some 15% of global exports, making it a lot harder for other economies to take much more without harm to themselves. Circumstances simply do not look propitious for China to repeat the game of some 25 years ago.

The world’s reluctance to accommodate China’s needs by accepting its exports has become increasingly evident. The United States had placed high tariffs on Chinese products in 2018 and 2019. Now it is considering additional tariffs on EVs, batteries, and other green energy products. The European Union (EU) has complained about Chinese dumping of cheap EVs on its markets and is considering retaliatory tariffs. The United Kingdom (UK) has complained about a flood of Chinese tractors and construction machinery, no doubt because construction declines in China have dried up domestic demands for such products. London is opening an anti-dumping investigation. It has also lodged complaints about electric bicycles. Brazil, India, Indonesia, Chile, and Mexico have complained about Chinese dumping in steel, ceramics, and chemicals. Chile is considering a 15 percent tariff on Chinese steel. India has added Chinese bolts, mirrors, and vacuum-insulated flasks onto its dumping complaints. Indonesia has done the same for synthetic yarns, saying that the flood of Chinese product has put its domestic industry in jeopardy.

Overall, the blowback on Chinese exports is impressive. Just since the start of the year, governments across the globe have announced more than 70 import related measures against China, up from 50 in 2021 and 2022. Clearly, things will not go as they did 25-some years ago. This almost entirely export-driven model will fail. Perhaps for the time being, memories of past successes will blind Beijing’s planners and policy makers to this reality, but time will pull the scales from their eyes. At this juncture, Beijing would do well to re-focus on the country’s still-festering property crisis and thereby lift domestic demand, which is ever the solution in a developed economy, which China has become.