Over the past 30 years, China has changed from an emerging market to an exporting powerhouse. He became the world’s maker, relying on cheap labor and a centralized economy, supplying the world with cheaper items through exports.
The days of export-led growth may be over and the Chinese may need to turn to a new source of economic growth.
The global economy is undeniably slowing and in the short term a slow year for exports. During the pandemic, stimulus measures in other countries fueled demand for imported goods and China thrived under such conditions, hitting new records. Much of this Chinese export demand had been pulled forward, so a slowdown in demand was expected.
Trade imbalances resulted from this increased demand, and the United States responded by alleging anti-competitive practices and government export subsidies. Tariffs have been imposed and remain in place, despite a preliminary trade deal, with China pledging to increase its purchases of US exports. In the two years since the conclusion of this trade agreement, China has fallen far short of its commitments.
Tensions between the world’s two largest economies are on the rise again, mainly over high-tech exports to China. New regulations reduced US exports to produce advanced computer tools and memory chips and restrictions on chip manufacturing assistance.
These restrictions will slow down China’s ability to produce new technologies or improve current applications to remain competitive in global markets. With growing trade restrictions, China will have to transition from export-led growth to domestic demand, which could take several years.
China’s role as the factory of the world has been disrupted over the past 3 years by the pandemic. The disruption was due in part to shutdowns in China, labor shortages for shipping and transportation, and rising costs due to shortages. Customers in developed markets had to reconsider or reconfigure supply changes.
The pandemic has highlighted the risks of concentrating supplies from a single source. These same customers have had to reconsider their supply dependencies and bring manufactured supplies closer to end markets, sometimes referred to as repatriation of supply. Geopolitical tensions and thinking about worst-case scenarios have accelerated this process.
Many Chinese industries are grappling with the move towards cleaner manufacturing and tackling environmental degradation in that country. Efforts to tackle global climate change must include China, as it is a source of 25% of the planet’s greenhouse gas emissions. The transition will carry the risk of not supporting economic growth.
China’s future economic growth is also likely to be inhibited by its aging population. Its population is expected to peak this year, due to declining fertility rates and rapidly aging citizenship. China’s fertility rate is at its lowest level in 70 years and well below replacement levels.
The share of its populations aged over 60 is expected to reach a third by 2050, compared to 19% currently and 10% 20 years ago. This can lead to a decrease in the working-age population and a decrease in labor supply. This can lead to a drop in domestic consumption and a dramatic increase in the need for health care and social security systems.
These factors could lead to significant changes in work habits, labor availability, savings and investment, which would put additional pressures on the economic system.
There are some similarities between the problems facing China and those of the United States, but the differences are important and significant. China is a centralized economy while the United States is mainly market-oriented. The aging of the U.S. population is less severe, and historically the United States has been the primary destination for immigrant labor, especially those with high-tech and specialized skills. The rule of law and an adaptable political system also offer advantages in the United States
David Helcher is senior vice president and trustee of Clinton National Bank.
