Barriers to Stimulus Measures
Competition between the United States and China intensifies, as diplomatic tension and economic rivalry escalate between the two global superpowers.
Before diving into the trade wars and reliance on domestic demand, let's discuss the dampeners slowing down China's stimulus measures:
- Fear of Anti-Corruption Investigations: In 2024, over 889,000 officials faced penalties – a 50% increase compared to the average from 2018. This fear deters them from actively participating in spending initiatives, creating a barrier for stimulus measures to take effect.
Escalation of Trade War with the US
China's economic ties with the US are gradually severing due to policies that, purposely or indirectly, push for a complete break between the world's two economic giants.- Global Disruption: Trade wars will influence the global economy, as China accounts for approximately 33% of world production.- Tariff Increases: Current tariff rates are similar to those of the 1930s, and Trump's potential actions - such as restricting or banning US investments in Chinese companies, or delisting Chinese companies from American exchanges - would amplify the disruption.
Dependence on Domestic Demand
China is experiencing a drop in external demand due to low potential economic growth, high unemployment, and deflation. To counteract this, policymakers aim to bolster domestic demand and shift from plain spending to supporting consumption.- Subsidy Programs: Plans include expanding a program of subsidies for household appliance replacement, increasing basic pension payments, and preparing subsidies for families with children (pilot projects are underway).- Limitations: The size of the support program is restrictive – too small to be effective or too large to sustain fiscal stability, especially considering an aging population. Additional measures, such as revitalizing the real estate market, are also needed.
A Growing Black Market
China's evasion of de minimis rules enables businesses to access the US market, despite trade barriers:- Bypassing Customs: Goods are imported via Canada and Mexico as North American products, repackaged and shipped through third countries to the US, and undervalued to fall under the $800 limit and reduce tariffs.- Effective Schemes: Weak control and limited US customs staff make these schemes effective. Only 10% of US customs staff are port-based, and 1.25 billion packages – most of which go unchecked – arrive each year.
The Aftermath of Trade Disruption
- US Inflation: Shifting production out of China is virtually impossible, even with ideal global connections. US industries and construction depend on Chinese supplies, while high-tech Chinese production relies on US components.
- Price Increases and Component Shortages: Tariffs will result in price increases and supply shortages, momentarily invisible to consumers.
- Vulnerable Sectors: According to the OECD, the most vulnerable US sectors are textiles, automotive, machinery, and electrical equipment.
- US Dependence on Chinese Components: US dependence on Chinese components is triple the Chinese dependence on US components due to the difference in production scale.
- China's Vulnerability: China is particularly vulnerable in high-tech sectors like electronics and aerospace, where global supply chains persist despite efforts towards import substitution.
Ideological Resistance
In negotiations, Trump employs a "carrot and stick" approach, but his aforementioned decision may have limited his leverage:- Market Tumult: If Trump raises tariffs again, markets are likely to plummet, eroding intra-party support and threatening financial sanctions.- Changing Perceptions: US free security guarantees no longer appear infallible, its readiness to provide SWIFT access no longer free, and US opposition to the construction of the "Nord Stream 2" pipeline demonstrates this.- Struggling Consumer Market: The US economy is heading towards a recession, supply chains are collapsing, and incomes are being eroded by inflation.- Challenges to US Monopoly: Like all expensive monopolies throughout history, the US's global technological ecosystem now faces challenges from around the world, including from China.
China's Counter Offer
- Global Dominance: China has a leading position in virtually all supply chains, thanks to the supply of critical minerals, intermediate products, components, and equipment, making it incredibly challenging for the US to displace it from the global stage.
- Technological Advancements: China currently invests heavily in key sectors, such as energy transition technologies and renewable energy, to foster technological growth.
- Developing Technological Ecosystem: China's technological ecosystem is rapidly developing and boasts several globally recognized innovations, putting it on par with US tech giants.
- Capital Availability: Cheaper capital availability compared to most other countries allows China to invest abroad in various sectors.
- Domestic Consumer Market: Stimulus measures put into effect have created a massive, increasingly affluent domestic consumer market.
In conclusion, as the US and China navigate trade wars, China focuses on shifting its growth model to rely less on external demand and more on domestic consumption, with potential solutions coming in the form of targeted monetary and fiscal measures, boosting domestic consumption and innovation, and structural reforms. However, overcoming the challenges presented by the US tariff impact, domestic demand weakness, property sector instability, market volatility, and overcapacity/inefficiency will require a coordinated and adaptable economic strategy.
- The fear of anti-corruption investigations among Chinese officials is a significant barrier to the effectiveness of stimulus measures, as it deters them from actively participating in spending initiatives.
- In 2025, potential actions by Trump, such as restricting or banning US investments in Chinese companies, or delisting Chinese companies from American exchanges, could amplify the disruption caused by the escalating trade war between the US and China.
- To counteract the drop in external demand, China's policymakers aim to bolster domestic demand and shift from plain spending to supporting consumption, as part of this strategy, they plan to expand a program of subsidies for household appliance replacement.
- China's evasion of de minimis rules allows businesses to access the US market despite trade barriers, this is achieved through goods being imported via Canada and Mexico and undervalued to fall under the $800 limit and reduce tariffs.
