Jeffrey D. Sachs is a University Professor and Director of the Center for Sustainable Development at Columbia University, where he directed the Earth Institute from 2002 until 2016. He is also President of the UN Sustainable Development Solutions Network and a commissioner of the UN Broadband Commission for Development. From 2001 to 2018 he was an advisor to successive UN Secretaries General. Prior to joining Columbia, he spent over twenty years as a Professor at Harvard University, from which he holds a PhD.
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The American playbook -- using trade, technology, financial, and military policies to stop another country -- is not new for the United States. It was, of course, the U.S. game plan to "contain" the Soviet Union during the 1950s-1980s. It was rolled out again in the late 1980s to stop the rapid growth of Japan, an American ally, because Japan was outcompeting the U.S. industry. The United States forced Japan to agree to "voluntary" export restraints and an overvalued Yen. Thus, Japan's economic growth plummeted and Japan entered a prolonged financial crisis.
China, however, is not Japan. It is far larger, more powerful, and not subservient to the United States. Unlike Japan in the 1990s, China need not and will not sit idly by as the United States pursues trade and technology policies to slow China's economic growth.
To understand China's policy choices, recall the national income account identity that GDP equals C+I+G+X-M. That is, China's GDP can be consumed, C; invested, I; consumed by the government, G; exported, X; or used to replace imports, M; China's exports can go to the United States and Europe or to the rest of the world.
In recent years, the U.S. and European markets have become increasingly closed to China's exports. In 2023, the United States imported 427 billion U.S. dollars of goods from China, down from 536 billion dollars in 2022. As a share of U.S. GDP, imports from China were 2.6 percent in 2018, but have declined to only 1.6 percent in 2023, as the result of U.S. protectionism under Trump and Biden.
Now, here then are the policy choices facing China. With the production of goods and services continuing to rise in China, and with exports to the United States falling, China faces an overall excess supply of goods. That excess supply will lower GDP and could even create a recession in China if policy measures are not taken to offset it.
The United States tells China to increase consumption to offset the fall in its exports. For example, China could cut taxes to stimulate consumption. The problem with the U.S. recommendation is that China would likely shift to lower growth and higher budget deficits, as in the United States.
A second option would be for China to increase domestic investments, for example to accelerate China's shift to a zero-carbon economy. There is some merit to boosting domestic investment to offset part of the reduction of exports to the United States.
A third option would be to boost government consumption. That policy too would likely entail slower growth and higher budget deficits.
A fourth option is to increase exports to the developing countries. That approach has a great deal of merit. If the U.S. market is closed, and the European market is closing (as Europe becomes more protectionist), then China can shift exports to the emerging markets. Some of that will happen automatically. As the United States buys less from China and more, say, from Vietnam, then Vietnam will buy more intermediate goods from China to process and export to the United States.
Some of the reorientation of exports, however, will require new Chinese policies. The purchasing power of the emerging economies is generally lower than in the United States and Europe. Yes, the emerging economies would like to buy what China has on offer -- solar modules, wind turbines, 5G, and the rest -- but will need more loans to do so. For China to sell substantially more to the emerging economies, it will have to boost loans and foreign direct investments to those economies, for example by expanding the Belt and Road Initiative and lending by the Asian Infrastructure Investment Bank and the New Development Bank.
There may be some resistance among China's policy-makers to increasing loans to the emerging economies, since some of those economies are already debt-distressed. Yet, the emerging economies generally have a very high growth potential. Their debt is not too high -- as long as the debt has a long enough pay-back period (maturity). The emerging economies mainly need time to grow and thereby to be able to repay China for the loans.
Here, then, is my own summary of the economic situation in China. The supply side of China's economy continues to grow rapidly. China's potential GDP continues to rise at 5 percent per year or faster. Moreover, the quality of that output is high and rising. China is the world's low-cost producer of goods that the rest of the world needs: zero-carbon energy systems, 5G digital networks, and high-quality infrastructure (such as fast inter-city rail).
China's problem is not on the supply side, but on the demand side. China faces demand constraints mainly because the United States has put up barriers against China's exports to the U.S. market, and Europe seems likely to follow the United States in this. While China could potentially offset that slowdown in exports by increasing domestic consumption, it would be well advised to increase its exports to the emerging economies, in part by expanding important programs such as the Belt and Road Initiative. To do so prudently, China would have to increase its long-term lending to the emerging economies.
I don't deny that there are other challenges facing China's economy, such as some temporary over-investment in real estate, or some over-borrowing by some local governments. Yet, I believe that such problems are short-term and cyclical, not long-term and structural. There are also areas that need further reform, to be sure, such as the hukou (urban residence) system. Yet here too, such reform challenges are ongoing and very likely to be solved successfully.
I would like to see China continue its rapid growth, and yes, overtake the United States in GDP at current market prices and exchange rates, befitting a country that is four times larger than the United States in population. I note that in purchasing-power terms, China already overtook the United States in 2017 (according to IMF data) and nothing awful befell the United States.
China's economic growth benefits not only China but the whole world. China has brought forward new and effective technologies ranging from a modern cure for malaria (artemisinin) to low-cost zero-carbon energy systems and low-cost 5G systems. We should be rooting for China's continued rapid development. We should put aside childish ideas of "primacy" and adopt adult ideas of mutual respect, peaceful coexistence, and global cooperation to protect the planet. The world does not want or need a single dominant country. Indeed, that's not even feasible in our world today. The absolute best solution for the world economy would be for China, the United States, and Europe to maintain open trade and mutually agreed industrial policies. Yet if the United States and Europe turn strongly protectionist against China, then the best response for China is to hasten its successful and growing trade and financial relations with the emerging economies.
Part One of ‘China’s economic success in the face of growing U.S., EU protectionism’ was published on 18 April 2024 - Click here to read Part One
This syndicated column is republished with the kind permission of the author.
