How China's global trade strategy could backfire
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Earlier this week, China's President Xi Jinping embarked on a tour of a few of his country's closest neighbors. Xi Jinping has launched a flurry of diplomacy and his purpose is to canvass support from China's trading partners and to portray China as a victim of Donald Trump's tariffs. That's the FT's Beijing bureau chief, Zhou Lei.

He says that on Xi Jinping's travel agenda are visits to Cambodia, Malaysia and Vietnam. He wrote in the Vietnamese media that in trade wars and tariff wars, there are no winners and that protectionism will lead nowhere. And he also said that all countries should safeguard the multilateral trading system. So he's really portraying China as a champion of globalization.

The reason Xi is checking in with these countries is because he's trying to protect an economic model that China's built over decades. I would say China is comfortably the world's trading superpower. It is simply a country upon which most of the world depends for so many products. And China has this huge trade surplus, which means it exports much more than it imports. Last year, it hit a record of around $1 trillion.

But that status as an exporting powerhouse is now under threat after President Donald Trump imposed roughly 150% tariffs on Chinese goods entering the U.S. There's no way of really playing this down, even though China's putting on a brave face. There's no way that they can sustain the same level of production and exports without having that U.S. market there. So this is a huge blow to China.

And Trump's tariffs on Chinese goods might just be the beginning of the world pushing back on that position. I think this is really a make or break moment for China's economic model. The big question for China here now is where will it sell all of its products? It has this huge surplus of goods and it has to find a market for them now. Or it has to change its own economic model with which it has been very successful for the past 40 years.

I'm Michaela Tendera from the Financial Times. Today on Behind the Money, how China became a global manufacturing behemoth and whether Trump's tariffs could threaten the country's position as the world's leading exporter. Hey, Joe, welcome to the show. Thanks very much, Michaela. It's great to be here. All right. So China plays a massive role in global trade today.

It has the largest trade surplus in the world, which means it's exporting way more than it's importing. But I want to dig a bit more into just how we got here.

So Joe, where do we start? Back in the 1990s, China made, you know, it was a much smaller player in terms of global products. It made less than 5% of global goods in 1995. So the turning point really came in the early 2000s when China joined the World Trade Organization, which opened it up to freer trade, greater competition, and more markets. And the whole thing just took off.

Joe tells me that once China joined the WTO, a lot of factors helped push China to these record levels of production. After China joined the WTO, everything kind of came together. You know, China already had the economies of scale with its vast factories across this enormous country. It had a pool or a population of migrant workers to fuel its factories.

And then it also persuaded foreign investors to come in and transfer their technology. And beyond that, it had a system of subsidies, cheap government credit and land. The whole thing, really, people have written books about this, just combined to give China this enormous competitiveness that we see today. And there's another side to this coin.

China's population really doesn't consume that much compared to, say, the U.S. or the EU. This sort of stems partly from a cultural source and partly it's ideological. The cultural part really is that, you know, historically China has had a scarcity of goods. And even as recently as, you know, during the Mao period in the 50s, people remember

terrible scarcity of food, products, of everything. Ideologically, there's sort of Marxist philosophy which stresses production over consumption. Now, all these factors, the intense production, the low consumption, have been a part of China's trade history for a long time. Beijing has recorded an overall trade surplus for 30 years.

And of course, an effect of that is that consumers in places like the U.S. have been able to buy relatively cheap made-in-China toasters and Halloween decorations, T-shirts, what have you.

But this also led to some friction between China and its trading partners over the years. The Chinese system leads to quite often massive overproduction in certain sectors. So at different points, you got the China shock where you suddenly had goods just flooding out of China like steel in one of the first phases. So everyone was suddenly awash with Chinese steel, putting their own glass furnace out of business.

So China's supply chains are chugging along throughout the 2000s and the 2010s. And in some cases, they're so productive that they're hurting manufacturing in other countries. And then two things happen that absolutely supercharged China's surplus.

The first is in 2020 at the start of the global pandemic. China gets hit, but then it gets things under control with its lockdowns. China's system is uniquely adapted to be able to do lockdowns. So the party can implement these controls probably better than almost any other government in the world.

So while the rest of the world is in chaos, China's locked itself down and life kind of returns to normal within China. And its factories begin pumping out all of the goods that the rest of the world needs. And then the second big event is in 2021. That's when China's property sector crashes. Consumers stopped buying. You know, they thought they had these properties, all of their wealth tied up in that. And suddenly they, you know, that wealth effect is gone and they stop spending.

And as China comes out of COVID, this trend continues. The government thought we'll release the COVID controls, everything will pop back. But it didn't. So what all of this meant was China's factories are still producing, but its consumers are not consuming. And then China's trade surplus with the rest of the world really widened. All this leads China's trade surplus to double.

Now, Joe, help me understand, what's in it for China to have this massive surplus with the rest of the world? I mean, is this the end goal for them? Yeah, I think it's not as though they're aiming to have a massive surplus with the rest of the world. But I think they prefer to have a bit of a surplus than a deficit. And the reason for that is China has never really trusted the

the US and the West. And it's always wanted to have its independence. And it has had various programs over the years that have aimed at developing homegrown technology, whether these range from making its own high-speed trains

or to dominating the world shipping industry. And the idea, I think, for China is really just to have that self-reliance, to have that independence so that if they do get into a fix, especially with the US over things like Taiwan or the South China Sea, they won't be cut off. No one can really cut them off from products because they can make these things themselves. Right. But

Is there any sense that there is some vulnerability to being like an export-led economy? I mean, if domestically consumers aren't buying, does that lead to some level of vulnerability for China? Yeah, this is the great irony of the strategy. Even though the whole thing is about self-reliance, the way that China develops these technologies and these industries is

critics say naturally leads to quite often overproduction. So when the whole country in industrial policy is directed towards developing a single industry, that means that all of the country's business people at the banks, everyone starts pouring resources into those areas and you end up with quite often with just too much production for the domestic market. And you become dependent on global markets. You need to export those materials. And

And now with the rest of the world, not only the US, mind you, but also Europe and even some large developing countries becoming more resistant to this flood of exports, China's in a bit of a fix. It needs to find markets for these goods.

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It's pretty much all he talks about, in a good way. He'd also tell you that this podcast is his favorite podcast, too. Ah, really? Thanks, Capital One Bank guy. What's in your wallet? Terms apply. See CapitalOne.com slash bank. Capital One N.A. member FDIC. So, Joe, I want to shift our focus a bit and talk more about the tariff news of the last week. U.S. President Donald Trump has announced tariffs on Chinese goods of roughly 150 percent.

Now, Joe, you're in China. So what's the reaction been internally to all this news? So there has been this sort of atmosphere of defiance. And we went around last week to Yiwu, a place where there are a lot of exporters. So there's this huge kind of

exhibition halls full of exporters, and we went around and spoke to them. And a lot of those people are kind of reflecting this rhetoric in what they're saying. And they really believe that, you know, China can stand up to the US, that Donald Trump won't force it to the negotiating table. Right. But isn't that just sort of posturing? I mean, certainly global markets have had a different reaction. Yeah. To put it into perspective, these tariffs are, you know,

During the election, Donald Trump spoke about 60% tariffs. So what we're seeing here is twice the worst case scenario that people had been expecting. I mean, these tariffs really are a huge test for China. And now China is going to have to find new markets for

billions and billions of dollars of goods. So when we were going around, you know, when you get scratch a little bit below the surface, you know, beyond the sort of bravado, people were telling us that, you know, some of them have already started laying off staff because they're

They're losing part of their market. There's no way that they can sustain the same level of production. So this is a huge blow to China. Will it bring the economy to its knees? Well, there's a lot that China can do to mitigate this. But we shouldn't lose sight of the fact that this really is the worst case scenario that they could have expected. So, I mean...

What is the path forward for China? How do they navigate this new world of massive tariffs from the US? Yeah, I think there's a number of scenarios here. And China's, on a number of occasions, made it clear that they're ready to talk. So, you know, probably the clearest one would be some sort of negotiation along the lines of the deal that Trump did during his first term, where the two sides, they sort of beat their chests and, you know, there's a bit of a

stand off and then the pain starts to become clear and then the two sides come together and start to talk. And I think that's still, we can't completely dismiss that possibility. The best case scenario, I think, is that they do try to negotiate their way out of this. If that doesn't happen, if the tariffs stay higher than, say, 20% or something like this or 30%,

then, you know, I think China will have to pursue other markets. Right. So you've mentioned this a few times, but what are these other markets that they could choose to pursue? China's most interested in expanding trade with the EU, and the reason's pretty simple. The EU is one of the biggest markets in the world, and it has millions of high-income consumers. Okay, so yeah, that makes sense. But what if the EU doesn't want that?

We've already heard from the president of the European Commission, Ursula von der Leyen, pushing back on that. Our relationship with China is one of the most intricate and important anywhere in the world. But we have seen growing imbalances and risks which come with doing business with China. We need to rebalance this relationship and ensure balance.

that our trade and investment relations makes sense for Europe, both for its economy and its security.

Europe is very concerned about the trade deficit that it runs with China. Last year, that amounted to about 305 billion euros. To put it in other terms, Europe imported from China 2.5 times more goods than it exported to China. And Europe is also concerned about what it sees as China's tacit support for Russia in the Ukraine war. So China will need to negotiate with Europe to give it much more comfort about the trade deficit.

particularly fears in Europe that it may be inundated with Chinese goods as China locks horns with the US in this latest round of the trade war. Well, what are some other options if not the EU? China will look to other regions and countries as well, you know, regions such as Africa or Latin America or Southeast Asia, too, which is already one of its biggest markets as a trading bloc.

Right. And that sort of goes back to Xi Jinping's tour that he's on this week in Vietnam, Cambodia and Malaysia, as you said. That's right. And we're going to see this flurry of diplomacy from China.

And they've been doing this, you know, it's for some time. Even with India, where they had quite a difficult border dispute, the two sides seem to be becoming more friendly. So maybe the upshot of what these Trump terrorists could do could really be to force China to become diplomatically much more powerful. It'll have to have good relations, good trading relations, even better than it has already with the rest of the world.

OK, so we could see a lot of diplomacy here as a way out, either negotiating with Trump or potentially expanding its relations with other countries to absorb a lot of these goods that the U.S. won't be buying.

But what if those paths don't work? Then what might China need to do? In the sort of event that negotiations with the US completely break down, you know, other countries start putting up their tariffs as well to keep Chinese, you know, this excess of Chinese goods flooding the market that would have gone to the US out of their markets. Then you could see China finally forced to

really address its domestic problem, which is how to boost domestic consumption in the country. And that would require a wholesale restructuring of its domestic model to

to really dismantle perhaps some of the system of subsidies and overinvestment in industry and infrastructure and start to channel that money into people's pockets so that they then can consume. But this would be a major change. It would be very monumental if it was done properly in China. And it's still going to be very difficult. Xi Jinping has said that he wants to stimulate consumption. They are talking about this. But so far, we haven't seen the huge...

or structural changes that would be required to bring this about. Okay, so we've talked about a few different scenarios that China can take in this new time of a trade war with the U.S.,

But where do you think things are going, Joe? I mean, what happens next? Yeah, I think first China will retain its position as the world's largest exporter. But maybe it won't have these record surpluses in pure dollar terms that it has had. And let's face it, the U.S. needs a lot of products that China produces even now. And even with these tariffs, the U.S. will have to continue to buy some of these products. So my view on this, it's a very unpredictable situation.

But it really is a game of chicken between these two leaders, Xi Jinping and Donald Trump. And if you look at Trump, he's got markets running against him. He has midterm elections coming. Xi Jinping doesn't really have any of that. There's only one party. Dissent is not tolerated at all.

and financially the government controls most of the banks and it has huge state-owned enterprises. So, you know, the party has a lot of levers to pull here to ensure that if things start to get a little bit out of control, that they can get it back under control again.

So at least in the medium term, Xi Jinping is looking stronger. But if this thing lasts for a very long time and you start to see unemployment climbing in China, the system here is more brittle. He doesn't have those sort of electoral off-ramps that you have in a democracy. So I would say in the short term, Donald Trump's looking weaker. And in the longer term, Xi Jinping has more to worry about. Well, Joe, thanks for coming on the show. Thank you.

Behind the Money is hosted by me, Mikala Tendera. It's produced by me, Safiya Ethmed, and Katya Komkova. Sound design and mixing by Sam Giavinco and Breen Turner. Original music is by Hannes Brown. Topher Forges is our executive producer. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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