China has embraced dependency on exports as the cornerstone of its economic policy. Mercantilism benefits the Chinese Communist Party and its absolute ruler, Xi Jinping. But it damages the domestic economy and reduces the prosperity of its people. Moreover, Chinese mercantilism harms the global economy, including the economy of the United States.
Chinese mercantilism is characterized by a persistent drive to generate massive trade surpluses with individual countries and with the global economy as a whole. Chinese export industries receive heavy state subsidies as part of an aggressive industrial policy designed to dominate global manufacturing. Through currency management and a relentless pursuit of global market share regardless of cost, China increases its power. For example, China uses its dominance in rare earth minerals and critical metals to influence U.S. policy toward Taiwan and other issues where American and Chinese interests diverge.
In Europe, Chinese export policies are undermining the continent’s iconic automobile industry. China uses the leverage of its vast domestic market to persuade Germany, a country that embraced mercantilism for decades, to keep its markets open to Chinese exports. As China gains market share in Germany, its political influence over Europe’s largest economy increases.
Nowhere is China’s export policy more damaging than in emerging market economies. China’s trade policies limit the ability of low and middle-income countries to industrialize in labor-intensive industries such as clothing, footwear, and leather goods. This strategy has historically enabled countries such as Bangladesh and India to achieve rapid economic growth. China’s export-at-all-costs model has instead stifled the ability of many developing nations to industrialize, raise incomes, and eventually become high-middle-income economies.
Over the past few weeks, China’s mercantilist strategy has also begun to affect the race for artificial intelligence superiority between the U.S. and China. Through a deliberate policy of distillation, copying, and adapting America’s most advanced AI models, China is attempting to undercut U.S. AI companies on price. As part of this strategy, China is promoting open-source AI models through global media channels. The objective is to dominate the global AI market and then use that technological leadership to advance its geopolitical goals, especially the subjugation of Taiwan.
The latest economic data demonstrates how China’s trade policies harm its own economy and households, however. Labor income in China accounts for a significantly smaller share of GDP than in most major economies, with the country directing a much larger share of national wealth toward corporate balance sheets and state-directed investment rather than household incomes. Indeed, household consumption in China accounts for less than 40% of GDP, substantially below the global average of about 60% and the U.S. average of roughly 70%. Chinese citizens generate enormous economic output but enjoy relatively little of it in the form of higher living standards and consumption.
Chinese households maintain exceptionally high savings rates because the country’s social safety net is limited and because residential real estate, the principal source of household wealth, remains in a prolonged downturn. The CCP relies on these elevated household savings to finance its export-driven economic strategy. One response to China’s export policies would be for the U.S. and other major economies to cooperate in pushing back against Chinese mercantilism. But President Donald Trump has generally favored confrontation over multilateral cooperation.
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Ultimately, the U.S. and China are organized around fundamentally different governing philosophies. The U.S. is about liberty, including economic freedom and the pursuit of personal well-being. China’s governing system is centered on preserving a simpler interest.
The unquestioned power of the CCP.
James Rogan is a former U.S. diplomat who later worked in law and finance for over 30 years. Today, he writes a daily note on markets, economics, politics, and social issues. He can be reached at [email protected].