Chinese dragon forges ahead amid collapse of property boom and US tariffs

Written by, Dr Ovidiu Tierean, Senior Advisor, PKF Malta

Two decades ago, China shocked the world when it demonstrated that it could manufacture and distribute goods quickly and cheaply on an unprecedented scale, leading to an export boom that transformed world economy and politics.  Now, a new “made in China” shock is sweeping across the globe, flooding markets in Europe, Southeast Asia, and Latin America.

As trade tariffs imposed by Donald Trump have begun to limit China’s access to its largest export market, the United States, Chinese factories are shipping their toys, cars, and shoes to other countries at a pace that will once again transform many economies and the entire geopolitical landscape.

So far this year, China’s trade surplus with the rest of the world is nearly $500 billion, an increase of 40% from the same period last year.  As the trade war between the two superpowers continues, the rest of the world is bracing for an even bigger shock.  China has a lot of stuff to export, and whether the US imposes tariffs on China or not, it’s virtually impossible to stop the flow of trade from changing.

China’s export slump is a result of government policies and the country’s slowing economic growth. To cushion the blow of the bankruptcy of the Evergrande property empire and the housing crisis that has hit millions of first-time buyers, Beijing has been investing heavily in its manufacturing sector, which produces far more than its domestic market can absorb. Despite Trump’s tariffs, Beijing’s policy is unlikely to change, and China’s market share across all product categories has been growing rapidly.

Now, Trump threatens to impose tariffs on countries that import heavily from China.  By redirecting exports to Southeast Asia, Latin America and Europe, China has already reduced the negative effects of falling demand from the United States, but it will lead to possible conflicts with its trading partners who feel the pressure from Washington.

Trump threatens to impose tariffs on countries that are now being flooded with more and more Chinese products, such as Vietnam, Cambodia and Indonesia. Some countries have benefited from increased investment by foreign companies trying to move their factories out of China as quickly as possible.

Other countries have managed to resell imported products from China to the United States, but if they fail to negotiate lower tariffs, domestic companies in Southeast Asia and other regions will be destroyed by their Chinese competitors.

As much as Trump has disrupted global trade with tariffs the likes of which have not been seen in more than a century, the drastic change in the course of China’s exports began long before the US president returned to the White House.  The “Made in China 2025” initiative, launched in 2015, aimed at producing more valuable and sophisticated goods, such as computer chips and electric cars, has led the US and Europe to increase trade tariffs on imports of electric cars, solar panels and other high-tech products.

China's economic model has surprised experts. In traditional economics, as a society increases welfare and thus becomes richer, it produces fewer cheap goods. China increased its welfare but has also increased its production of cheap goods that its economy relied on two decades ago.

This is a challenge because it puts even more pressure on the rest of the world and the economic consequences are already starting to be felt. German companies are increasingly concerned about rising imports from China, which has produced 45 percent more electric cars this year despite falling domestic demand.  As a result, electric car exports have risen 64.6 percent this year, according to the Chinese statistics.

Industries in countries that attracted this influx of Chinese products are now in dramatic decline, facing job losses and bankruptcies.  In Indonesia, an estimated 250,000 people lost their jobs in the textile industry in 2023 and 2024 because of cheap clothes imported from China.  In Thailand and Brazil, automakers have closed factories because Chinese electric cars have flooded the market.

For most countries flooded with Chinese goods, there are only two options: do nothing and watch from the sidelines as local industries deteriorate, or impose trade tariffs and other protectionist measures, as the United States has done with China.

Besides international trade, China is developing advanced technologies, including robots and artificial intelligence, and in some areas has caught up with the United States.  Back in 2018, President Xi said China should not be forced to beg others for technology.  Since then, China has pushed innovation in many strategic sectors: electric car companies are sold all over the world, AI firms are comparable to OpenAI and Google, and China’s factories are filled with cutting-edge industrial robots.

At sea, Chinese-built shipping vessels dominate global trade.  In space, the country has launched hundreds of satellites to monitor every corner of the planet.  Beijing is also seeking to become more self-sufficient in food and energy and is continuing to expand its military.  Thanks to these advances, China is now less dependent on the rest of the world for goods and services.  Imports have fallen to less than 18% of GDP in 2023, down from about 22% a decade ago.

However, China is unlikely to ever become completely self-sufficient. Last year it imported more than $2.5 trillion worth of goods, $164 billion of which came from the United States.  China’s huge population makes it virtually impossible to eliminate its dependence on imports.

President Xi argues that China’s socialist system and planned economy will help the country win the race for future technologies by allowing the state to focus its resources where they are needed most.  But these plans could also have unintended side effects, with many resources wasted on the drive to reduce China’s reliance on imports, which could exacerbate the country’s debt mountain and threaten to further slow economic growth in the long term.

Much of China’s success is due to its ability to channel huge sums of money into the sectors that matter most. China invested $500 billion in research and development last year, three times more than when Xi took over in 2012.  China spends almost as much on research and development as the United States, when adjusted for purchasing power parity.

Chinese companies have bought as many industrial robots as the rest of the world combined. Some factories in China have reached such a high degree of automation that they can operate with the lights off, the so-called “dark factories”.

Yet China still faces serious economic problems: slow economic growth and a standard of living that may never catch up with the United States.  In all countries resources are limited.  If they are used inefficiently, this will drag down living standards in the long run. Add a focused American president on punishing anybody who trades with China.  The next decade will tell if the dragon flies high in the sky or is doomed for a hard landing.