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In early January, China released its 2024 trade surplus at a staggering $990 billion, shattering the previous record of $838 billion set two years prior. Exports in December also reached new highs with a surplus of $104.8 billion in the month alone. While some economists believe this shows China’s dominance in manufacturing, others argue it shows unsustainable growth with risks of deflation. China’s unprecedented trade surplus risks the escalation of tariffs and eroding trade partnerships.
Today, China has 27% of the world’s industrial production, with the U.N. projecting their share to go to 45% in 2030. In 2024, China’s trade surplus with the U.S. was $360 billion, which has grown 23% in the last 7 years, with their trade surplus with the EU doubling to $250 billion in the same period. China is now the world’s leading exporter of cars and solar power and provides one third of the world’s textiles and electronics. As China provides subsidies to manufacturers in order to keep prices low, they also have had a weakening demand to import goods. This can be attributed to a few aspects, two being a weakening economy and increasing domestic output. Stefan Angrick, senior economist at Moody’s Analytics, says “everything is made in China now,” which is reducing their need to import goods from other countries. China went from importing large amounts of cars from Japan to becoming the leading exporter of cars in the world.
However, China’s growing real estate bust and growing oversupply are starting to strain their economy. Overbuilding factories and housing has hurt many Chinese companies. With millions of construction workers losing their jobs, and many of the large real estate companies defaulting on their debt, many families are wary of spending too much on goods. According to Nicholas Burns, U.S. ambassador to China, “China is making a major mistake in producing two to three times domestic demand”. As supply has grown, prices have been falling for two years in China, which has hurt corporate profits and workers' income. This has raised concerns that China could face deflation or stagflation.
Following China’s announcement of their trade surplus they also announced their Central Bank would stop buying government bonds. Their goal was to slow the trend of investors investing in less risky bonds instead of stocks or real estate, which had been shaken by the fall of their real estate and stock market, which had driven interest rates to a record low. This is the inverse of the rest of the world, which is facing higher interest rates resulting from inflation while China has been facing consistently low inflation numbers, an indicator of stagnation. With the Central Bank stopping purchases of its own bonds, it hopes to slow demand and increase yields on their bonds, creating a different environment than it declared a few days earlier of keeping the supply of money open in order to stimulate growth, a potential worrisome sign.
However, as China’s supply of global products has increased, other countries' shares have had to decrease. Specifically hurting Germany, Japan, the U.S. and potentially poorer countries hoping to grow their production capabilities. This has increased the risk of tariffs, with Trump pledging up to 60% tariffs on products with Chinese parts. Even the EU, which has historically been more cautious, is starting to increase their tariffs on China, implementing tariffs on EVs and looking into discrimination against their medical device producers. Additionally, the UK's Trade Remedies Authority recommending tariffs of 83.5% on Chinese Excavators.
However, many economists believe tariffs could have little or a negative impact on the economy. They posit that the only way to slow China’s dominance is to curb our own spending habits, resulting in a large shift in U.S. consumption and spending.
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