Tensions are again rising in the global trading system, with China becoming the target of criticism from many sides. US Treasury Secretary Janet Yellen has urged market-oriented allies to present a "wall of opposition” to the country over its excess industrial capacity, which she argues is a result of generous state subsidies and other industrial policies. Similarly, European Commission President Ursula von der Leyen has called for action against Chinese "subsidised products,” from electric vehicles (EVs) to steel, that are "flooding the European market.”The problem is that much of the bashing focuses on specific Chinese government actions, such as Chinese regulators’ recent demand that financial institutions increase credit to strategic industries, like artificial intelligence, and green manufacturing. But these actions are aimed at treating the symptoms of a deeper challenge: excess Chinese savings.China’s national savings rate remains stubbornly close to 45% of GDP, compared to about 26% in the European Union and less than 17% in the United States. For decades, these savings were channelled mostly toward real-estate and infrastructure investment, which long amounted to an estimated 25-30% of GDP. But Chinese households have a per capita living area of over 41 square metres (about 441 square feet), as much as the average European, and China has a highly developed transport infrastructure, with more high-speed train lines than the rest of the world combined. Unless China wants yet more ghost cities and empty highways, a slowdown in construction spending is unavoidable.Something similar happened in Japan in the 1990s, after its property bubble burst. As in China, construction activity had long been financed by high domestic savings. At a certain point, however, property prices stopped rising, and construction investment slowed sharply. Recognising that the savings had to go somewhere, the government sharply increased its own investment spending. But Japan needed only so much infrastructure, and the proliferation of bridges to nowhere forced the government to abandon this policy. With that, the savings surplus had only one place to go: abroad, via a weaker yen and a large trade surplus.Other economies – especially the US and European countries – responded to Japan’s export surpluses with measures aimed at protecting Western incumbents in sectors facing new competition from Japanese producers. When it came to automobiles, in particular, the Japanese government had to agree to "voluntary” export restraints to appease its Western trading partners. Such obstacles to Japanese exports did little to reduce Japan’s trade surplus, which was determined by domestic excess savings, but they did shift competitive pressure to other sectors.Of course, China is much larger than Japan – about 12 times larger by population, and five times larger by GDP. But in its heyday in the 1980s – when the world economy was much smaller than it is today – Japan accounted for about 17% of global GDP and a similar share of global trade. That is not much less than China today. While China will become much more important than Japan ever was – its much larger population translates into huge growth potential – its relative weight in the global economy today is comparable to Japan’s a few decades ago.There are, however, important differences in the two countries’ circumstances – beginning with the geopolitical environment. Democratic Japan was viewed as a pillar of – not a threat to – the world order. By contrast, increasingly autocratic China overtly seeks to overturn the existing global geopolitical order. For the West, this looks like a good reason to attempt to constrain China’s economic power.But there is a second key difference: climate change, which necessitates an urgent reduction in global greenhouse-gas emissions. The technologies needed to replace fossil fuels in energy production require large initial capital investments – say, to construct solar or wind parks – but energy is then produced at essentially zero marginal cost.A capital-abundant country like China thus has a natural advantage in the green transition. In this sense, excess capacity is not a bug, but a feature of an economy with excess savings. In fact, Chinese producers would likely dominate green industries, such as renewables, batteries, and EVs, even without any special government subsidies.Given that a faster green transition benefits everyone, China’s high savings rate should be viewed not as a problem to be solved, but as an opportunity to be seized. Unfortunately, the US is so fixated on its geopolitical rivalry with China that it has effectively closed its market to green Chinese products. US President Joe Biden administration’s recent decision to quadruple the tariff on Chinese EVs, bringing the rate to 100%, is a case in point.The EU is much less concerned about geopolitical rivalry with China. The bloc does not have as dominant a position to lose and is running a large overall trade surplus, with its imports from China falling over the past year. But despite this overall favourable position, the EU Commission recently imposed anti-subsidy duties of around 20% on imports of battery EVs from China. This is a step in the wrong direction, though it is, at least, much more moderate than the 100% tariffs imposed by the US.Instead of implementing protectionist measures to prevent Chinese goods from "flooding” its market, the EU should welcome cheap green goods from China, effectively harnessing Chinese savings to lower the cost of the clean-energy transition. — Project Syndicatel Daniel Gros is Director of the Institute for European Policy-Making at Bocconi University.
June 23, 2024 | 11:39 PM