Episode summary
Why China's Biggest Strength Is About to Become Its Biggest Problem
Wall Street Week
· · 10 min · Guests: Michael Froman
Summary
Michael Froman argues that China’s biggest strength—its ability to drive growth through manufacturing and exports—has become a global problem and may soon become a domestic one. He says Beijing has built industrial dominance through subsidies, protection, and a system that does not require companies to make a profit, which allows firms to underprice competitors and hollow out manufacturing bases abroad.
He points to China’s $1.2 trillion trade surplus last year and says exports are growing at two to three times global growth, a pace that becomes unsustainable as other countries respond with tariffs and protection. The U.S. has already moved in that direction, and Europe is beginning to face the same pressure as its auto and industrial sectors weaken.
Froman says China has resisted reforms toward consumer-led growth because exports give the Communist Party more control over the economy and over individuals. He argues AI and robotics may help Chinese factories become more efficient, but they cannot replace the scale of exports as a growth engine. He also says the U.S. faces its own structural imbalance, citing an unsustainable fiscal situation and a $40 trillion deficit problem that Washington has yet to confront seriously.
Key takeaways
- Michael Froman says China’s $1.2 trillion trade surplus and export growth at 2 to 3 times global growth are increasingly unsustainable.
- He argues China’s industrial policy works partly because companies are not required to make a profit, which functions as a subsidy.
- Froman says Europe is entering its own “China shock” as Chinese exports pressure autos and other manufacturing sectors.
- He says Xi Jinping resists a consumer-led economy because it would shift power away from the party and toward individuals.
- Froman says AI and robotics may boost Chinese manufacturing, but cannot easily replace exports that account for about 30% of growth.
- He also warns that the U.S. has its own unsustainable imbalance, with a $40 trillion deficit problem and no serious political appetite to fix it.
Notable quotes
“not requiring their companies fundamentally to make a profit, which is perhaps the greatest subsidy of all”
“China has achieved, last year they had a $1.2 trillion trade surplus with the rest of the world”
“at 2 or 3 times the rate of global growth. It's different now when China is the size that it is”
“But $1.2 trillion of exports is about 30% of their economic growth. That's a hard piece to substitute for on AI alone”
How the episode opens
We start with China. President Xi made his visit to Washington this week to keep the discussion going between the world's two largest economies, economies with very different approaches and in very different places. Is there a path forward where both can prosper despite those differences?
Michael Froman is the president of the Council on Foreign Relations. -China has laid out a very ambitious plan to be dominant in sector after sector, and put a lot of money behind it, both subsidies and practices, policies to protect their industries, but also, very importantly, not requiring their companies fundamentally to make a profit, which is perhaps the greatest subsidy of all. If you don't have to make a profit and you can continue to charge less and less for your product, then you're going to both be very competitive at home, but also undermine other manufacturing capacity around the world.
And that's what we've seen going on. On the other hand, the United States has come to the conclusion that we need to rebuild our manufacturing base, we need to reindustrialize, in part because we're dependent on China for critical inputs, even for our military, but also more broadly across the economy. So there's a real effort here to look at what are the policies necessary to rebuild manufacturing and make that a more significant part of our economy.
Westin: When we talk about global trade right now, and this is the United States, but also Europe and elsewhere, I think the word I hear most of is "imbalance. Talk to us about the structural imbalance right now with China's exports. Well, China has achieved, last year they had a $1.2 trillion trade surplus with the rest of the world.
Even though the U.S. had put tariffs on Chinese imports, Chinese imports to the U.S.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- china trade surplus
- export growth
- consumer-led economy
- xi jinping political threat
- global demand slowdown
Watch the episode
Watch “Why China's Biggest Strength Is About to Become Its Biggest Problem” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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