While Beijing makes diplomatic gains in Europe and the Middle East, and Washington worries over China’s growing navy, the country’s economy is losing influence, especially in the United States.
Once America’s No. 1 trading partner, China has taken third place behind Mexico and Canada. Combined, India and Southeast Asia overshadow China’s importance on this side of the Pacific. Part of the change reflects the growing hostility between Washington and Beijing, but that is not the whole story. Much of China’s relative loss has occurred naturally as a consequence of its own development. The decline will likely continue for the foreseeable future.
The erosion cuts across all product categories. Each of the 10 major product groups tracked by the Commerce Department showed a declining share for China between 2022 and 2023. Even exports of toys and games, a mainstay of China-U.S. trade for decades, lost their share of U.S. imports of such products. Especially telling, China lost its share in electronics, a critically important factor in Beijing’s agenda. China’s share fell from 32 percent last year to 27.9 percent in the first half of this year, quite a change in a single year.
Figures from Beijing’s National Bureau of Statistics (NBS) confirm the Commerce Department’s read. Overall Chinese exports declined a whopping 14.5 percent in July from year-ago levels, a deterioration from June’s already troubling 12.4 percent decline. Shipments to the United States led the way down, falling 23 percent from year-ago levels. Shipments to Europe and the Association of Southeast Asian Nations (ASEAN) each fell 21 percent in July. Were it not that demands from sanctions-beleaguered Russia raised China’s sales there 52 percent above year-ago levels in July, the picture for China’s still export-dependent economy would have looked extreme.
U.S. policy accounts for much of this deterioration. China’s problems began in 2018 when then-President Donald Trump imposed tariffs on a range of Chinese imports. He extended that range in 2019. Although President Joe Biden seemed determined to reverse everything President Trump had done, he kept the tariffs in place after he took office in 2021. Intensifying Washington’s anti-Beijing rhetoric well beyond that of his predecessor, President Biden put limits last year on certain U.S. exports to China and advanced subsidies to any firm that would produce semiconductors in this country. This year, his administration placed limits on American investments in Chinese technology. Neither policy directly impinged on Chinese exports to the United States, except that many Chinese exports, especially electronics, depend on imported parts from the United States.
But Washington is not responsible for all of China’s exports shortfall. Beijing has also played a role. Its policies have eroded China’s former reputation as a reliable place to source products. During the COVID-19 pandemic, Beijing interfered with export sales of masks and other needed medical supplies. American, European, and Japanese buyers lost still more confidence in the reliability of Chinese sourcing when for years after the pandemic had largely run its course, Beijing’s zero-COVID policy interrupted production and shipping in a manner that seemed arbitrary.
Of critical importance in this equation, costs in China have risen dramatically faster than elsewhere in the world. Chinese wages have outpaced wages in the West, Japan, elsewhere in Asia, and Latin America. According to the NBS, urban wages in China have risen at an 8.6 percent average annual rate over the last five years. That is almost twice the 4.4 percent average annual rate of wage gains in the United States. To be sure, American wages still stand high above Chinese wages, but the gap is much smaller than it once was and certainly less compelling to business decision-makers. The rise in Chinese costs has become a major reason for Western and Japanese producers and buyers to consider India, for example, Latin America, and Southeast Asia. Especially Vietnam, the Philippines, Indonesia, and Mexico have lured investment and buying attention away from China.
The unfolding situation cries out for China to change its economic development model. For decades, it relied on its reputation for cheap, reliable production to drive growth. Since that is no longer possible, China would do well to reorient its growth model toward greater dependence on consumer needs and domestic demand generally. In the past, Beijing has paid lip service to such a need, but in practice, the nation’s leaders have engaged more in rhetoric about a change than actual efforts to readjust the economy. Indeed, the rhetoric flew in the face of Chinese leader Xi Jinping’s stated goal to become globally dominant in certain product areas. Given the contradictions of the past, it is far from apparent that Beijing is up to the challenge, even as it has clearly become more urgent.
