How Biden wants China to revamp its growth strategy
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Biden administration officials fear an economic threat from China is looming — that the global superpower is using the same tactics to boost its economy that proved disastrous for U.S. industry when used two decades ago.
Why it matters: That is the subtext of this week's escalation of the trade war between the two nations, including a 100% tariff on Chinese electric vehicles.
- In theory, an economically vibrant China is good for the rest of the world. But the Biden administration says the nation should approach its recovery differently: by supporting domestic consumer demand rather than subsidizing heavy industry.
Driving the news: China's recovery dynamics are evident in the latest round of economic data released Friday.
- Industrial production in China soared nearly 7% in April from the same period a year ago, picking up pace from the 4.5% in March. Retail sales, a gauge of consumer demand, rose only 2% — the slowest pace in two years.
The big picture: China's economy is faltering amid a property crisis and experiencing lackluster consumer demand.
- In an attempt to prop up the economy, China has unleashed huge subsidies for its factory sector that has ramped up production of green technology products, including EVs, solar panels and more.
- There isn't enough demand for its goods at home, so China is exporting them elsewhere in a way that resembles the early 2000s — except now the nation is much bigger.
What they're saying: "China is using the same playbook it has before to power its own growth by investing in significant industrial overcapacity and flooding global markets with artificially cheap exports," Lael Brainard, the top White House economic adviser, said Thursday.
- "China is now simply too big to play by its own rules," Brainard said. "China's industrial capacity and exports in certain sectors are now so large, they can undermine the viability of investments in the U.S. and other countries."
- "There can be no second China Shock here in America," she said.
The intrigue: Treasury Secretary Janet Yellen signaled how China might boost its economy in a new way.
- "The flip-side of a very high saving rate is [that] consumer spending as a share of GDP is quite low," Yellen, an economist, said in Beijing last month.
- "One possible approach would be to boost demand and to see a larger share of GDP approved to households to bolster their income."
What to watch: China is taking the most aggressive steps yet to boost demand — not just supply — with its property sector rescue package.
- Among the efforts: nixing the minimum interest rates on mortgages and cutting the down payments required to buy a house.
U.S. workers who lost manufacturing jobs in the early 2000s due to China's export boom saw substantial declines in their income, according to a new working paper..
- The findings help explain why the Biden administration is willing to act aggressively to prevent a similar outcome, especially as it throws piles of money to invigorate green technology manufacturing.
Flashback: The shift to globalization resulted in a glut of goods that pulled down prices and made it difficult for businesses in certain industries, including manufacturing, to compete.
- U.S. manufacturing workers saw "substantial and persistent" declines in employment and wage growth, with the most severe effects seen in places across the country most exposed to China in the 2000s.
- It also shows the impact of workers leaving the manufacturing sector, a "more complete view of the labor market transitions of manufacturing workers at the onset of the steep increase in import competition from China," Justin Pierce, Peter Schott and Cristina Tello-Trillo write.
By the numbers: Using Census Bureau data, they found that workers who left manufacturing to work in other sectors requiring fewer skills saw nominal wage declines of more than 20% over seven years.
- "Indeed, while workers initially employed in manufacturing have substantial and persistent predicted declines in relative earnings, those outside manufacturing are generally predicted to experience relative earnings gains," they add.
Zoom in: Workers who held onto jobs within the manufacturing sector in this period saw notable growth in their paychecks.
- "Even with the substantial decline in manufacturing employment during this period, the most common outcome is for workers to remain in the manufacturing sector, and these workers experience median nominal earnings growth of 27 percent," the authors write.
