China Has a $1 Trillion Head Start in Any Tariff Fight
China’s trade surplus shows Western efforts to reduce dependence on China are coming up short
Donald Trump kicked off a new era of Western economic rivalry with Beijing when he took office in 2017. As he prepares for his second term, China’s dominance of global manufacturing is greater than ever.
China just posted a trade surplus with the rest of the world of almost $1 trillion for 2024, according to official data released this week. That giant gap between exports and imports—roughly equal to the annual output of Poland—is now three times what it was in 2018 when decades of Western orthodoxy favoring open trade were upended by Trump’s tariffs on Chinese imports.
China today accounts for around 27% of global industrial production, according to United Nations data, up from 24% in 2018. By 2030, the U.N. predicts, China’s share of industry will have risen to 45%—a level of dominance unmatched since the U.S.’s postwar manufacturing heyday or the U.K.’s in the 19th century.
For Washington and its allies, this ascendancy shows that efforts to reduce their dependence on China are coming up short. That suggests it will remain hard for Trump to rebalance U.S.-China trade relations, even if he pushes tariffs higher.
Over the past several years, the U.S. has placed tariffs on billions of dollars of Chinese imports and offered subsidies to chip makers and other companies in strategic industries. To varying degrees, governments from Berlin to Tokyo have embraced a similar policy mix to rejuvenate their factory sectors and shield strategic champions from Chinese competition.
But China has responded by finding other customers, subsidizing its factories and working around the levies by moving production to other countries. Those strategies are keeping China’s factory floor intact for now, though its economic problems are multiplying, with excess capacity, the specter of deflation and collapsing corporate profits all weighing on growth.
The result is an increasingly unbalanced global economy, which many analysts and Western politicians fear can’t continue.
The expansion of China’s global share of production anticipated by the U.N. means other countries’ slice of manufacturing will need to shrink unless something changes. Losers will be manufacturing-led economies such as Germany, Japan, and potentially the U.S., as well as poor countries hoping to move up the development ladder by building factories to compete with China.
Those trends are setting up debates over what, if anything, the U.S. and its allies should do.
Trump has pledged stiffer, across-the-board tariffs on Chinese imports, potentially of 60% or more. His incoming trade chief has floated the idea of imposing tariffs on imports from third countries made with Chinese parts, or made by Chinese companies.
President Biden’s administration married tariffs with new export controls on advanced semiconductor technology on national security grounds, while also tightening rules around U.S. investment in China.
The European Union has been more cautious, but there are signs its attitude to Chinese trade practices is hardening, bringing the bloc closer to the U.S. It levied tariffs on Chinese electric vehicles last year and this week accused China of unfairly discriminating against European medical device makers in its domestic market, setting the stage for further retaliation.
The U.K.’s Trade Remedies Authority in November recommended levying tariffs of 83.5% on Chinese excavators after a monthslong antidumping investigation.
Surpluses all around
The tariffs and industrial subsidies of the Trump and Biden administrations are credited with spurring a wave of manufacturing investment in the U.S., especially in sectors such as semiconductors, and nudging American firms to move some production back home or to other friendly countries.
Still, some economists have voiced doubts over whether tariffs will do much to claw back for the U.S.-led West a bigger share of global manufacturing from China.
China’s goods surplus with the U.S. in 2024 was $360 billion, 23% larger in dollar terms than it was when Trump imposed tariffs in January 2018. The U.S. has reduced the share of its imports that come directly from China, though it still relies on Chinese factories for electronic goods, plastics and pharmaceuticals. It also now vacuums up products made in places such as Vietnam and Mexico with Chinese parts, often in Chinese-owned factories.
China’s surplus with the EU has more than doubled since 2018 to almost $250 billion. China’s surplus with other parts of the world, especially Southeast Asia, has also increased.
China in 2023 vaulted past Japan to become the world’s pre-eminent exporter of cars. Its factories now produce more than a third of global apparel exports, around 30% of global electronics exports, and 22% of machinery exports. In solar power modules, China ships 80% of the world’s exports.
To shore up its position in global trade, China has poured support into its factories in the form of cheap loans and subsidies, bolstering manufacturers’ ability to keep selling at low prices and undercutting rivals abroad.
A weak exchange rate has helped, as has China’s formidable expertise in emerging sectors such as EVs and renewable energy equipment.
At the same time, growth in Chinese demand for the rest of the world’s goods has been anemic. In part that is because of a weak economy, battered by a real estate bust, which needs less iron ore and other commodities. It is also because China has been replacing foreign suppliers of everything from chemicals to cars with domestic ones.
China used to buy lots of German cars and Japanese machinery, said Stefan Angrick, senior economist at Moody’s Analytics in Tokyo. Not anymore. Now China is the world’s biggest exporter of passenger cars and its streets are filled with EVs made by Chinese companies such as BYD and XPeng. Starbucks is losing out in China to Luckin Coffee. Apple is in danger of being eclipsed in smartphone sales in China by Huawei.
“Everything is made in China now,” Angrick said. Though high energy costs and other factors are at play, too, dwindling Chinese demand for the goods of traditional manufacturing powers helps explain why other countries’ manufacturing sectors are in the doldrums, he said. “China just doesn’t need the rest of the world as it did in the past.”
Questions of sustainability
To many economists, China’s $1 trillion surplus isn’t a sign of economic strength, but evidence of an unsustainable growth model that is already creating problems for the country. As supply outpaces demand, producer prices in China have been falling for more than two years, pummeling corporate profit margins and restraining hiring and incomes.
That has left China at risk of sinking into the kind of stagnation that dogged Japan for decades after its stock and real-estate bubbles burst in the early 1990s.
Chinese officials say they intend to boost consumption to counter these and other headwinds and avoid Japan’s fate. But their efforts so far—nudging up pension payments and expanding cash-for-clunkers-style trade-in programs to encourage spending on new cars and appliances—fall short of the kind of deep reforms many analysts say China needs to rebalance its economy and unlock more sustained consumption.
China’s ever-expanding exports have also come in for greater scrutiny in many emerging markets, including India, Indonesia and Pakistan, where officials worry their efforts to industrialize their economies and get richer are being threatened by China’s overwhelming manufacturing strength. Turkey and Brazil are among those countries that have joined the U.S. and Canada in raising tariffs on Chinese steel.
Still, some economists believe the U.S. and other countries that want to rein in China’s factory dominance may have to make other adjustments, including curbing their own spending habits.
In the U.S., years of enthusiastic government borrowing and a shortfall in domestic savings have contributed to the widening trade deficit. Reducing China’s surplus could therefore require not just a monumental shift in China’s economy, but in the U.S.’s, too.
“This surplus is here to stay,” said Brad Setser, a senior fellow at the Council on Foreign Relations and a former U.S. Treasury official. “Just tariffing the bejesus out of China won’t solve this problem.”
Write to Jason Douglas at jason.douglas@wsj.com