The Journal. - Why China Is Risking a Trade War

Episode Date: August 28, 2024

Faced with stagnating economic growth, Chinese leader Xi Jinping decided to go all in on manufacturing and exporting. But, as Lingling Wei reports, the increase in low-cost Chinese goods is squeezing businesses around the world and raising the specter of a new trade war. Further Listening: - How Xi Jinping's Dream Slowed China's Economy  - The Political Cost of China's Faltering Economy  Further Reading: - Why China Is Starting a New Trade War  - China Revives Socialist Ideas to Fix Its Real-Estate Crisis  Learn more about your ad choices. Visit megaphone.fm/adchoices

No nation in the world flexes its manufacturing muscle quite like China. The country makes more things for the world than anyone else, and recently, it's leaning into that even more. The country's own factory sector is on steroids. So basically means to go all in on manufacturing, regardless of domestic demand. China is exporting everything from toys to electric vehicles at an extraordinary pace. Sometimes selling those goods so cheaply, foreign rivals can't compete. And it's shaking up the global economy.

Our colleague Lingling Wei has seen it affecting companies in the U.S. One of the companies is called Cubic PV. It is a company founded by MIT engineers in 2008. So in late 2022, Cubic PV announced plans to build a $1.4 billion wafer plant in Texas to make silicon wafers a key solar panel component. The company then went on to hire engineers, source materials, and make all the preparation work. Manufacturing these wafers for solar panels would have been a step forward for the American

solar power industry. But then, earlier this year, the company had to halt all the production plans, and big reason for that is China. China has nearly doubled its output of silicon wafers, way more than it needs. The extra wafers had to go somewhere. So the extra wafers went overseas, and pushing prices down by about 70%. So cubic PV was like outpriced essentially.

Exactly. So that's why they have to suspend the production plans. As the company told us, a distorted market as a result of China's overcapacity is the reason. And this push to make more stuff leading to this overcapacity problem, why is this such a concern? So this very manufacturing-centric economic policy is really starting to raise the specter of a global trade war. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza.

It's Wednesday, August 28th. Coming up on the show, why China is risking a new trade war. How do stop losses work on Kraken? Let's say I have a birthday party on Wednesday night, but an important meeting Thursday morning. So sensible me pre-books a taxi for 10 p.m. with alerts. Voila! I won't be getting carried away and staying out till two. That's stop loss orders on Kraken, an easy way to plan ahead.

Go to kraken.com and see what crypto can be. Non-investment advice, crypto trading involves risk of loss. See kraken.com slash legal slash ca dash pru dash disclaimer for info on Kraken's undertaking to register in Canada. ["The Daily Show"] For the last few years, Beijing has had a big problem. China's jobless rate for 16- to 24-year-olds hit 21.3% in June. That's nearly four times the national rate.

Over the past year, China's economy and its stock market have gotten beaten up pretty bad. People aren't buying as many homes, so the whole model is slightly falling apart. This is a big problem in China. China's economy these days is in one of the worst downturns in decades. And the big reason for that is a loss of confidence in the leadership's ability to manage the economy. A big piece of evidence is the current housing down term. A lot of measures they have put out so far really piecemeal, not nearly enough to rebuild confidence, broadly speaking, the entire private sector.

So what position did this put the Chinese government in? We have talked to many officials and policy advisors in Beijing, and the picture they painted for us is that last year in particular, the Chinese leadership faced a pivotal crossroads. Officials argued that, you know, China's economic model really needed a fundamental reshaping. Basically, we should focus more on how to booster domestic consumption. Domestic consumption, meaning instead of focusing on exporting goods to the world,

these policy advisors were arguing that Beijing should turn inward and focus on Chinese consumers. It would have been a radical rethink of the country's economic policy. China's manufacturing and exports had been powering its growth for years. How did Chinese President Xi Jinping, who's calling all the shots here, how did he respond to what his advisors proposed? Based on our reporting, Xi Jinping basically ignored all that advice and instead ordered Chinese officials to really double down on this state-led

manufacturing model with billions of dollars in fresh subsidies and credit. In Xi Jinping's view, industrial security really sits at the core of China's economic stability and national security. He looks at a lot of things these days through the lens of great power competition between the United States and China. Xi Jinping decided not to invest domestically.

Rather than move away from exports as an economic engine, he went against his advisors and accelerated it. Under Xi's direction, money flowed into manufacturing, mainly in the form of government subsidies. In April, the People's Bank of China earmarked $70 billion for tech firms. Billions more came from state-owned banks. And the flood of cash did its job. Chinese export volumes are up 10% since 2021. Steel exports alone jumped 36% last year. Xi Jinping was especially interested in investing in

China's high-tech sectors. So building up industries China wants to dominate for the future— the EVs, semiconductors, green energy— while also maintaining the country's traditional areas of strength in so-called old sectors, such as steel. The result is an excess of goods made in China— way more than the Chinese consumer needs or even the global market needs. And because of all the subsidies, the prices on these Chinese goods are artificially low. Economists call this overcapacity.

Overcapacity. Overcapacity. Overcapacity. What is being described as Chinese overcapacity. There's an overcapacity issue with China. So it's the focus on really pushing manufacturing and overcapacity of it. Right. Pushing manufacturing regardless of the demand from the domestic market and aiming at foreign

markets to absorb the kind of overcapacity that is taking shape in China today. And this whole overcapacity strategy has worked before. This plan that Xi is doubling down on is not a new plan, right? China has done something like this in the past. Right, so that's basically a story of how China became the factory floor for the entire world. The first time Chinese goods flooded international markets was just after China entered the World Trade Organization in 2001.

I think it would be a very good thing for the world and a very good thing for the Chinese, China and the WTO. Admitting China into the WTO was a big moment for normalizing trade relations with the West. Chinese exports surged, and so did China's economy. For Western countries, it meant much cheaper goods for consumers. But it also did serious damage to domestic manufacturing in places like the U.S. So that was the start of the so-called China shock. China shock wiped out an estimated 2 million American jobs.

A lot of manufacturing jobs also lost because factories in the Midwest and Southeast of the United States really couldn't compete with low-cost Chinese manufacturers. Despite all of that, there was still a lot of optimism and goodwill about welcoming China into the global economy. How did countries around the world, particularly the U.S., European countries, the West, how did they respond to that? So the reaction from the Western economies

wasn't that strong at all. They didn't mind buying cheap parts from China back then. And also back then, China really didn't produce much of the high-end stuff. It was still pretty low tech. They weren't competing at the same level. Right. A lot of foreign companies wanted access to China's own market.

So they didn't want to put up much of the protectionist measures for fear of losing their own access to China. But times are different now. Fast forward to today, the environment both outside China and inside China has changed dramatically. And Western leaders are pushing back. When you make tactics like these, you're not competing. It's not competition, it's cheating. That's next. Introducing TD Insurance for Business with customized coverage options for your business.

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Global open trade has come under more political scrutiny, and tensions between China and Western countries are higher. That was apparent back in April. Thank you all for being here today. I'd like to begin by speaking— —when U.S. Secretary Janet Yellen visited Beijing. —China is now simply too large for the rest of the world to absorb this enormous capacity.

—Yellen had some stern words for China. —And when the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question. Her key message for the Chinese leadership was a warning, which is, you know, you should really try to deal with this overcapacity problem because, you know, it is really hurting the trade relations. That's our colleague Lingling Wei again. And how big of a threat is China's policy to the global economy? We're seeing a lot of countries that simply cannot compete with China, right?

Because the only way for you to compete is cutting your prices. And cutting your prices means you would have to accept very low profits or even losses. How can you keep your business running when you can't sell your products for profit? That's what happened to Cubic PV, that solar parts company we mentioned earlier. And the consequences of Chinese overproduction are being felt elsewhere, too. An iron ore mine in Chile had to close after cheap Chinese steel made its way to the country. And Qcells, a South Korean clean tech firm, recently said that the company is losing millions a month due to a flood of Chinese goods.

Some of these nations accused China of having an unfair edge because the manufacturing of these products is subsidized by the government. So Chinese officials have been out in force denying the country has overcapacity. The state media has defended China's industrial policy and said our ability to manufacture and export actually should be seen as a positive for the world rather than a problem. And they're saying that the US and some other Western countries are simply, quote, hyping China's overcapacity to try to keep China down. So Yellen gave her warning, but what are Western countries actually doing in response this time around?

The West is coming up plans to how to push back, right? Most recently, we're seeing Canada announcing tariffs on China-made EVs. Shortly, we will be introducing a 100% tariff on Chinese-made electric vehicles. It was right after the Biden administration hiked tariffs on China-made EVs. — Because we're not going to let China flood our market, making it impossible for American auto manufacturers to compete fairly. — Other countries are opening investigations

to see whether Chinese goods are being sold below fair value. India is looking into Chinese pigments and chemicals. The UK is investigating imports of construction equipment. We're seeing countries from Brazil, Vietnam, Argentina, different countries trying to hit back. And that just shows that the potential for a global trade war is real. Lingling says that if these tensions get worse, it could mean higher prices for consumers

and less access across global markets. Is there a chance that this policy backfires on China? The risk for China is you cannot keep counting on other people to buy your stuff, right? Especially at a time of such heightened geopolitical competition between Beijing and the West. Trade tensions inevitably will keep increasing. And then you presumably would get into a situation

where you really get stuck with all the stuff you made. And that would really hurt China's economic vitality and lead to even greater waste, more sharply lowered valuations for Chinese companies. It sounds like China is in a risky position. What are you watching for next? China will react. China will retaliate.

Question is how China will react, how China will retaliate. Big picture wise, this could mean the US economy and the Chinese economy moving further apart. That's all for today, Wednesday, August 28th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.