We need to talk about China as global economic tensions remain high

Chinese govt made important mistakes during pandemic. It chose to support Russia in its invasion of Ukraine in 2022. Embracing nationalism, it chose hostile behaviour against India in 2017 and 2020

The world has been consumed by the international relations theatre and discussions of economic statecraft after American President Donald Trump’s “Liberation Day”. The tariffs imposed by the United States (US) and the retaliatory measures by China have turned into a trade war between the two giants, and a great deal of disruption for all other countries. As the true impact of the tariffs begins to hit American consumers and businesses, the Trump administration has started to feel the heat from domestic constituencies. There is a possibility of a rollback of the new tariffs even without Chinese concessions. The reversal of US tariffs will represent a capitulation, and many will spin it as a Chinese triumph. But the deeper story is more complicated. Even if we return to the trade status quo that existed before April 1, 2025, China will emerge weaker from this episode. And that has important implications for the rest of the world, and for us in India. 

The Chinese economy ran into trouble well before this trade war. From 2012 onwards, President Xi Jinping has consolidated power, and reversed Deng Xiaoping’s project of political modernisation that had been pursued since 1978. The garb of a populist anti-corruption campaign was used to seize power and destroy the incumbent elite. There was heavy-handedness unleashed on the private sector — in the form of crackdowns on tech giants like Alibaba and Tencent — through the abrupt dismantling of the private tutoring sector, and the detention of influential entrepreneurs. One-party rule and demands for loyalty are incompatible with private-sector confidence. In the face of arbitrary state power and nationalism, elite trust declined (both domestic and foreign) and the great boom ended.

  The Chinese government made important mistakes during the Covid-19 pandemic. It chose to support Russia in its invasion of Ukraine in 2022. Embracing nationalism, it chose hostile behaviour against India in 2017 and 2020. All this led up to “the third globalisation”, where long-standing discontent about Chinese misbehaviour in economic nationalism bubbled up into coordinated action against the country.

  A big part of the Chinese economy was a real estate ponzi scheme, with millions of households blindly buying real estate because they were convinced that prices would only rise. This sector turned and has become a drag on growth. Important real estate developers are on the brink of bankruptcy as thousands of homes stand empty or unfinished. Hence, local government revenue, which is reliant on land, has been undermined, and local governments are facing a fiscal crisis. An ageing population with rising pension obligations makes the fiscal problem hard to handle. If the government raises taxes to meet the fiscal requirements, it further damages an already fragile housing market. If the government bails out the real estate giants, then it damages its already weakened fiscal condition. Real estate is a big part of Chinese household wealth, so these developments on its prices adversely impact consumption.

  The point of this digression is to emphasise that while tariff wars matter to China, they only represent the latest addition to deep-set problems in the economy, which go back to the political system decline under Mr Xi.

  Consider the optimistic scenario, where retaliatory trade policy does not harm the world, where there is an abrupt retreat by Mr Trump in response to rising prices in the US. Does this constitute a victory for China and a return to optimism for the country? No, it does not. There was already a context of Chinese economic distress. The collapse of exports to the US for a month or two causes its own harm. Global interlocutors now see vulnerability to China as an even bigger issue, as compared with the conditions of April 1. For example, China’s blockade on exports of real earth metals will inevitably set off a global effort in constructing a China-free supply chain in such metals. Similarly, we got an announcement by Apple recently that all iPhones sold in the US would be sub-assemblies manufactured in China, and sent into India for final assembly.

  How does this matter for India? To a soft extent, there is a China+1 and China+US+1 idea for global corporations, which can favour India. To harness this, we in India need to improve our policy frameworks to open up to globalisation (goods, services, and capital) and achieve greater safety for the private sector. The disruption of the global production system and the decline in the Chinese economy will be a drag for global growth in gross domestic product, which harms India. India’s exports to China include organic chemicals, ores, cotton, and machinery, and there is direct exposure here. Finally, there was an important problem with Chinese attempts to resolve their macroeconomic distress through government-subsidised factories selling goods all over the world. This will be an even greater issue either directly (with Chinese goods sold in India) or indirectly (with Chinese goods sold in Indian export destinations).

  Domestically, a simplistic adoption of the Chinese playbook — import substitution, directed credit, state-led industrial policy, and government subsidies — should be resisted. These tools are attractive at first glance but do not deliver economic development, as the Chinese distress shows. Instead, the Indian state needs to take measures to reduce regulatory uncertainty, enhance the enforceability of contracts, and create a stable environment for private investment. As global firms seek more predictable jurisdictions in which to diversify, India must achieve a rule-based, investor-friendly destination. Further, financial and macro policy in India needs to achieve a liquid and efficient financial market system and macroeconomic stability (ie inflation stability and a floating exchange rate).

  The mass media revels in the drama of victories and defeats. If Mr Trump backs down without Chinese concessions, this will be spun as a victory of China over the US. The reality is more complex. China is structurally weaker regardless of the outcome of the tariff war, and a weaker China makes for a more challenging global environment. We in India need to achieve state capability in trade policy, macroeconomics, finance, and institutional reform. 

 

The authors are, respectively, a researcher at the XKDR Forum, and CEO, Trustbridge Rule of Law Foundation