China’s industrial strengths must also benefit its trading partners

The European Commission urges China to take action within the next month to address the widening trade imbalance between the EU and China, potentially leading to new protectionist trade policies. This raises questions about how China and its trading partners should tackle perceived economic imbalances while still benefiting from China's industrial competitiveness.

China's trade surplus reached a staggering US$1.2 trillion last year, despite other exporters seeking control measures. The often-cited explanation for China's industrial success, "overcapacity," does not fully capture the complexity of the issue. China's industrial prowess stems from a multifaceted ecosystem, intense domestic competition, and extensive supplier networks.

China's car industry exemplifies the country's competitive edge. The International Energy Agency revealed that while manufacturing an electric vehicle costs 30% less in China compared to advanced economies, more than one-third of this advantage is not due to batteries alone. The discrepancy for traditional vehicles is comparable.

This advantage lies within China's manufacturing system rather than government subsidies. According to Rhodium Group research, BYD, a prominent Chinese carmaker, enjoys a cost advantage of approximately US$4,700 per vehicle over Tesla's Chinese operations. Subsidies and government support account for only around US$292 of this advantage, primarily owing to vertical integration and reduced research, administrative, and supplier costs.

Textile production in China provides a historical precedent. Despite rising wages leading to some production relocating to countries like Vietnam, Bangladesh, and elsewhere, China maintains a significant share of global textile exports, accounting for over 30%. This success is attributed to China's supplier clusters, infrastructure, skilled workforce, and ability to enhance production capabilities.

However, relying solely on industrial policy and subsidies to explain China's cost structure is insufficient. China has been contemplating a shift towards consumption-led growth for two decades, with the government now articulating its commitment more explicitly. The 2025 consumption action plan includes measures addressing wages, pensions, healthcare, childcare, paid leave, and benefits for migrant and flexible workers.

The government also launched China's first five-year plan specifically focused on consumption, aiming for retail sales of about 60 trillion yuan (US$8.96 trillion) by 2030. While household consumption still constitutes only around 40% of the gross domestic product, Beijing is making progress. Disposable income per capita increased by 5% last year, and consumption expenditure rose by 4.4%. Nevertheless, significant work remains.

China's household savings rate stands at an estimated 32.4% in the first quarter of this year, up from the pre-pandemic average of 29.6%. The government is already allocating more fiscal resources towards pension systems, healthcare, unemployment insurance, childcare, and portable benefits for migrant workers as part of the domestic transformation.

Enhancing household security and wealth would decrease precautionary savings and foster sustained consumption. Likewise, embracing openness to foreign goods and services could bolster import demand. Addressing the sensitive topic of exchange-rate flexibility could facilitate this adjustment; an increase in the yuan's value would enhance Chinese households' purchasing power abroad. However, adjustments must occur internationally as well.

Historically, Chinese companies have produced "in China for the world." Now, there is a shift towards producing "in the world, for the world." China's competitive edge can help support overseas industries through joint ventures, technology, and local-supplier development programs that enabled China's global expansion. Chinese process knowledge, combined with employment and industrial capacity in Europe and other markets, would generate meaningful local value rather than the limited gains from merely assembling imported kits. This outcome would result from closing the doors to cooperation on win-win trade and investment.