What Trump gets right about China

US President Donald Trump’s embrace of tariffs has been met with considerable criticism, and for sound reasons. But Trump’s diagnosis of the global trading system – and, specifically, its impact on US manufacturing – may not be entirely wrong. The problem, instead, is the treatment: rather than using a chainsaw, which would probably kill the patient, he should reach for a scalpel.

The existing international order, including the global trading system and the dollar-based monetary system, were established in Bretton Woods, New Hampshire, near the end of World War II. With Europe in ruins, the United States enjoyed undisputed economic dominance, including in manufacturing: in 1948, four years after the Bretton Woods conference, the US accounted for more than half of all goods produced worldwide.

But one product of that conference – fixed exchange rates – turned out not to be all that good for the US, as it contributed to the precipitous decline of America’s share of global manufacturing value-added, from 55% in 1953 to 24% in 1970. US President Richard Nixon’s 1971 decision to de-link the US dollar from gold mostly stabilised this share, which then remained roughly consistent for three decades. But it also turned the US from a surplus country into the world’s largest deficit country, as it fuelled the rise of Japanese manufacturing.

The 1985 Plaza Accord – whereby the US convinced the rest of the G5 (Japan, West Germany, France, and the United Kingdom) to help weaken the dollar – succeeded in shrinking America’s external trade deficit. But these gains were eroded in 1994, when the North American Free Trade Agreement (NAFTA) went into effect, and obliterated after 2001, when China’s accession to the World Trade Organization opened the floodgates for Chinese goods to pour into the US market. In 2001-21, the ratio of US manufacturing exports to imports plummeted from 65% to 45%, and America’s share of global manufacturing value-added declined from 25% to 16%.

So, when Trump complains that Chinese exports have contributed to the decline of US manufacturing, he has a point (the extent to which reducing Chinese imports today would revitalise US manufacturing is another matter altogether). But no one has paid a higher price for Chinese overcapacity than China.

Children are “super consumers”: the more children a household contains, the more it spends. But decades of fertility-control policies have left China with relatively few children. In 1982, three years after the one-child policy was introduced, the country’s total population-to-worker ratio stood at 2.2, reflecting a relatively large number of dependents for each worker (aged 20-59). By 2010, the ratio had plummeted to 1.6, well below the international average of 1.8-2.2. (While this ratio is now rising again in China, it is being driven primarily by an increase in the number of elderly, not children.)

As households shrank, so did their incomes – from 62% of GDP in 1983 to 44% of GDP today. The result has been low and falling consumer demand: since 1983, household consumption has fallen from 53% of GDP to just 39% of GDP, compared to nearly 70% in the US.

Weak domestic consumption left China dependent on a manufacturing surplus – which reached $1.86 trillion, or 10.5% of GDP, in 2023 – to provide jobs. Because the US not only has a huge and voracious consumer market, but also issues the world’s primary reserve currency – and thus provides the world with trade surpluses and liquidity – American over consumption became the natural counterweight to Chinese overcapacity.

This relationship, which historian Niall Ferguson and economist Moritz Schularick dubbed “Chimerica,” initially seemed symbiotic. But it quickly morphed into something monstrous, as it simultaneously destroyed US manufacturing – I was warning of a US-China trade war as far back as 2009 – and perpetuated the imbalance between production and consumption within China. In other words, China’s demographic collapse led to overcapacity.

China’s government has few options for addressing its demographic crisis. Its attempts to loosen fertility rules – replacing the one-child policy with a two-child and then a three-child limit – failed miserably, because low household incomes meant that families could not afford to have more children.

The government seems to be pinning its hopes on an “engineer dividend,” as China boasts more engineering graduates than the rest of the world combined. But college graduates typically find jobs in the services sector, which accounts for only 46% of Chinese employment. When other countries reached China’s current tertiary enrollment rate, their service sectors provided 70-80% of jobs. Little wonder that youth unemployment is skyrocketing in China, and the number of new marriages – the backbone of fertility – are plummeting.

By imposing sweeping tariffs on America’s trading partners, Trump risks severely weakening – or even destroying – the global trading system. Since it is China’s trade surplus that perfectly mirrors America’s trade deficit, any effort to revive US manufacturing should start there. Unfortunately for Trump, the only real solution is to boost China’s fertility rate, and that demands rapid progress in raising Chinese household incomes – something no tariff can achieve.

Yi Fuxian, a senior scientist at the University of Wisconsin-Madison, spear-headed the movement against China’s one-child policy and is the author of Big Country with an Empty Nest (China Development Press, 2013), which went from being banned in China to ranking first in China Publishing Today’s 100 Best Books of 2013 in China.

Accompanying this commentary are charts, which you can download here.