If Trump’s China tariffs are now a bipartisan position, their intellectual backbone comes from Michael Pettis, an American finance professor at Peking University who has influenced both the Trump and Biden Administrations. The root of the China problem, Pettis alleges, is the country’s excess savings, low consumption, and industrial “overcapacity,” externalized into exports that are “dumped” onto the rest of the world. To US observers, it is obvious that China should pivot from exporting goods to developing its home market—just as Japan did in the ’80s. The Communist Party’s intransigence can only result from aberrant psychology. Paul Krugman described Xi Jinping as “bizarrely unable” and “bizarrely unwilling” to shift accordingly. In the Wall Street Journal, Lingling Wei blamed Xi’s “deep-rooted philosophical objections to Western-style consumption-driven growth,” which he views as “wasteful,” “welfarism,” and simply at odds with China’s ambitions for global power.
Pettis, however, does not see China’s strategy as bizarre. He notes that moving away from export-driven growth is risky. Any measures to “reverse” the ongoing transfer of wealth from households to government, by redirecting it to wages and welfare, would come with trade-offs. China’s manufacturing would suffer greatly in the short term, creating a “painful” economic contraction without any guaranteed payoff in the long term.
Rather than psychology, then, explanations for Chinese political strategy can be found in recent history. Foremost are the lessons of Japan and East Asia, in both their successes and limitations. As Chinese reformers embraced export-led industrialization in the ’80s, they reasoned that because the country was still a closed circuit, efforts to promote domestic consumption—through higher wages and social welfare programs—would come at the cost of industrial investment. Planners realized they could instead follow the model of their East Asian neighbors by using the markets of the US and other rich countries to subsidize their own growth.
In 1990, heterodox economist Alice Amsden clarified the stakes of the East Asia experience. Asia’s economies, she argued, had broken with the US model of mass production and mass consumption, that is, Fordism. Instead, for “late developers” like those of East Asia, the problem was
not that of too little effective demand but of too much, as different income groups and social classes struggle over the distribution of a puny pie. . . . What [governments] must raise is more foreign exchange, savings and public revenues; for these, and not effective demand, are the constraints on increasing the pie’s absolute size.