When the war arrived, they expected it to culminate quickly.


Judging by their actions in 2019 and 2020, they perceived that the probability the war would soon end was over 90%.


When Mr Trump left office and the tariffs did not go with him, their hopes evaporated.


The probability of an end to the war fell to 46% in 2021 and to 24% by 2024.


The results have a paradoxical implication: entrenchment of tariffs under President Joe Biden did more harm to trade than their imposition under Mr Trump.


Would a second trade war be as damaging?


The sheer recklessness of Mr Trump’s latest threat is double-edged.


On the one hand, a sweeping 60% tariff would be far more disruptive than the targeted 25% tariffs he imposed in 2018.


But their vertiginous height may make them harder to sustain.


If they annoy too many consumers, hurt too many American firms or exact too big a toll on the stockmarket, they may prove relatively short-lived.


Chinese exporters did not take Mr Trump’s trade threats seriously before 2018.


Although they will not want to make the same mistake again, the most damaging of Mr Trump’s policies are ones that outlive his time in office, becoming a permanent feature.


And not everything Mr Trump says in his presidential campaigns comes to pass.


He never followed through on his desire to restore official relations with Taiwan.


In Beijing, Bush tried hard to quell the anger his remarks had caused.


“I certainly respect your views on wanting to stay out of the American election,” he said in response to China’s foreign minister.


“I’d like to stay out of it myself sometimes, because it gets pretty hot in the cross-fire.


” For China’s exporters and the American firms that buy from them, this year’s election will be just as uncomfortable.


|San Francisco and Singapore

Finance & economics | Still coupled
How Trump and Biden have failed to cut ties with China
It is hard to overcome economic incentives

Donald Trump and Joe Biden do not agree on much, but they are of a similar mind when it comes to America’s trade relations with China.


They believe that the world’s largest economy is simply too reliant on its second-largest.


Thus American officials travel the world touting the benefits of “friendshoring”—or shifting production out of China and into less risky markets.


Business leaders make positive noises, and are sincerely worried by China’s weak economic growth, not to mention its volatile politics.


The number of comments in earnings calls referring to “reshoring” has exploded.


Yet how much of this is anything more than talk?


Last year The Economist argued that lots of the supposed decoupling between America and China is in fact illusory.


Look closer, we wrote, and the two countries’ economic relationship is holding strong, even if this fact is masked by tricks on both sides.


Since then a growing body of evidence confirms, and strengthens, our original findings.


The economies of America and China are not coming apart.


Indeed, some changes to supply chains may be binding the two countries even closer together.


A complete picture of Chinese-American trade would cover trade in services, including America’s use of Chinese apps and China’s love of American films.


But these flows are difficult to track, meaning that economists have focused their attention on trade in goods, which customs officials measure reasonably accurately.


Here, the headline figures will cheer Messrs Biden and Trump.


Last year Mexico overtook China as America’s largest source of imports.


Since 2017 the share of America’s imports coming from China has fallen by a third to around 14%, according to American figures.


A chunk of that decline came after Mr Trump implemented high tariffs in 2018.


Another chunk reflects growing worries about China’s territorial ambitions: if China invades Taiwan, many Asian supply chains will become unworkable.


The headline figures do not tell the whole story, however.


To understand why, start with Mr Trump’s tariffs, which Mr Biden has largely kept in place.


Before their introduction in 2018, American statistics suggested that America received many more imports from China than did Chinese statistics.


China reports that its exports to America rose by $30bn between 2020 and 2023, whereas America says its Chinese imports fell by $100bn.


If China’s data are correct, the country’s share of American imports has still declined, but by much less.


What accounts for the gap between the measures?


Adam Wolfe of Absolute Strategy Research, an advisory firm, suggests that the switch reflects the fact that American importers have an incentive to underreport how much they are buying from China in categories covered by tariffs.


Mr Wolfe estimates that, as a consequence, America now understates its imports from China by 20-25%.


At the same time, in recent years the Chinese government has cut taxes on exporters, reducing the incentive for domestic businesses to undercount goods leaving the country.


Other data provide additional reason for scepticism about decoupling.


“Input-output” tables, as published by the Asian Development Bank, show the share of a country’s economic activity that can be traced back to others.


Examining 35 industries, we calculate that in 2017 the Chinese private sector contributed on average 0.41% of American firms’ inputs.


That may not sound like much, but it beat the 0.38% that came from Germany and the 0.24% from Japan.


By 2022 China’s share had more than doubled to 1.06%, a larger proportional increase than for either Germany or Japan.


It is hard to know exactly what is behind this trend.


America’s attempts to build clean-energy infrastructure could be one factor, making imports of Chinese electrical equipment much more important.


American service-sector firms also appear to be increasingly reliant upon intellectual property owned in China.


Whatever the cause, the figures are hard to square with supposed decoupling.


Developments on the Chinese side also push against decoupling.


China’s leaders have no intention of relinquishing their country’s role in global supply chains, even as its biggest trading partner is half-heartedly trying to cut it off.


In December the Central Economic Work Conference, China’s agenda-setting economic council, made expanding trade in intermediate products (those used to make finished goods) a priority.


State banks are redirecting credit from property to manufacturing, raising the prospect of a glut of Chinese exports.


And many of the new titans of Chinese industry, like Contemporary Amperex Technology, a battery firm; BOE Technology Group, a producer of organic light-emitting-diode displays; and LONGi Green Energy Technology, which makes components for solar panels, are well placed to benefit from this strategy.


Indeed, the growth of these sorts of companies is already having an impact.


We estimate that since 2019 China’s global exports of intermediate goods have risen by 32%, compared with a rise in other sorts of exports, such as finished goods, of only 2%.


The surge is driven by exports to countries such as India and Vietnam, which are two of the American government’s preferred trading partners.


American trade with these countries is, in turn, increasing—from 4.1% of its goods imports in 2017 to 6.4% today.


In combination, these trends imply that the two countries often act as something akin to packaging hubs for goods made with Chinese inputs that are destined for America’s shores.


Across the world, many such arrangements are emerging.


Take the case of India, where the government is trying to build up its manufacturing base.


Following the introduction of subsidies, mobile-phone exports have soared, suggesting that India is eating China’s lunch.


However, in a recent paper Rahul Chauhan, Rohit Lamba and Raghuram Rajan, three economists, point out that the import of mobile-phone parts, such as batteries, displays and semiconductors, has also jumped.


India appears to be more of a mobile-phone go-between than it does a smartphone powerhouse.


Vietnam’s trade with America is booming.


But its production remains deeply intertwined with Chinese supply chains, meaning that much of the increase may be accounted for by products with little Vietnamese content.


In the most extreme cases, Vietnamese exports are essentially rerouted from China, as America’s Department of Commerce occasionally gripes.


The correlation between Vietnam’s exports to America and its imports from China is now significantly higher than it was before Mr Trump’s tariffs were put in place.


This suggests that that the South-East Asian manufacturing high-flyer increasingly plays a role as a conduit, matching Chinese production to American demand.


In Mexico the situation is a little more complicated.


Standards established by the United States-Mexico-Canada Agreement require a higher “regional-value content”, meaning that exports are scrutinised to ensure production was conducted in North America.


In some industries where Mexican exports to America are booming, such as the production of cars, the growth is difficult to attribute to decoupling, since China has never exported large quantities of vehicles and parts to America: in 2018 it was the source of just 6% of American imports of such goods.


All the same, Mexico’s imports of Chinese industrial supplies have surged, rising by about 40% since 2019.


Even in America’s backyard, decoupling is not going to plan.


The overall picture is therefore clear: Chinese supply chains may be less visible, but they remain extremely important to the American economy.


Mr Trump has threatened enormous tariffs on all Chinese products should he become president in November.


Such levies may be enough to encourage some companies to move out of China for good.


Aggression from Xi Jinping—whether in Taiwan or elsewhere—could have a similar impact.


Over decades, some countries that currently act as a final step in production lines may develop more impressive industrial capabilities, and challenge China’s position.


In the absence of dramatic shifts in American or Chinese policy, do not expect much to change any time soon.


Many countries are more than happy to play both sides—receiving Chinese investment and intermediate goods, and exporting finished products to America.


Economic efficiency, provided by China’s huge scale and manufacturing expertise, is a powerful force in favour of the status quo.


Decoupling may be strong rhetoric, but that is not quite the same thing.


By Invitation | American trade policy
Donald Trump’s former trade chief makes the case for more tariffs
There are economic, geopolitical and moral reasons to increase protectionism, says Robert Lighthizer

WHEN AMERICA grew in the 19th century from a modest agricultural country into the world’s largest economy, tariffs were critical to its success.


In recent decades, however, the T word has become toxic to some.


Free-trade purists argue that tariff increases destroy capitalism.


When tariffs rose during the Trump administration, and that didn’t happen, the purists claimed that we should ignore the facts and rely on their antiquated economic models.


Now that Donald Trump has proposed a modest tariff on many goods and larger tariffs on Chinese products, Americans deserve a reasoned public discussion.


His stated objective with the broader tariff is to reduce America’s trade deficit and to rejuvenate American manufacturing.


The China tariffs are designed to help America prevail in that all-important geopolitical competition.


But the notion that tariffs are always good or always bad is guided more by theology than by reason.


The truth is that they are often beneficial.


In a pretend world of completely free and balanced trade and no government interventions, one can imagine tariffs being unnecessary.


In the real world, though, they can be useful.


Since the end of the cold war, America has come as close as almost any major country in history to eliminating significant tariffs.


It was a bold experiment, and it has failed.


America has run up more than $17trn in cumulative trade deficits over the past 24 years.


Now, foreign interests own over $18trn more in American assets than Americans own in all their countries.


Foreigners will get the future earnings associated with those assets, and Americans will have to work harder to make up for the earnings they have lost.


These massive trade deficits also drag down American economic growth.


Countries with persistent trade surpluses artificially lower global demand.


Rather than expanding global production by buying foreign goods (how trade is supposed to work), such countries use massive market distortions to replace foreign production capacity with their own and use the proceeds of trade to buy long-term assets in countries with deficits.


This slows growth in the deficit countries, particularly America.


These facts help to explain the collapse of American manufacturing, and, importantly, of advanced manufacturing.


Today, America annually imports $218bn more high-tech products than it exports.


It invented personal computers, yet now virtually none are made there, and those that are require imported parts.


It led the world in making semiconductors in the 1970s and 1980s, yet today it makes only 12% of global supply and is wholly dependent on imports for the most advanced chips.


America has fallen behind China in cutting-edge sectors such as advanced batteries, nuclear-power equipment and drones.


None of these developments result from the type of “comparative advantage” you read about in economic textbooks.


Instead, they result from the industrial policies of other countries.


South Korea doesn’t have a great steel industry because it has cheap ore.


Taiwan isn’t a great semiconductor-manufacturing centre because it has inexpensive silicon.


China’s manufacturing dominance was largely paid for by its government.


These and other countries benefit from a mix of subsidies, domestic market restrictions, lax labour laws and numerous other policies aimed at giving their companies an edge in global markets.


In the case of China, its government distorts the market by allocating resources to manufacturing and away from consumption.


As a result, its per-capita consumption is very low.


Letting consumption rise to natural levels and allocating more resources to individuals is inconsistent with the communist theory of personal austerity and could threaten Communist Party control.


America should change its own policies because making things matters.


There is an obvious national-security benefit from having a vibrant manufacturing base.


America doesn’t just need munitions factories.


In times of war it needs basic manufacturing, so it can scale up in order to, for example, make the steel used to build new defence plants.


Furthermore, as economists like Harvard’s Ricardo Hausmann and MIT’s Cesar Hidalgo have shown, manufacturing a wide range of complex products is essential to building a high-performing economy.


Despite accounting for around 11% of American GDP, manufacturing creates 35% of annual productivity increases and pays for 70% of business research and development.


No sector employs more super-STEM (high-end science, tech, engineering and maths) workers.


Because the ability to innovate is closely related to proximity to production, losing factories has a multiplier effect on growth.


But the greatest evidence of the failure of free-trade policy can be seen in the effect it has had on America’s middle and lower-middle class.


The economy has lost millions of high-paying jobs, and the earnings of many American workers have been largely stagnant for decades (with the exception of a large jump in 2019).


As a result, inequality has increased rapidly: the top 1% of Americans now own more wealth than the middle 60%.


This stagnation has devastated many communities.


America has experienced an alarming increase in “deaths of despair”: suicide, drug overdoses and alcohol poisoning.


Non-college-educated Americans now have a life expectancy nearly nine years lower than that of people with a degree.


For most of American history workers could expect to be economically better off and to live longer than their parents.


There are, of course, numerous causes for this calamity, but a failed trade policy is clearly one.


The question then becomes: how can tariffs help?


Of course, they are a tool that should be used in conjunction with a pro-growth tax policy, a reduction in unnecessary regulation and the use of subsidies to develop key sectors like semiconductors.


But because America’s economic imbalances are driven primarily by global trade flows, tariffs are the vital part of any serious reindustrialisation.


Economists have long recognised that in cases where significant distortions cannot be removed from a market, a second-best option is to take steps to offset the distortion’s effect.


As Michael Pettis, an economist, points out, offsetting such foreign interference actually makes markets more efficient and increases the benefits of trade.


For example, if a country subsidises a product or if a company dumps in another market, global rules allow the use of tariffs in response.


In circumstances where the exporting country’s trade distortions are systemic, broad tariffs may be the only way to offset them and reinstate market forces.


Before covid-19, real median household income in America rose from $70,840 in 2016 to an all-time high of $78,250 in 2019.


From January 2017 to January 2020 the number of jobs in manufacturing rose by 419,000.


The pandemic temporarily disrupted manufacturing growth.


However, the tariffs have mostly remained in place, and from January 2020 to January 2024 American manufacturers added another 194,000 jobs.


Sector-level data confirm that tariffs supported domestic production of tariffed goods.


According to a study by the non-partisan United States International Trade Commission (ITC), America’s Section 301 tariffs drastically reduced its dependence on imports of strategic goods from China and spurred domestic production of those goods.


In the wake of the tariffs, imports of Chinese semiconductors, for instance, declined sharply (the largest annual fall being 72% in 2021) and American production increased (the largest gain being 7.8% in 2020).


The broader multi-country tariffs had an even more pronounced effect on domestic production of tariffed goods.


The 25% steel tariffs, for instance, led to $22bn in new investment in steelmaking across the industry.


Now, with relief from the pressure of foreign overcapacity, American producers are modernising their mills and building electric arc furnaces.


Furthermore, the price effects have been minimal.


According to the ITC, the price of domestic steel increased by a mere 0.75% and overall steel prices by about 2.4%.


Likewise, restrictions on imports of washing machines led to the opening of two new facilities, in Tennessee and South Carolina.


Washing-machine prices fell back to pre-tariff levels after a brief adjustment spike, according to the Bureau of Labour Statistics.


Granted, other studies have concluded that retaliation from China blunted some of the tariffs’ positive effects.


But none of these studies challenge the ITC’s core finding that the tariffs boosted domestic production and employment in the tariffed sectors at a negligible cost to consumers.


Donald Trump has proposed a 10% tariff on all imported goods to offset economic distortions created by foreign governments, to reduce America’s trade deficit and to speed up its reindustrialisation.


Experience suggests that this will succeed and that high-paying industrial jobs will be created.


Indeed, a recent model from the non-profit Coalition for a Prosperous America, which unlike many other trade models does not unrealistically assume full employment, concluded that the tariffs will lead to an increase in real household income and millions of new jobs.


Mainstream economists disagree with the notion that tariffs would increase household income, but in the pre-covid Trump years we did raise tariffs and median family income rose, too.


In some cases tariffs higher than 10% will be needed.


By using a mix of massive subsidies, low borrowing costs, forced technology transfer, near monopolisation of input material and a relatively closed market, China has created an industry that makes electric vehicles (EVs) much more cheaply than Western companies can.


It is now flooding the EV market in Europe and threatening producers there with severe harm.


It would do the same in America if not for 25% tariffs imposed by the Trump administration in 2018.


If China’s efforts to manipulate the EV market succeed, tens of thousands of American workers will lose their jobs and fall out of the middle class.


In addition, America will send untold billions of dollars to an adversary that will use them to strengthen its armed forces and further threaten America.


Critics of the global 10% tariff allege that, if implemented, it will stoke inflation.


There is much reason to be sceptical of this claim.


To start, tariffs were raised in the Trump years and inflation stayed below 2%.


Second, even an ardently anti-tariff think-tank, the Peterson Institute for International Economics, found that the direct effect on inflation of Section 301 tariffs was an increase of just 0.26 percentage points.


Furthermore, countries with persistent trade surpluses that implement pro-manufacturing policies have tended to have lower inflation rates than countries with deficits.


This suggests that there may be little correlation between acting to protect your domestic market and your domestic inflation rate.


Finally, it is worth noting that the driver of personal inflation for most Americans is energy, fuel and food prices and the cost of health care.


These generally are not imported and would not be subject to tariffs in the Trump proposal.


Both economic and geopolitical facts strongly support the planned tariff increases.


But there is also a moral case for them.


Americans deserve productive jobs, strong families and thriving, safe communities.


The free-trade policies of the past 30 years did not create any of this.


The wreckage they have left behind is all around us.


Properly used tariffs can be part of the solution.


|Mexico City

The Americas | The China-Mexico-US triangle
Could there be a US-Mexico trade war?


The bilateral trade deficit has exploded since Donald Trump was president

Mexican and US officials were cheered by trade data released in February.


It showed that Mexico overtook China in 2023 to become the number-one exporter to the United States (see chart).


The value of goods sold has been rising steadily, and reached almost $476bn for the year; the equivalent figure for Chinese goods fell sharply, from $536bn in 2022 to $427bn in 2023.


The last time Mexico overtook China, in 2002, it was a blip (and Canada held the top spot).


Today its rise has the whiff of a new order for global trade.


Data for January 2024 show the trend remains strong.


United States’ efforts to decouple from China and bring supply chains closer to home are intensifying, pushing trade through other countries.


An updated free-trade agreement between the United States, Mexico and Canada, known as USMCA, has been in force since 2020.


It supports Mexican exports of car parts, medical supplies and agricultural products to the United States.


But the third side of this trade triangle, between Mexico and China, is creating tension.


China’s firms did not sit idle while incentives were created for companies to look beyond its shores.


They have been pushing into the same markets where the US aims to supplant China, including Mexico.


This means many Chinese exports are simply taking “a slightly longer road to get to the same place”, says Ana Gutiérrez of IMCO, a think-tank in Mexico City.


China appears to be promoting this strategy.


In December the country’s leaders said it was a priority to export products that are used to make finished goods, rather than the finished goods themselves.


Mexico is an attractive beachhead into the United States because USMCA gives tariff-free access for goods made with enough North American content.


Mexico’s official customs data show no sustained influx of goods from China.


But some US officials and industrialists believe Chinese inflows are being undercounted, whether deliberately or not.


The suspicion is that Mexico turns a blind eye to imports from China, and that those are then re-exported to the United States.


Steel and aluminium are the main concern.


In February Katherine Tai, the United States Trade Representative (USTR), noted a “lack of transparency regarding Mexico’s steel and aluminium imports from third countries”.


In December Mexico imposed tariffs of up to 80% on some steel imports from China, but US officials remain frustrated.


Setting tariff levels is one thing; actually enforcing them is another.


“What we’ve seen is that USMCA has really become a US, China and Mexico deal, where China is trans-shipping a lot of product through Mexico,” says Jeff Ferry of the Coalition for a Prosperous America, a group that represents manufacturers.


Electric vehicles are a looming concern.


The price of the average EV in China is roughly half that in the United States, and China produces more than half the world’s output.


Without hefty tariffs in place, Chinese EV sales in the United States would probably boom, much as they have in other countries.


President Joe Biden’s administration is mulling raising tariffs on the vehicles above their current level of 25%.


USMCA has rules against unfair subsidies and market practices, which are common among Chinese companies.


But in many cases no law or rule is being breached.


Mexico offers Chinese automakers a path around the tariff wall because USMCA’s rules of origin contain what one US official calls “loopholes” that allow for the integration of Chinese components.


An importer can assemble Chinese components in Mexico and label Mexico as the country of origin, obscuring Chinese involvement.


“New tools may be needed,” says the official.


There is already a large car-manufacturing industry in Mexico, and Chinese money is pouring in, especially to northern states that are the biggest exporters to the United States.


In February BYD, China’s most successful EV manufacturer, said it would make 150,000 vehicles a year in Mexico.


BYD says that production will serve the local market, but many companies are eyeing the larger, wealthier market north of the border.


Chinese foreign direct investment in Mexico hit $2.5bn in 2022.


Margaret Myers, of the Inter-American Dialogue, a think-tank in Washington, notes the “remarkable growth” of sophisticated manufacturing by Chinese companies in Mexico.


What might the United States do about this?


In the case of steel and aluminium imports, it could copy its approach with the EU and Japan, where there are limits on the volumes that can be imported at lower tariff rates.


Higher tariffs kick in after those limits have been reached.


When the Trump administration lifted steel and aluminium tariffs on Mexico in 2019, it was on the condition that Mexico restrain export surges into the United States.


Some would like new rules to cut China out of supply chains entirely.


“If you want to be a trading partner with the United States, we’re not going to allow your country to be a stopping point for goods from China,” says Mr Ferry.


That would mean restrictive rules of origin and a tighter enforcement regime.


It would also raise thorny questions about how to treat production by Chinese-owned factories in Mexico.


Robert Lighthizer, who was the lead trade negotiator during Donald Trump’s presidency, has said that a first step would be to strip China of its most-favoured-nation status.


That would automatically ratchet up tariffs on Chinese products across the board.


Enrique Dussel of UNAM, a university in Mexico City, says this would unmoor the world trade system.


“The United States [would be] saying ‘adopt my rules or you’re against me’.


”
If Mr Trump wins in November, he is likely to adopt a harder stance toward Mexico.


As well as Chinese trade, there is also the issue of migration.


But perhaps most importantly Mr Trump loathes trade imbalances.


The United States’ trade deficit with Mexico rose to $152bn in 2023, up 17% from 2022.


In 2026 Mexico and the United States, along with Canada, have to discuss whether to extend USMCA’s validity by another 16 years, to expire in 2052 instead of 2036.


Mr Trump signed USMCA, but that is no guarantee that he would not scrap it, or use its extension as leverage to extract concessions from Mexico.


He has already talked of a 10% import tariff on goods from all countries, which is not possible for Mexico and Canada under USMCA’s rules.


Mexico seems unprepared, says Mr Dussel.


Claudia Sheinbaum, who is expected to be elected Mexico’s next president in elections on June 2nd, is promoting “nearshoring” to raise Mexico’s economic growth to 5% of GDP annually.


“Mexico has an enormous sign reading ‘Welcome China’,” says Mr Dussel.


The question confronting Mexico is the extent to which it is willing to risk its vital relationship with the United States, to keep that welcome sign shining.


China | Chaguan
China and America trade blame for a world on fire
A global contest is under way to recruit like-minded countries as supporters

MOST COUNTRIES have no desire to choose between China and America.


But it is becoming clear that they might have to.


The contest between the two powers is going global.


This is an age of political turmoil, economic angst and rising barriers to trade.


In Beijing and Washington leaders see opportunities to blame rivals in the other capital for making the chaos worse.


For now, this contest often sounds surprisingly high-minded.


Because so many countries fear a conflict between China and America, the two giants have cause to play the responsible, constructive great power.


China’s leader, Xi Jinping, duly adopted a gracious tone when he hosted America’s secretary of state, Antony Blinken, in Beijing on April 26th.


Earlier China’s top diplomat, Wang Yi, had accused the Biden administration of trying to contain his country with “endless measures to suppress China’s economy, trade, as well as science and technology”.


But Mr Xi wished to talk about the “bigger picture”, namely that “the world today is undergoing transformation not seen in a century”, and that “we live in an interdependent world and rise and fall together.


” He suggested that China and America should help one another and avoid “vicious competition”.


Amid the warm words, Mr Xi offered a rebuke, noting that China opposes alliances and American-led “small blocs”.


That is code that China uses when accusing America of endangering peace by maintaining defence alliances with Atlantic partners in NATO, and with its Indo-Pacific partners, Japan, the Philippines and South Korea.


China’s hostility to American-led alliances and blocs is an argument about power.


It is also a challenge to the legitimacy of America’s presence as a security guarantor in Europe and Asia.


On May 5th Mr Xi will leave for a five-day visit to three European countries, France, Hungary and Serbia.


Each of those countries is praised by Chinese diplomats for its commitment to “strategic autonomy” and an independent foreign policy, meaning a willingness to defy America.


Previewing Mr Xi’s visit, Lu Shaye, China’s ambassador to France, reminded Chinese reporters in Paris of the moment, 60 years ago, when France’s then president, Charles de Gaulle, had the courage to withstand “heavy pressure from the Western camp” (ie, America) to establish diplomatic relations with China.


In Beijing the embassies of other European Union countries grumble that efforts to reach a consensus on China policies are routinely blocked by one member—Hungary.


That diplomatic stance is directed from the top by Viktor Orban, the Hungarian prime minister and an avowedly pro-Chinese, pro-Russian champion of “illiberal nationalism”.


Mr Xi’s stop in Serbia is timed to coincide, to the day, with the 25th anniversary of NATO’s bombing of the Chinese embassy in the Serbian capital, Belgrade.


Three Chinese journalists died in that bombing and China has never accepted America’s insistence that the attack was an error.


When Russia invaded Ukraine in 2022, Chinese officials blamed NATO for provoking Russia by expanding to take in former Soviet-bloc countries.


Nearer to home, China pushes the same line that America is an unwelcome, troublemaking presence when it sails warships through the South China Sea, in international waters that China claims for its own.


Still, as this contest for influence gathers pace, America has its own arguments to make about China isolating itself.


In his meetings in Beijing Mr Blinken suggested that China is imperilling its own interests in three ways.


The first involves Chinese harassment of coastguard ships and fishing boats belonging to the Philippines, an American treaty ally, as China asserts claims to almost the entire South China Sea, in defiance of international law.


Mr Blinken pointed to a dramatic strengthening by the Philippines of its ties with America, and to unprecedented displays of support from such regional allies as Japan, South Korea and Australia.


Second, Mr Blinken told his Chinese hosts that European security has for many decades been a “core interest” for America—a deliberate use of a phrase often uttered by Chinese diplomats.


Europe’s security is threatened by Chinese companies selling large quantities of microelectronics, machine tools and other dual-use components that Russia needs to make weapons for its war against Ukraine, Mr Blinken told his hosts.


China needs to choose between propping up Russia and its desire for close relations with Europe, the secretary of state argued, citing views expressed to him by multiple European leaders.


As Nicholas Burns, the American ambassador to China, puts it: “The government in Beijing needs to understand that Putin’s aggression on Ukraine is an existential threat to Europe.


That is why the Europeans have been so angry with Chinese companies selling dual-use items to the Russian defence industry.


”

Finally, Mr Blinken said that many countries share American concerns about Chinese industrial overcapacity leading to goods being exported at artificially low prices.


He cited EU investigations into solar panels and electric vehicles from China, and Mexican and Brazilian probes into alleged dumping by Chinese firms.


China is not ready to give ground on these points.


Its diplomats blame America for instigating tensions in the South China Sea.


They insist—against all evidence—that China is a neutral observer of the Ukraine conflict.


As for surging Chinese exports, its embassy in Paris recently declared in a statement that talk of Chinese overcapacity actually shows that Western industries have lost their competitive edge.


China and America are in a long-term contest for global influence and leadership.


Both rivals need all the friends they can get.


Briefing | The great regression
The world’s economic order is breaking down
Critics will miss globalisation when it is gone

IN LATE APRIL, for the 75th time in a row, America blocked a mundane motion at the World Trade Organisation to fill vacancies on the panel that is the final arbiter of disputes among the group’s members.


The relentless vetoes, obscure as they might sound, have in effect completely defanged the WTO for almost five years.


Members that are found to have violated its rules can simply appeal against the decision, to a panel that is not functioning for lack of personnel.


While the appeals moulder, the transgressions go unpunished.


Two years ago, at one of the WTO’s biennial summits, members resolved to get the dispute-resolution mechanism up and running again by this year.


At the latest summit, earlier this year, having failed to do so, they instead decided, without even a hint of irony, to “accelerate discussions”.


The dysfunction at the WTO is emblematic of a world where the institutions and rules intended to foster international trade and investment are falling into abeyance.


Every day brings alarming new headlines.


The European Union, although supposedly both more supportive of free trade and more determined to reduce its greenhouse-gas emissions than other economic powers, is on the verge of imposing duties on Chinese electric vehicles.


Last month EU officials raided a big Chinese security-equipment maker as part of a probe into subsidies.


America recently imposed sanctions on more than 300 entities, including some in China and Turkey, for providing support to Russia’s armed forces.


The proliferation of subsidies and sanctions is one of the most obvious signs of the unravelling of the “international rules-based order”, as policy wonks like to call it.


Institutions like the WTO were created to remove barriers to the movement of goods and capital and so foster trade and investment.


This process has gone into reverse, with the obstacles multiplying as the rules fray.


This unhappy regression—call it deglobalisation, for want of a better term—is beginning to become visible in the economic data, as investors reprice assets and redirect capital in a less integrated world.


Although these shifts have not yet had much impact on global living standards, they constitute a giant and alarming gamble: that the enormous reductions in poverty brought about by globalisation can continue without it.


In the aftermath of the second world war, the global economy was a Wild West.


Many countries imposed big tariffs on goods to build up domestic industry.


Governments regularly expropriated assets from foreign owners: it happened at least 260 times to American investors abroad between 1961 and 1975, according to an official report.


Even when foreign investors were tolerated, they were not given the red-carpet treatment.


Consider George Cohon, the McDonald’s executive who led the effort to set up a branch of the fast-food chain in the Soviet Union in the 1970s and 1980s.


Foreigners were forbidden from taking money out of the country, making it impossible for the firm to earn a return on its investment.


Its only option was to reinvest any profits within the Soviet Union and hope that the rules would change in the future.


Getting permission to open was also a slog.


“This is a hamburger; this is an order of French fries,” the late Mr Cohon recalled having to explain to surly bureaucrats in his memoir.


At one point he was made to wait in a hotel room for 17 days for a contract to be translated and typed up.


The end of the cold war, however, helped stitch the global economy together more tightly.


A consensus emerged, however fragile and reviled: that it was easier for economies to grow through integration than self-isolation.


Governments abolished many capital controls (including the ones that prevented McDonald’s from taking profits out of what had become Russia).


Many countries even surrendered some sovereignty to allow the emerging system to work better.


One of the reforms that accompanied the evolution of the General Agreement on Tariffs and Trade (GATT) into the WTO in 1995 was the creation of a binding mechanism to resolve trade disputes—the one that America is now sabotaging.


Politicians tried to court foreign investors like Cohon, rather than the other way round.


This was always an incomplete process, in China in particular.


But flows of trade and investment soared.


In recent years cross-border trade and investment have stopped growing (see charts 1 and 2).


Three big scourges are undermining globalisation: the proliferation of punitive economic measures of various sorts, the sudden vogue for industrial policy and the decay of global institutions.


The punitive measures do not typically take the form of higher tariffs.


Although a few big countries, such as America and India, have been raising them, tariffs remain low by historical standards—and many governments continue to cut them.


In Canada and Japan average tariffs are still falling.


Australia recently abolished close to 500 tariffs unilaterally.


There is little sign yet of the sort of tit-for-tat escalation that hobbled the world economy in the 1930s.


But the world’s governments are imposing trade sanctions more than four times as often as they did in the 1990s, according to the Global Sanctions Database, a research outfit.


Western governments have put hundreds of sanctions on Russia in retaliation for its invasion of Ukraine.


America is placing ever more restrictions on China to thwart its technological ambitions, especially in semiconductors.


Governments are also screening foreign investments more carefully and often barring investments in “strategic” companies.


“The number of FDI regimes and regulatory enhancements is growing around the world, particularly in Europe,” according to White & Case, a law firm.


In America in 2022 (the latest official data) the Committee on Foreign Investment in the United States closely scrutinised 286 proposed deals, up from just 97 in 2013.


The British government recently approved the sale of the country’s largest chipmaking facility to an American firm, after blocking a bid from a Chinese-owned entity.


A senior Canadian minister has boasted that his government has blocked a number of Chinese bids for mining companies, saying that the move had gone down “very well” with the American authorities.


Other countries are going to greater extremes and actually expropriating assets.


Earlier this year Mexico’s government ordered the seizure of a hydrogen plant belonging to a French firm.


In March lawmakers in South Africa voted to confiscate land without compensation when it is in the national interest.


A year ago Chile announced plans to expand the government’s role in the lithium industry markedly.


Russia’s defenders complain that Western governments are discussing plans to expropriate Russian assets held abroad and divert the proceeds to help Ukraine.


The second big change is the rise of industrial policy.


Politicians are frantically competing to build up domestic supply chains and local industries—not in coal and steel, as in the post-war period, but in clean energy, electric vehicles and computer chips.


By one count governments around the world adopted over 1,500 policies to promote specific industries in both 2021 and 2022, compared with almost none in the early 2010s.


On the fiscal side, America is funnelling billions of dollars to favoured firms to boost production of clean energy and computer chips.


Last month TSMC, a chipmaker that has been promised vast state funding, announced that construction of a big new plant in Arizona was on track.


Well-funded schemes to boost domestic manufacturing include “Made in Europe”, “Make in India” and “A Future Made in Australia”.


Canada’s government dubbed last year’s budget its “Made-in-Canada plan”.


It is in subsidies, rather than tariffs, that a tit-for-tat escalation is occurring.


A new paper published by the IMF finds a 74% probability that a subsidy for a given product in a big economy is met with a subsidy for the same product from another big economy within a year.


The third change relates to global institutions, which are a shadow of their former selves.


The IMF used to have almost exclusive power to resolve poor countries’ debt problems.


But with the rise of alternative creditors such as China and India, it is finding that job more difficult.


Each part of a debt restructuring, including steps that were once formalities, are often now subject to protracted negotiations.


A growing number of countries, especially in sub-Saharan Africa, are nearly or already unable to service their debts.


Yet resolving such crises is proving almost impossible.


The organisation, chastened by widespread complaints that its policy prescriptions were too harsh in the 1980s and 1990s, now devotes growing attention to questions of climate change and inequality at the expense of its overarching mission of instilling sound macroeconomic management.


In the latest edition of its flagship annual publication, the “World Economic Outlook”, the word “reform” appears 63 times, compared with 171 times in the edition of 30 years ago.


The most moribund multilateral institution, however, is the WTO.


Since the collapse of a 14-year-long negotiation in 2015, all talk of expanding free trade or deepening protections for it has fallen by the wayside.


This year’s summit only just managed to extend a moratorium that, had it lapsed, could have seen countries imposing tariffs on cross-border transfers of data, including software and music.


With the appeals process frozen, governments can adopt capricious policies with little fear of censure.


In the past year an index of “trade-policy uncertainty”, produced by economists at the Federal Reserve, has been nearly twice as high as the long-run average.


The effects of these three scourges are predictably grim.


An index that tracks references to economic uncertainty in prominent publications is at twice its average level from 1997 to 2015.


Not only has global trade in goods stagnated; the same problem now afflicts services, too.


Cross-border investment is in retreat, as well, as a share of global gdp.


Both long-term (direct) and short-term (portfolio) flows are well below their peaks.


Companies are retrenching, to avoid geopolitical rifts in particular.


The share of American corporate profits coming from abroad is falling fast.


Western law firms and banks are pulling out of China.


After Russia’s invasion of Ukraine in 2022, McDonald’s quit the Russian market.


A new Russian-owned restaurant, “Delicious, full stop”, has taken over many of the American chain’s outlets.


(As if to bear out Cohon’s proselytising about the benefits of globalisation, the new restaurant has received poor reviews.


)

Those investors still willing to venture abroad expect a higher rate of return.


The Economist analysed data published by the Federal Reserve on stocks and flows of cross-border investment.


For years the gap between American investors’ returns abroad and that on risk-free Treasury bonds was shrinking, suggesting that the world was becoming a safer place.


But in recent years the gap has widened again, pointing to growing global instability (see chart 3) .


Another sign of deglobalisation comes from relative prices—how similar prices are for the same goods and services in different places.


In a seamless market, variation should be small as firms and consumers seek out the best deals and incomes in poorer areas catch up with richer ones.


Before the pandemic average prices in Britain’s costliest region were only about 10% higher than in its cheapest, for instance.


For years the variation in relative prices around the world was declining, signalling a convergence.


But in recent years progress has stopped or even gone into reverse (see chart 4).


Admittedly, economists’ dream of a single global market was always a distant prospect.


Some services are hard to trade—a lawyer or barber in Rome will struggle to attract customers from Auckland—meaning that prices are unlikely ever to converge fully.


But growing global variation suggests that the world economy is atomising rather than integrating.


The reduced efficiency that this entails does not seem to bother the many politicians who are embracing deglobalisation.


So far the economic damage has been limited.


Last year global GDP grew by a respectable 3%.


Some of the countries that have embraced isolationism most enthusiastically, including America and India, are growing especially quickly.


That has prompted some to argue that deglobalisation will actually boost growth.


The golden age of globalisation caused an unprecedented decline in global poverty.


The number of Chinese living in extreme deprivation, for instance, has fallen from 800m to almost zero.


“Starting around 1990, developing economies began to grow more rapidly and catch up to the higher income levels enjoyed by advanced economies,” says Douglas Irwin of Dartmouth College.


Research published in March suggests that inequality within countries has declined, too.


Moving away from global integration thus presents a massive risk to the world’s poor, in particular.


Nonetheless, politicians appear wedded to deglobalisation, which they see as a means to secure a slice of “the industries of the future”.


Narendra Modi, who is about to be re-elected as India’s prime minister, is spending vast sums on a “production-linked incentives” scheme to boost its share of global manufacturing.


China’s leaders, meanwhile, are spending a fortune to strengthen their country’s position as the global leader in clean energy and electric vehicles.


Donald Trump, who may win a second term as America’s president in November, is mulling a 60% tariff on all Chinese goods.


He may well revive an old threat to quit the WTO altogether.


Joe Biden, the incumbent, is only slightly better.


He is convinced that subsidies can turn a services-dominated economy back into a manufacturing powerhouse.


The EU, for its part, wants the WTO to allow space for industrial policy in future trade deals.


At the same time tensions between the West and China make economic warfare ever more likely, even as they reduce the chance of meaningful reform to global institutions.


As deglobalisation gathers pace, its true costs are likely to become clear.


Leaders | Biden’s baleful barriers
America’s 100% tariffs on Chinese EVs: bad policy, worse leadership
The global trade system is disintegrating as you read this

Although it is unfashionable to say so these days, one of the great accomplishments of the past half-century was the remarkable decrease in global tariffs.


This reduction, from average levies on imports of more than 10% in the 1970s to 3% today, helped fuel a boom in international commerce and a near-tripling in global GDP per person.


The more that countries opened up, the more they flourished.


So it is deeply regrettable that President Joe Biden has decided to impose tariffs of 100% on electric vehicles (EVs) made in China.


Because trade benefits consumers broadly, but harms specific workers and companies that are able to organise resistance, it has always carried political costs.


Today those costs loom large in politicians’ minds.


The consensus required to underpin an open trading system is disintegrating, a process accelerated by the fact that China is not playing fair, as well as the rise of Donald Trump’s America-first vision.


Politicians in America from both parties argue that they need to increase tariffs on a wide range of goods.


China is heavily subsidising its manufacturers, giving them an edge in global markets.


And, they add, the security risk of letting in Chinese cars is too great, since EVs are easily tracked and monitored.


But Mr Biden’s tariffs are a blunt tool for dealing with them and will bring underappreciated economic harms to America and the world.


Return, for a moment, to first principles.


As David Ricardo laid out more than two centuries ago and experience has since shown, it makes sense for governments to open their borders to imports even when others throw up barriers.


Residents in the liberalising country enjoy lower prices and greater variety, while companies focus on what they are best at producing.


By contrast, tariffs coddle inefficient firms and harm consumers.


America learned this the hard way in the 1980s, when Japanese carmakers—in Washington’s crosshairs—agreed to quotas, driving up their prices in America.


The “big three” carmakers continued to churn out clunkers.


Today’s American firms fear competition from BYD’s Seagull, some versions of which cost less than $10,000 in China.


Now, they can sell inferior cars for three times the price.


This gives American motorists little incentive to switch to greener wheels, as Mr Biden says he wants them to.


You might argue that tariffs were inevitable, because America’s green subsidies would otherwise flow to Chinese firms.


That is true, but it shows how one inefficient policy leads to the next.


Even less excusable is how the Biden administration went about imposing its tariffs.


Governments are rightly keen to manage the political costs of trade.


That is why the rules-based trading system has mechanisms against unfair competition.


Although economists welcome cheap imports, politicians can fight back if they worry that an influx would hurt specific industries and towns.


Since the second world war, America has generally used the power of example to establish the trade-off between economic efficiency and political reality.


The latest tariffs reject such mechanisms.


The administration could have set out how Chinese EVs had gained from huge subsidies and then hit them with calibrated countervailing duties.


It could have documented the security threat it claims they pose, rather than offering scary conjectures.


Instead, it covered its protectionist aims with a fig-leaf: the new tariffs were put on top of Mr Trump’s, which were themselves originally justified by China’s theft of American technology.


The real fear about Chinese EVs today is not that they are stealing from America, but that they have left American cars in the dust.


America’s blatant disdain for the need to make a rigorous case has dangerous consequences.


At home it invites more firms to seek protection.


Republicans and Democrats are already vying to offer the steepest barriers: Mr Trump has warned that he will put tariffs of 200% on cars made by Chinese-owned plants in Mexico.


Abroad, protectionists will follow suit as China exports its surplus around the world, dealing another blow to the trading system that America once championed.


Brazil is increasing tariffs on EVs and the European Union may soon do so, too.


America is still leading global trade policy—but in the wrong direction.


|Delhi

Finance & economics | The art of the deal
Rumours of the trade deal’s death are greatly exaggerated
Plenty of countries are in a dealmaking rush

In some parts of the world, not least America’s capital, “trade” is a dirty word.


Both Donald Trump and Joe Biden now champion protectionism, and neither president signed a single new trade deal.


The World Trade Organisation (WTO) is a shell of its former self.


So you might think that trade deals are history—but in fact, from South Asia to Latin America, dealmaking continues apace.


To understand the new landscape, start with the birth of the modern trade deal.


The first half of the 20th century saw escalating tariffs and two world wars.


Then, in 1948, the General Agreement on Tariffs and Trade (GATT) was signed in an effort to temper zero-sum competition.


The construction of the World Trade Organisation (WTO), which formalised continuous negotiations, followed in 1995.


One of its core principles is the “most-favoured nation” clause: if you change tariffs on one country, you must do so for all the others, too.


The one exception is the free-trade agreement (FTA), through which countries can gain access to each others’ markets by cutting tariffs and aligning standards.


Such deals proliferated after the fall of the Soviet Union, with an average of 13 a year struck in the 2000s (see chart 1).


That was until China’s rise led many to rethink the system.


The WTO was accused of ignoring China’s distortive trade practices, and Mr Trump blocked new appointments to the WTO’s dispute-settlement committee, in effect defanging the organisation (a practice that Mr Biden has continued).


All the while new FTAs have become rarer, with just three signed in 2023.


Yet despite the headline numbers, interest in strengthening trade links is not dead.


Dmitry Grozoubinski, the author of “Why Politicians Lie about Trade” and a former trade negotiator, observes that dealmaking is slowing in part because countries have signed so many already.


With 370 deals currently in force, there are few new potential partners left to court.


Meanwhile, some countries are actively pursuing negotiations.


Data from the WTO show that eight major economies—Australia, China, the EU, India, Indonesia, Israel, South Korea and Turkey—have each put at least three new trade deals into force in the past five years (see chart 2).


Different governments are pursuing different strategies.


The EU has been striking “everything deals”, with chapters covering both trade and topics ranging from climate to gender.


India is pursuing more targeted and streamlined deals.


It took less than a year to complete one with the United Arab Emirates, signed in 2022.


A deal with Australia, also signed in 2022, avoided many of the extra provisions the EU is keen on.


A third, with a bloc comprising Iceland, Liechtenstein, Norway and Switzerland, created targets for these countries to invest $100bn in India and create 1m jobs.


If these are not met, India can renege on some of its tariff cuts.


India’s approach, says one of its government’s former trade economists, has been to sign deals that open up complementary sectors in each country, to avoid hurting existing exporters.


Many emerging economies’ interest in new deals stems from a desire to attract businesses that want to be less exposed to China.


“The less people trust your system, the more signing trade deals can lock in elements of your business climate and provide investors [with] certainty,” observes Mr Grozoubinski.


He points to the Gulf states as especially active in this regard.


The Gulf Cooperation Council (GCC) has recently signed deals with South Korea and Pakistan, and is negotiating with Britain and China.


“The Emirates, Saudi, the GCC…they’re in negotiations with…nearly everybody,” Mr Grozoubinski says.


Alongside such traditional deals, trade policies that skirt the typical FTA framework are becoming more important.


For many countries, “there’s a sense that the WTO is not doing it for them, that FTAs can be too much work and attract too much attention”, says Kathleen Claussen of Georgetown University.


Average WTO tariff levels are already less than 10% globally, so “there’s not much juice left to squeeze,” she adds.


Even Uncle Sam has been quietly forging new trade links.


Under-the-radar “mini-deals” focus on non-tariff barriers and do not go to Congress for approval (though many such deals are not legally enforceable).


A common approach is the mutual recognition agreement, under which countries promise to rubber-stamp products certified by each other’s regulators.


In a paper published in 2022, Ms Claussen counted some 1,200 mini-deals on America’s books.


The same year Mr Biden unveiled the Indo-Pacific Economic Framework—not a trade deal, but what American officials call an “arrangement”.


Mini-deals can plug gaps in domestic policy.


America’s Inflation Reduction Act included exceptions to its “Made in America” requirement for subsidies, for countries with which it has an FTA, but neglected to include important allies such as Japan and the EU.


So America later signed a “critical minerals agreement” with Japan and classified it as an FTA, despite the deal hardly resembling one.


“Mini-deals are sort of becoming a form of insurance against protection,” says Mr Grozoubinski.


Negotiations for a similar deal are under way with the EU.


Other countries are using mini-deals, too.


Japan has an expedited process for passing trade policy that does not alter domestic law, as does the EU.


A paper by Lucian Cernat of the European Commission, published in 2023, counts some 2,000 mini-deals struck by the EU since 1962, dwarfing the 40-odd FTAs it has in force.


Such deals can have a significant macroeconomic impact.


Another paper by Mr Cernat observes that mutual recognition agreements have historically boosted exports of affected products by between 15% and 40%, more than many FTAs.


America and the EU are negotiating an agreement that would cut certification costs by more than the cost of many tariffs, and would affect some $200bn in annual trade flows, far more than the total affected by FTAs between the EU and many smaller countries.


In much of the world, non-traditional deals are likely only to grow in importance owing to the rise of the digital economy, says Devon Whittle, a former trade negotiator for Australia.


A health-care firm operating across borders, for instance, may face many different data-privacy rules that are hard even to catalogue.


Removing such barriers is a huge part of modern trade negotiations, and does not require an FTA.


In recent years, countries including America, Japan and Singapore have pursued standalone deals for digital services.


Some would like to formalise the new system of targeted deals that often skirt the WTO.


A recent essay by Peter Harrell, a former official in Mr Biden’s administration, argues for sectoral agreements in which like-minded economies strengthen supply-chain links to reduce their dependence on adversaries.


This would supercharge what is already happening through some mini-deals in fashion today.


But as Mr Whittle says, “some governments may be willing to push at the boundaries”.


After all, if Mr Trump returns to the White House, plenty more rules will be broken anyway.


Finance & economics | The Tijuana two-step
How Chinese goods dodge American tariffs
Policymakers are unsure what to do about a tricky loophole

Queues of idle trucks trying to enter America are standard fare at Mexico’s border.


Recently, however, vehicles at the Otay Mesa crossing, which separates California and the city of Tijuana, have been lining up to get into Mexico.


The trucks do not travel far—they offload their shipping containers in newly built warehouses just 15km south of the border.


The goods are then separated into thousands of small packages and driven back to America.


Although such imports are made in China and purchased in America, no tariffs are paid.


The two-step is a way in which some retailers make use of a loophole in American trade rules known as the “de minimis” exemption, which means “too small to be trifled with” and allows packages worth less than $800 to enter America without facing duties.


More than 1.4bn packages, worth at least $66bn, are expected to arrive under the exemption this year, up from 500m in 2019 (see chart 1).


The rule exposes flaws in Uncle Sam’s tariff strategy: bricks-and-mortar retailers that import from China must pay duties, while their offshore rivals bypass them altogether.


Some legislators now want to close the loophole, a move that would hit poor Americans.


Congress created the exemption in the 1930s to reduce hassle for, among others, tourists bringing home souvenirs.


But Trump-era policies and the rise of e-commerce have made it more important.


In 2016 legislators lifted the threshold on packages from $200 to $800 to save on enforcement.


In 2018-19 they raised tariffs on Chinese products, increasing incentives to find a dodge.


During the covid-19 pandemic, American imports of cheap goods such as clothes and homeware, which often come in under the threshold, shot up.


Trade through the exemption—mostly the regular import of small packages rather than any trickery—is now so large it distorts national data.


Seven in ten de minimis parcels arrive from China.


Shein and Temu, two large online retailers with Chinese supply chains, alone account for three in ten.


Our calculations, based on China’s share of de minimis imports, suggest that America’s trade deficit in goods is 13% larger with China, and 5% larger with the world, than official numbers indicate.


This may help explain a growing puzzle in Sino-American trade statistics.


China says that it exports about $73bn more than America thinks it receives, and some economists believe the true gap may be more than $150bn.


Figures from America’s Customs and Border Protection (CBP), a law-enforcement agency, suggest that at least $37bn of the gap comes from goods which fall under the $800 threshold.


The real de minimis tally may be bigger still.


CBP relies on values entered by foreign shippers, who lack both training and a reason to declare goods accurately.


An improbably high 16% of parcels claim to be valued at $1 or less, according to data from private carriers.


A Senate investigation in 2018 found that foreign-shipment data was often a “long line of illogical letters and characters” in place of information about the origin and value of parcels.


Some sellers exploit the threshold in ways other than simply posting parcels worth less than $800.


One option is to falsely declare a good’s value.


Amit Khandelwal of Yale University and Pablo Fajgelbaum of the University of California, Los Angeles find that America receives 79% fewer shipments from China with reported values just above $800 than just below, compared with 24% fewer shipments from all other countries, which face lower duties (see chart 2).


Although some of this may reflect consumers opting for cheaper items to avoid tariffs, it seems unlikely the whole difference does.


American authorities recently found that almost a tenth of parcels violated import rules, typically by falsely listing the content or value of imports.


A different approach is what CBP calls “structuring”.


Senders split a high-value order from a single customer into multiple parcels that qualify as duty-free.


Many e-commerce platforms advise shoppers to split orders when a cart exceeds the $800 threshold, which is allowed so long as the orders are placed 24 hours apart.


The Tijuana two-step is another crafty but not illegal workaround, in which containers land in America, before travelling in “bonded” lorries to Mexico, meaning the goods are treated as if they have not entered the country.


Once they arrive at a Mexican distribution hub, they are split into smaller packages and sent back to America, arriving under the $800 threshold.


The manoeuvre saves sellers in the region of 6-12% a package, according to Divey Gulati of ShipBob, a logistics firm.


There are big winners from this tariff avoidance.


However, the avoidance also generates a windfall for American consumers.


Messrs Khandelwal and Fajgelbaum calculate that, absent the exemption, consumers would have paid $7.8bn more in tariffs in 2021.


Include fees and the fact that producers often cut prices just below the threshold to avoid tariffs, and consumers save $22bn a year, or $69 each.


Poor households benefit most as they are the biggest consumers of cheap Chinese goods.


Indeed, one in every two de minimis parcels from China lands in the poorest postcodes, compared with one in five for the richest.


Without the exemption, tariffs on China would be even more regressive.


Border towns, and those seeking employment within them, are another winner.


Although the number of commercial lanes at the Otay Mesa crossing has doubled over the past year, waiting times for trucks entering Mexico have risen, such is the level of demand.


DHL, a freight company, has constructed 15 in Mexico since 2016.


Industrial floorspace on the American side of Otay Mesa, where packages are received before distribution, has grown by 45% since 2019.


Amazon, an online retailer, built 340,000 square metres of warehouses across Otay Mesa and Tijuana in 2021-22.


The wave of de minimis parcels, mostly filled with cheap clothing, is hitting America’s heavily protected textiles sector.


Industry representatives say 18 cotton mills have shut since last summer.


Retailers with physical stores receive bulk shipments and thus cannot avoid border levies.


For example, retailers importing t-shirts from China must pay a 16.5% duty, 7.5% in China-specific tariffs, as well as brokerage and customs fees.


That, in part, explains how Shein is able to list women’s fashion items at 39-60% cheaper on average than H&M, a rival clothes retailer.


H&M paid $205m in import duties in 2022; Gap, a rival, paid $700m.


By contrast, Shein and Temu paid no import duties, according to a recent congressional report.


Some firms, including Shein, say they want rules enforcing more transparency for de minimis shipments, but the exemption to remain.


For its part, China shows no signs of relenting.


In May the country’s cabinet passed a resolution announcing its desire to “expand exports via cross-border e-commerce and advance the development of overseas warehousing”.


The de minimis exemption is crucial to this strategy.


Without it, average tariffs on Chinese parcels worth less than $800 would jump from zero to 15%, as well as a fixed charge.


In May CBP suspended several brokers from a programme designed to speed up shipments.


Foreign shippers are now made to declare contents before packages reach American shores.


A broker notes that some shipments which disclose scant data on their prices are now being delayed by a few days as CBP steps up inspections.


In future, shippers may be required to provide a product webpage so that the American authorities are able to verify the prices of the goods in question.


Congress is working on one bill to close the loophole by removing tariffed goods from de minimis eligibility.


Another bill would have America simply match its trading partners’ de minimis thresholds (China’s is set at 50 yuan, or $7).


Any move would probably come after November’s presidential election.


Neither option is particularly attractive.


Getting rid of the de minimis exemption would punish America’s poorest consumers and raise prices at a time when policymakers are doing their best to cool them.


Yet leaving the loophole in place gives China something akin to a free-trade deal on low-value goods, while taxing American retailers—an approach that is almost comically at odds with the rest of Uncle Sam’s trade policy.


The Tijuana two-step has America in a muddle.


|Shanghai

Business | Tit for tat, not Tesla
The EV trade war between China and the West heats up
But Elon Musk’s carmaker is somehow escaping the worst of it

IN the TRADE war between the West and China, a battle over electric vehicles (evs) has begun.


In May, as part of a broader volley against Chinese tech, America slapped a 100% duty on Chinese evs.


On July 2nd Canada launched a consultation on what it called “unfair Chinese trade practices” in the EV industry.


Three days later a provisional tariff of up to 37.6% on Chinese EVs took effect in the EU.


On July 10th, days after the symbolic swipe of opening an anti-dumping probe into European brandy, China’s ministry of commerce signalled it will not take the assault lying down.


It says it will study whether the EU’s tariffs create barriers to free trade.


Western car companies with large Chinese businesses fear getting caught in the crossfire.


They would join earlier casualties of the intensifying conflict.


Chinese government agencies have been told to tear out software and hardware made by American firms such as IBM, Microsoft and Oracle, ostensibly on national-security grounds.


Some officials have even been told not to buy Apple’s iPhones.


The most obvious target for China in EV tit-for-tat is Tesla.


America’s EV pioneer has a huge presence in China and is constantly vying with BYD, a local rival, to be the world’s top maker of battery-powered cars.


And yet, far from being the big loser from the tariff spat, Tesla appears to be notching one win after another in China.


In April its boss, Elon Musk, struck a deal to use a local firm’s mapping data for a new self-driving system.


In June Tesla won approval to test such a system in Shanghai.


More surprising, this month the government of Jiangsu province added Tesla to its official list of suppliers—despite earlier reports that Teslas were banned from sensitive places such as airports because their sensors snaffled too much information.


The decision grants permission to state and Communist Party entities to buy Teslas and gives the firm something akin to the status of a local business.


It is unclear why Tesla appears invulnerable.


Perhaps Mr Musk persuaded Li Qiang, China’s premier, that Teslas do not pose a security threat when the two of them met in April in Beijing.


Or, as some insiders close to Tesla’s factory in Shanghai suspect, the company’s successes may be connected to Mr Musk’s recent chumminess with Donald Trump, who looks likelier than not to return to the White House after America’s presidential election in November.


If the car boss becomes a presidential adviser, as some are speculating, he could talk America’s China-basher-in-chief into moderating his stance.


There is a less conspiratorial explanation for Tesla’s run of good fortune.


The treatment of Mr Musk’s firm illustrates the awkward spot China’s government finds itself in.


On the one hand, it must appear tough on hostile foreign powers accusing Chinese companies of flooding markets with subsidised products.


On the other, as China’s economy slows, it is trying to signal that it remains open to foreign investment.


In this context, a crackdown on one of the most prominent outside investors would send the wrong message.


The Chinese government may thus opt for a more calibrated counterstrike.


One likely outcome is for it to make greater use of America’s weapon of choice—export restrictions.


China has already curbed exports of gallium and germanium, two minerals whose production Chinese firms control and which are crucial to all manner of electronics, including those in electric cars.


China could also update its list of controlled exports in areas where Western firms rely on Chinese intellectual property.


In December lidar, a radar-like laser technology used in autonomous-vehicle sensors, appeared on that list alongside innovations in gene editing and synthetic biology.


|Johor

Asia | Digital domination
America v China: who controls Asia’s internet?


Amid an explosive data and AI boom the superpower contest hots up

Nusajaya Tech Park looks like any other construction project.


Cranes and building materials sit scattered around this industrial site in Johor, Malaysia, just 15km from the border with Singapore.


Nusajaya is at the heart of an enormous data-centre boom that is taking place in one of the world’s fastest-growing regions.


From here you can see the digital war between America and China unfold before your eyes.


Even as it builds up its military presence in Asia, it risks falling behind in the digital contest.


The competition is being fought over the control and ownership of the data centres, undersea cables and wiring that form the physical underpinnings of the internet.


America has dominated communications infrastructure since the second world war.


China has become far more technologically autonomous in the past decade, according to a composite index of “digital dependence” that assesses hardware, software and intellectual property, put together by two analysts, Maximilian Mayer and Yen-Chi Lu.


In Johor the two superpowers’ infrastructure sits side by side, in open competition.


Down the street from Equinix, an American data-centre host, are the facilities of GDS, a Chinese rival and the “preferred vendor” of Alibaba and Tencent, two Chinese tech giants.


Across Asia, superpower affiliation and the degree of overlap vary by country.


Among big cloud firms, China controls all of the cloud-computing clusters in Thailand and the Philippines, despite the fact that America views both as “major non-NATO allies” (see chart).


Of a selection of 12 Asian countries, seven have most of their cloud clusters run by Chinese firms.


At the other end of the spectrum Australia, India and South Korea have largely American-run systems, according to a study in 2023 by Vili Lehdonvirta and colleagues at the Oxford Internet Institute.


China’s firms already have big footprints.


Alibaba has data centres in nine Asian countries, for example.


Over 500 mid-sized to large data centres have been launched in Asia since 2021, and another 270 could come online next year.


Spending on the servers that populate them will rise by 39% this year, forecasts Gartner, a consultancy.


Mobile-data traffic in Asia is expected to quadruple by 2030, according to GSMA, a trade body.


New computational needs for AI applications have further stoked data-centre demand.


Commercial imperatives cannot be easily divorced from security.


China’s planning ministry views data as a “factor of production” alongside land, labour and capital.


Early internet evangelists thought data would flow freely through a decentralised network.


Instead there are four choke points: “internet exchange points” (IXPs), which let internet firms cut costs by routing traffic down the hallway rather than across the world; data centres; undersea fibre-optic cables; and telecoms firms.


Tapping undersea cables has been a trick of spooks since the cold war.


Landing stations are hubs for data interception.


Back doors can be installed in infrastructure.


America’s government has warned that Chinese presence at IXPs creates “the capability to misroute traffic and, in so doing, access and/or manipulate that traffic”.


Even if the data flowing through IXPs are encrypted, some experts think metadata could be exposed.


Doubts over supposedly secure data centres in Asia are swirling.


In 2019 Papua New Guinea found that a Chinese-subsidised data centre in Port Moresby used “openly broken” encryption methods that exposed government data to interception.


Governments can compel their tech firms to fork over data.


As Abraham Newman and Henry Farrell show in their book “Underground Empire”, American intelligence has forced cloud firms and companies such as AT&T to surveil allies and enemies.


No sharp distinction exists between Chinese tech firms, the state and the Chinese Communist Party.


Chinese law gives the state broad authority to make companies turn over data.


This power is not absolute: Alibaba and Tencent have refused government requests for customer data before.


But where there are data of interest, China expects to be told.


American and some regional officials worry that in a crisis China might shut off data centres or telecom services.


Short of that, China could combine cyber-espionage with its legions of state-linked hackers to harass countries that anger it.


According to a former American cyber-security official, this is easier to do if networks do not have to be reverse-engineered from afar.


Chinese firms’ high market share partly reflects an overt Chinese government plan.


Its Digital Silk Road strategy, an offshoot of the Belt and Road Initiative, combines infrastructure rollout with an attempt to reshape data governance.


But Chinese companies are also good value, offering cut-price cloud services that compete at the technological frontier.


Since 2023 Alibaba Cloud has slashed its prices three times.


Huawei, a telecoms-equipment firm, has become known for its aggressive tactics to poach customers.


As well as wires and servers, China’s values are being built into Asia’s digital boom.


China has promoted “data sovereignty” at home and abroad, while increasing its heft at global technical standard-setting bodies.


Control-obsessed governments like Vietnam’s have taken inspiration from China’s stringent data-localisation laws, which require data created in China to physically reside there while curtailing outbound transfers.


These laws have wrenched Chinese data out of the hands of American companies such as Apple and Tesla.


Put together, argue Emily De La Bruyère and Nathan Picarsic, two researchers, China’s strategy amounts to a drive for “asymmetric dominance”, seeding its data infrastructure in other countries while guarding against outside interference.


American efforts to curb Chinese digital influence have notched up some successes.


American restrictions on high-tech chips are probably holding back China’s AI data-centre ambitions.


Authorities have blocked several transpacific cable projects from landing in Hong Kong, re-routing them through friendlier places like the Philippines.


In 2022, brandishing grants and sanctions threats, America ousted HMN Tech, a Huawei spin-off, from running a cable network linking South-East Asia to Europe.


Direct American-Chinese cable links have fallen away; only one has been built in the past 15 years, notes Richard Sun of OMS Group, a cable-builder.


Some American allies have pivoted against China’s digital build-out.


Japan and Australia have cracked down on Chinese firms, citing risks to their sovereignty.


They have banned Huawei and ZTE 5G infrastructure.


In September, Japan and Australia launched a joint programme to build digital infrastructure in Pacific Island nations; the prime minister of Tuvalu, Taiwan’s strongest supporter in the Pacific, told Nikkei Asia, a newspaper, that he was worried about Chinese cyber pressure.


India has gone further, banning hundreds of Chinese apps and probing several Chinese firms, including Alibaba and Xiaomi, a phonemaker.


Alibaba Cloud closed down its data centres in India and Australia this year.


Some American officials want to create a new kind of digital trade pact in Asia that offers access to AI and cyber-security technologies and standards, in return for assurances on keeping some Chinese technologies out.


Until then many countries are hedging their bets.


Warnings about the risks of Chinese digital infrastructure fall on deaf ears: China may spy, but so does everyone else—America most of all.


“Everything is a risk,” replies a Malaysian official, asked about using Huawei’s kit.


Weaker countries look particularly exposed.


Chinese hackers have penetrated governments from Vietnam to Indonesia, and broken into telecoms to spy on Uyghur travellers in Malaysia and Thailand.


In the Philippines, where at least one big telecom network runs on Huawei 5G, the cyber-defence bureau is woefully underfunded.


As Asia’s digital build-out accelerates, countries’ allegiance is being baked into their cables and data centres whether they realise it or not.


Finance & economics | Retaliate, negotiate, repeat
Europe prepares for a mighty trade war
Will it be able to stick to its rule-abiding principles?


What prosperity looks like

“We cannot carry on trade without war, nor war without trade,” wrote Jan Pieterszoon Coen, a brutal governor-general of the Dutch East India Company, to shareholders in 1614.


Four centuries later, things sound a bit different.


“Let’s make no mistake: assertiveness is a prerequisite for keeping our markets open,” says Sabine Weyand, the EU’s top trade negotiator.


After decades during which America supported the global rules-based trade order and European commerce thrived, the bloc now has to learn how to do business in a fractious world.


Electric vehicles (EVs) from China are the EU’s latest target.


On July 5th the European Commission started to apply provisional tariffs to them.


These differ by firm, from 17% for BYD to 38% for SAIC, based on subsidies they have received from the Chinese state and their co-operation with the EU’s investigation.


The commission’s logic for applying levies on top of an existing 10% tariff on car imports is that Chinese carmakers have an unfair advantage owing to favoured treatment at home—a justification that allows the levies to fall within the World Trade Organisation’s (WTO) rules.


The move nevertheless illustrates the tightrope European officials must walk.


They want to uphold the rules-based order, from which the continent benefits enormously, while ensuring that they are not bullied by more protectionist rivals.


German carmakers, fearing China’s response, oppose the move.


Olaf Scholz, Germany’s chancellor, reportedly wants a mutual car tariff at China’s level of 15%.


On July 10th the Chinese trade ministry announced that it was investigating the latest EU trade practices, with a view to suing the bloc at the WTO and implementing retaliatory measures.


Cecilia Malmström, a former EU trade commissioner, thinks talks will produce lower tariffs by the autumn, but that the levies will not go entirely, as China will not meet the commission’s demands and European officials want to look tough.


Further spats are likely, during which the EU will make use of new weapons.


One is the “international-procurement instrument”, which is being employed with its investigation into the Chinese market for medical devices.


Should negotiations over access for European companies fail, the EU may respond by demoting Chinese bidders in procurement tenders.


When Donald Trump imposed tariffs on aluminium and steel in 2018, the EU joined forces with other countries and imposed revenge tariffs on goods including motorcycles and whisky.


If he is re-elected in November and imposes 10% tariffs on all imports, as he has suggested he will, European officials will want to respond.


In all of this, the EU is at pains to stress its policies are and will be WTO-compliant.


The trade club is much more important to the EU than to either America or China, which are both uncomfortable with being restrained by multilateral rules.


Yet other countries have also fallen out of love with the WTO.


The likes of China, India and Russia prefer ”an alternative system based on commercial contracts rather than a rules-based institution that, in their view, has been corrupted by European lawyers and US vetoes,” notes Hosuk Lee-Makiyama of the European Centre for International Political Economy, a think-tank.


As such, the EU is conscious that it is defending a vulnerable institution.


If things heat up, doing so will prove tough.


In contrast with American tariffs on Chinese EVs, the EU’s approach is so fastidious that it even allows Chinese companies to sue the bloc in European courts.


Adhering to the old order’s principles is getting harder because they were not made for dealing with enormous economies run on principles of state capitalism.


The latest trade weapons also try to comply with the system, though lawyers fear that the international-procurement instrument could, for example, become a “Buy European” clause if applied too aggressively.


Europe’s intention is to use tariffs as a way to negotiate better treatment, says Mr Lee-Makiyama, as it did with American aluminium and steel.


This may yet happen in the case of Chinese EVs.


But negotiating after trade fights is a crude strategy, and may not be a sufficient one if Mr Trump returns to the White House.


If that happens, the EU will have to work out how to recruit outside countries to its cause.


Ms Weyand proposes tailoring aid, investment, financing and trade policies to meet their needs.


That would be a more peaceful method than the war waged in the 1600s.


But it is an uncomfortably political one for a body as dedicated to the rules-based order as the European Commission.


|Delhi

Asia | Indo-Chinese relations
The epic bust-up between China and India could be ending
Witness calm in the Himalayas, diplomatic charm offensives and thickening trade links

Ask an Indian diplomat about relations with China and they will repeat a well-rehearsed mantra: there can be no return to normality until peace is restored on their disputed Himalayan border.


That has been the official line for most of the time since 2020, when a deadly clash occurred there between Indian and Chinese troops.


On the face of it, India’s stance is a rejection of China’s suggestion that the two countries should set aside the dispute, which has pushed India closer to America, and focus on areas of mutual interest.


Relations are indeed still far from their pre-2020 normality.


And they are unlikely to return to it soon.


Even so, there has been a quiet yet notable shift in recent months towards a new phase of relations defined by border stability and closer commercial ties.


The shift reflects India’s urgent need for Chinese technology, investment and expertise to meet its immediate industrial needs.


It is also based on China’s mounting concern about its own economy and escalating trade barriers worldwide.


The first sign of the shift came in November last year, when Indian restrictions on visas for Chinese professionals in some industries were relaxed.


That was followed by a softening of rhetoric on China from Narendra Modi, the prime minister.


In an interview with Newsweek magazine published on April 10th, weeks before the Indian election, Mr Modi described relations with China as “important and significant” and expressed hope that border stability could be restored.


His defence minister, Rajnath Singh, said in late April that border talks were “progressive and satisfactory” and “no fresh tension has come up”.


Then in May a new Chinese ambassador, Xu Feihong, arrived in Delhi after a hiatus of 18 months in which China’s embassy there operated without one.


Mr Xu has since been on a charm offensive, meeting several members of the political elite.


China has also been unusually restrained in its public statements on India.


Xi Jinping, China’s leader, did not congratulate Mr Modi on his re-election in June.


However, China gave a relatively low-key response when Mr Modi thanked Taiwan’s new president, Lai Ching-te, for doing so (China claims Taiwan as its territory).


And Chinese officials avoided criticising India after an American congressional delegation met the Dalai Lama, who it views as a separatist, there.


One reason for the recalibration is the apparent success of a new mechanism for managing border tensions.


It relies on “buffer zones” where both sides withdraw troops and cease all patrols.


Through 21 rounds of talks between military commanders, the two sides have already established such zones at five of seven flashpoints and are discussing others, although their strategic importance makes them more contentious.


The other impetus for change is a recent surge of demand for Chinese technology in India, despite official efforts to reduce its economic dependence on its neighbour.


After the clash in 2020, India’s government banned 320 Chinese apps, launched tax raids on Chinese companies and introduced new rules requiring government approval for any Chinese investment.


Bilateral trade dropped, and Indian officials joined Western counterparts in trying to “de-risk” supply chains.


And yet India’s dependence on Chinese imports has only grown (see chart).


In the 2023-24 financial year China edged past America to reclaim its position as India’s top trading partner.


India’s imports from China increased to $102bn (about 56% more than in 2020) out of a total $118bn in bilateral trade.


India’s trade deficit with China has risen by around 75% since 2020.


More strikingly, China was India’s biggest source of major industrial products in 2023, accounting for around 30% in categories such as electronics, machinery, cars, chemicals and textiles, according to a recent study by the Global Trade Research Initiative (GTRI), a Delhi-based think-tank.


The study found that India’s reliance on China was highest in imports of electronics, telecoms and electrical products, at 39%.


A year ago, “the narrative in India was that our imports from China are a worry”, says Ajay Srivastava, an Indian former trade official who runs the GTRI.


That narrative has changed over the past two or three months, he adds; now the dominant theme is that not only does India need Chinese products, but it needs Chinese companies to make stuff in India.


Under pressure from some Indian firms, the government is planning to relax visa restrictions to allow in more Chinese technicians.


Indian public views of China remain generally hawkish.


Diplomatic relations are still touchy too: Mr Modi skipped a summit attended by Mr Xi and Russia’s president, Vladimir Putin, in Kazakhstan in July.


And a bilateral Xi-Modi meeting does not seem imminent.


But commercial ties look set to expand further in the coming years, as Indian and Chinese companies form joint manufacturing ventures in India, which will probably import machinery and components from China.


Many of these ventures involve big and influential Indian companies.


They are also in industries such as electrical vehicles and mobile-phone assembly that the government is subsidising to boost manufacturing.


In one high-profile example, SAIC Motor, a state-run Chinese company that owns the MG Motors brand, announced a joint venture in November with India’s JSW Group to produce electric vehicles in Mr Modi’s home state of Gujarat.


The venture has since committed to sell a million vehicles annually and capture a third of India’s electric-vehicle market by 2030.


JSW also plans to make electrical-vehicle batteries in eastern India, through a technology transfer deal with a Chinese manufacturer.


The trend suggests that some Western firms’ efforts to shift manufacturing to India from China may not result in a clean break.


Apple already produces about 14% of its iPhones in India.


But the latest public list of Apple suppliers shows that several of its Chinese component-makers have started manufacturing in India.


Chinese technology is also integral to India’s infrastructure plans.


A single state-run Chinese company, ZPMC, has already provided at least 250 of the cranes at Indian ports.


Yet despite security concerns over these hi-tech cranes in India and America, private Indian port operators continue to install them.


The Adani Group, one of India’s biggest conglomerates and port operators, took delivery in May of the final six out of 24 such cranes for a new port it is building in Kerala.


On the military front, India continues to hedge against China by enhancing ties with America and its allies.


It is also bolstering relations with Russia to try to offset China’s growing influence there, as seen by Mr Modi’s recent bear hug with Mr Putin.


And India and China still compete for influence elsewhere in the world.


Still, like its Western counterparts, India’s government has to balance the interests of military chiefs with those of business leaders, who argue that most alternatives to Chinese tech are too costly.


Mr Modi will also be mindful that the recent loss of his party’s majority in parliament was partly because of frustration over a shortage of high-quality manufacturing jobs.


India’s leader has good reason to fear China.


Leaders | Not too early to say
China should not wait to stimulate its economy
It is heading into a trade war
Photograph: Qilai Shen/The New York Times/Redux/eyevine

JOURNALISTS LOVE a telling quote—so much so that they will sometimes seize hold of a telling misquote.


Zhou Enlai, who was China’s first Communist prime minister, was once asked what he thought of the French revolution.


His priceless answer was based on a misunderstanding: he was referring to the student unrest in Paris in 1968, only four years earlier.


But his words helped cement the reputation of China’s leaders for farsightedness.


This long-termism may be to blame for China’s unhurried response to its urgent economic woes.


Its property market, which peaked in 2021, is still fragile.


Consumer confidence, shattered by the covid-19 lockdowns in 2022, has never recovered.


The consequences include lacklustre spending, dwindling fiscal revenues and deflationary pressure.


Figures released on November 9th showed factory-gate prices falling, year-on-year, for the 25th month in a row.


In September China’s leaders acknowledged these “new” problems and promised a more forceful response.


Hopes rose for a bold fiscal stimulus that would provide handouts to consumers and mobilise more public money to revive interest in property.


But a flurry of subsequent press conferences—from the planning agency, the finance ministry and the housing ministry—have offered little of substance.


In a final disappointment, a meeting of senior legislators between November 4th and 8th also failed to spell out a new stimulus package.


What will China do to respond to inadequate demand, an ailing property market and persistent deflation?


The legislators did unveil a plan to refinance the implicit debts of local governments.


The debt swap will alleviate financial risks and reduce borrowing costs.


But the money expected to be saved in the next five years will amount to less than 0.1% of GDP over that period.


That is far too little to get the economy back on track.


China’s leaders may believe there is already enough other stimulus working its way through the economy to help GDP meet the official growth target for this year of “around” 5%.


In July, for example, they expanded a scheme to encourage consumers to trade in old cars and appliances for new ones.


Property sales also picked up in recent weeks in China’s big cities, after regulators cut mortgage costs and reduced down-payment ratios for second homes.


Nomura, a bank, this week raised its growth forecast for 2024 to 4.8%.


China’s leaders may also be biding their time.


In keeping with their reputation for farsightedness, they may be keeping their powder dry until they know how much damage Donald Trump’s second presidential term will inflict on their country’s economy.


The 47th president has threatened to slap tariffs of 60% on Chinese goods as an opening move—and to raise them higher if he chooses.


But this watchful waiting would be a mistake for China.


Greater fiscal stimulus today does not preclude even more stimulus later if necessary.


The country’s sovereign-bond yields are historically low, suggesting ample demand for the government’s paper.


An onslaught from America would be likely to push them lower still.


Whatever fiscal limits apply in China, they are still nowhere near biting.


China would also be in a stronger position to withstand American tariffs next year if the government successfully reflated the economy first.


A higher rate of inflation would, for example, give China’s central bank more room to respond to further setbacks by lowering real interest rates.


By the same token, China will be in a weaker position to navigate a second trade war if it allows deflation to become further entrenched before the shooting starts.


Falling prices would increase the country’s real burden of existing debts.


They may also lead to a round of wage cuts by firms, which would only compound the problem.


China may be keen to husband its fiscal ammunition.


But China’s true resources are the labour and capital at its disposal.


Every month they remain underemployed is a wasted month—time the economy will never get back.


Leaders do not prepare for war by counting their money, but by mobilising their manpower.