It was not very long ago that there were laments about the “savings glut” in Asia. Excessive savings by Asians were blamed for creating the easy monetary conditions in the US that eventually precipitated the global financial crisis in 2008. Others claimed that the same Asian tendency to over-save, combined with deliberately under-valued currencies, produced large current-account surpluses and their equivalent deficits in the US. Such reasoning gave an excuse for a growing wave of trade protection at that time.
More recently, there has been less talk about such Asian surpluses. But new imbalances are emerging which could be used to justify further protectionism and other inward-looking policies unfavourable to Asia. Two forces are likely to create these imbalances — industrial policies in Asia to boost value-added manufacturing and high savings rates, especially in China, which would expand external surpluses. Asian policymakers need to be aware of this threat and take proactive measures to contain it.
Imbalances could emerge from strategies to boost manufacturing
Many Asian countries are keen to employ more aggressive industrial policies to strengthen value-addition in manufacturing. China’s approach has already produced a startling increase in competitiveness in strategic new industries such as electric vehicles (EVs) and other green technologies. That resulting surge in Chinese exports is raising eyebrows in developed countries. Similarly, Indonesia’s forceful efforts to establish a nickel processing industry rather than just export nickel ore, are also giving it an increasingly dominant position in global nickel manufacturing. Neither Beijing nor Jakarta is likely to rein in their industrial ambitions, so their positions in these key sectors will probably grow more dominant, sparking resentment and trade tensions.
Rightly or wrongly, it will be China’s approach to industrial development that will provoke the most backlashes. President Xi Jinping’s administration is committed to strengthening the country’s self-reliance in critical technological domains. A conservative estimate by an American think tank, CSIS, puts subsidies such as state funding for R&D and below-market credit at 1.7% of GDP in 2019. CSIS estimates that Beijing’s cumulative support of the EV sector in 2009–2021 exceeded US$125 billion. With little competition in their domestic market from foreign businesses saddled with onerous local requirements, Chinese firms quickly leveraged off China’s immense scale economies to become highly competitive. Chinese industrial policy has created world-beaters such as BYD and battery producer CATL that threaten rivals in developed economies.
China’s exports of EVs and solar panels are good case studies of the potential problems that can arise with such successful industrial policies. Its EV exports surged by a staggering 70% in 2023, at a time when a difficult global environment reduced overall exports by 5%. China’s share of EVs sold in the EU has risen to 8% from below 1% in 2019 and could reach 15% in 2025. At the same time, the EU currently imports around 80% of its solar panels from China and that is also causing consternation in Europe. The China-EU surplus has expanded by an annual average of 36% in the past few years. Not surprisingly, the European Commission has launched an investigation into whether Chinese EV makers received unfair subsidies that could potentially lead to higher tariffs on Chinese goods.
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The portents are worrying. Beijing has already fired a warning shot against European protectionism in the form of an anti-dumping investigation into French brandy imports. When Chinese and EU negotiators met in December, neither side was willing to make meaningful concessions. A confrontation on trade is likely between the two economic powers.
But it is not only developed economies that resent China’s expanding share of global manufacturing. The Asean steel sector has long been unable to compete against Chinese imports which benefit from extensive Chinese government support. An ongoing resurgence in China’s excess steel production capacity could aggravate this situation. China’s competitiveness in components manufacturing has also allowed it to ship high-value-added products to Asean while importing cheaper raw materials and agricultural products.
Consequently, Asean’s trade deficit with China has widened 69% in the five years to 2022, accounting for an uncomfortable 4% of Asean’s GDP. Likewise, Chinese electronic exports, by far the largest category, to Southeast Asian exporters grew by a massive 80% over the five years to 2023. Surveys show that the region’s opinion makers are concerned by the lop-sided nature of these trade relationships and how they stifle the growth of domestic producers.
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China’s share in global manufacturing has risen 22 percentage points in the period from 2004 to 2021, while the share of developed economies has fallen by 27 percentage points. Concomitantly, there has been a pronounced shift in China’s import composition towards lower-valued goods: imports of capital goods have fallen from 42.6% to 38.1% between 2015 and 2021, while imports of raw materials have risen from 21.7% to 28.5% in the same period.
Unlike the industrial ascent of smaller economies such as South Korea or Taiwan or Singapore, China is so large that its gains in competitiveness produce an out-sized and painful impact at the global level. And with that comes similarly out-sized backlashes against China.
That is why it is not only in the US where there is growing support for tariffs on Chinese imports. Even Mexico, which has benefitted greatly from Chinese firms relocating there, is now agitated about China flooding its market with cheap imports. In December, it announced an 80% tariff on certain imports of Chinese steel.
China could see larger external surpluses in the coming years
A second source of imbalances is more related to China. While Chinese policymakers would like to rebalance the domestic economy away from decades of high savings rates and extraordinarily high investment rates, their efforts have largely been in vain. The trouble is, despite their best efforts, Chinese savings rates will likely remain relatively elevated while investment rates are likely to fall: but when savings in an economy exceed investments in an economy by a wider margin, the result will be an expanding current account surplus.
There are powerful reasons why Chinese savings rates will remain at heightened levels. In the past two decades, Chinese households allocated too large a share of their savings to investment in real estate. The recent property price slump has destroyed some of that wealth. The psychological damage to savers has been substantial — most expected property prices to just keep on rising. This psychological impact means more cautious spending, and the next few years will see Chinese households saving more to rebuild their savings.
They have added urgency to do so as China’s ageing population is unfolding in the context of relatively weak social safety nets. China still lacks a multi-pillared retirement funding system that assures ordinary Chinese folks of a secure retirement. Thus, consumers will rein in their spending so as to build an adequate retirement nest egg. We are not likely to see the seismic shift in policies for stronger social nets that will be needed to give the people that assurance. There is still no strong consensus among policymakers on social safety nets, with some leaders worried that welfare policies could breed laziness.
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Adding to concerns is the crisis in local government finances. As local governments are responsible for social spending in their localities, their ability to support their communities is crucial. But residents know that local governments are saddled with massive debts and many are already struggling to avoid defaulting on their bonds. Until there is a concerted effort to clean up the mess in local government finances, Chinese citizens know that they will have to rely on their own savings rather than the public purse for their retirement needs.
In contrast, we expect investment rates to decline over the coming years. China has sustained levels of investment as a share of GDP rarely seen in human history. World Bank data shows that investments typically represent 25% of a country’s GDP. China, however, has in recent years been investing a staggering 42%–44% of its GDP. That cannot go on. The massive investments in real estate, infrastructure and production capacity in factories have run into diminishing returns. As rates of return on capital fall, there will be less incentive to invest. Sure, investments in some areas where China is excelling, such as renewable energy and state-supported strategic industries (for example, semiconductors), could still grow. But, overall investments as a share of economic output will almost certainly fall.
What are the implications?
The result of more aggressive industrialisation policies in Asia and China’s persistently high savings rates will probably be another bout of rising current account surpluses in China and increased market shares for developing Asian countries in developed markets. This will involve painful adjustments around the world, which would then encourage trade and other measures that could hurt Asian interests:
As Indonesia’s position in nickel manufacturing becomes more dominant, other countries will lose out. Already, major commodity firms such as Anglo-American and BHP have announced substantial writedowns of capital totalling more than a billion dollars. Mining operations in other parts of the world will be shut — with painful consequences for jobs in many communities.
Market shares are a zero-sum game. China’s emergence as a major producer of automobiles is at the expense of auto firms elsewhere in the world, especially in Europe but perhaps eventually in the US as well. As the incumbent auto producers suffer falls in profits, they will be forced to restructure. Mounting job losses will bring pressure on their governments to take action.
So, what should China and other Asian exporting nations watch out for?
When something similar happened with Japan’s rise as an auto producer, we saw years of trade tensions between Japan and its trading partners. That culminated in Japan agreeing to allow a sharp appreciation of the yen and in Japanese auto producers moving production to the US and Europe. We could well see the US Treasury declaring more Asian nations to be “currency manipulators”, thereby justifying tariffs and other import restrictions. There will also be much pressure on Asian exporters to move at least some production to the markets where they sell their goods.
The political mood in developed economies is different now from the time Japan’s rising export prowess caused trade friction. There is much less commitment in the political class to free trade. There is also great fear among political leaders that job losses and desultory economic growth could lead to the election of more extreme political parties. The consequence will be more aggressive use of trade restrictions against successful exporters.
Another ideological shift in the developed world is the greater acceptance of state intervention. US President Joe Biden’s Inflation Reduction Act and Chips Act are examples of aggressive industrial policies of a sort that the US has not resorted to for years. Expect more of this in the US and in Europe, aimed at displacing imports and preserving national champions of their own.
Another difference is that the World Trade Organization is much diminished now that its arbitration role has been gravely undermined by America’s vetoing of appointments to the arbitration panel. So, it cannot provide less powerful trading nations protection against unfair trade restrictions that the US or other large nations may impose on Asian exporters.
In short, this region must expect more determined nationalistic calls for protectionism in the US and Europe and a higher risk of a trade war, no matter who wins the next US presidential election.
Manu Bhaskaran is CEO of Centennial Asia Advisors
