China’s Economic Model: A Red Line in Trade Talks with EU and US
As China prepares for crucial trade talks with Europe and the United States, the country has drawn ‘red lines’ around its economic model, signaling increasing confidence in its approach. This stance has been adopted ahead of high-stakes negotiations with its major trading partners, with President Xi Jinping and US President Donald Trump planning more face-to-face meetings this year.
Defending China’s Economic Policy
China’s economic policy mix, which prioritizes advanced industries over consumption, has been a subject of controversy among Western countries. They argue that this approach leads to a trade surplus and hollows out industry in nations seeking more balanced growth. However, a recent meeting of top Communist Party leaders has signalled policy continuity, calling for targeted support rather than consumer-focused stimulus and structural changes.
A Message of Confidence
In a recent position paper, China’s commerce ministry accused the West of protectionism, rejecting the notion of industrial overcapacity as rooted in “logical flaws” and “ulterior motives”. The ruling Communist Party’s flagship theoretical journal, Qiushi, also defended China’s low consumption in July, describing it as a “historically justified” outcome of the investment-led, catch-up development model. These messages stop short of telling the West that China will not change course, but send two clear posturing signals: hoping for a better mutual understanding and drawing a red line.
A Growing Sense of Confidence
According to Xu Tianchen, a senior economist at the Economist Intelligence Unit, China’s messages are not about changing its economic model, but about making its stance clear. The commerce ministry paper “made clear that China doesn’t accept discriminatory measures against its firms and products,” he added. China says its model reflects the needs of a country still converging with advanced economies, and its products are not only cheaper but increasingly better.
A Different Narrative
Premier Li Qiang has countered warnings of a “China shock 2.0” by portraying it as “China opportunity 2.0” for the global economy. However, this narrative is falling flat in countries at the receiving end of Chinese exports, according to Eswar Prasad, a professor of trade policy at Cornell University. China’s heavy dependence on exports to power its own growth in light of weak domestic demand is making it difficult to argue that Chinese exports are a gift to consumers worldwide.
Trade Disputes and China’s Confidence
Washington’s effort to boost pressure on China through tariffs of more than 100% last year floundered as Beijing used its dominant position in production of rare earths to regain strategic ground. Now, the European Union is pursuing its own industrial and domestic procurement policies to defend its market. The latest statements from China suggest Beijing’s confidence is growing that it can soften trade disputes without making significant concessions.
A Managed Engagement
Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, believes that Beijing’s messaging on its economic model comes across as more confident and tightly framed than a year or two ago. To be sure, Beijing has slowed investment this year, primarily by tightening scrutiny on local government spending, which economists blame for driving overcapacity in manufacturing and infrastructure.
A Recognition of Imbalances
Analysts say that China recognises imbalances in its economic model, but wants to move carefully, fearing disruptive changes. However, a growing body of international research warns that Beijing’s policies threaten both the global economy and its own. For nearly 60% of Chinese firms, their market share gains can be explained by subsidies received, according to the Organisation for Economic Cooperation and Development. A Bank of Italy paper estimated that domestic factors, such as weak consumption and overcapacity, have driven about 75% of Chinese export growth.
Systemic Domestic Economic Problems
Daniel Rosen, co-founder of researcher Rhodium Group, believes that Chinese arguments are more frequent and formal now because the evidence of systemic domestic economic problems leading to spillovers on the rest of the world is mounting even faster. China’s economic model is a red line in trade talks with EU and US, and it remains to be seen how this will impact the negotiations.