There’s a China-Shaped Hole in the Global Economy

China’s economy is unusual. Whereas consumers contribute 50% to 75% of gross domestic product in other major economies, in China they account for 40%. Investment, such as in property, infrastructure and factories, and exports provide most of the rest.

Lately, that low consumption has become a headwind to China’s growth because property investment, once a major component of demand, has collapsed.

This isn’t just a problem for China; it’s a problem for the whole world. What Chinese companies can’t sell to Chinese consumers, they export. The result: an annual trade surplus in goods now of almost $900 billion, or 0.8% of global gross domestic product. That surplus effectively requires other countries to run trade deficits.

China’s surplus, long a sore spot in the U.S., increasingly is one elsewhere, too. While China’s 12-month trade balance with the U.S. has risen by $49 billion since 2019, it’s up $72 billion with the European Union, $74 billion with Japan and Asia’s newly industrialised economies, and about $240 billion with the rest of the world, according to data compiled by Brad Setser of the Council on Foreign Relations.

Logan Wright , head of China research at Rhodium Group, a U.S. research firm, said China accounts for just 13% of the world’s consumption but 28% of its investment. That investment only makes sense if China takes market share away from other countries, rendering their own manufacturing investment unviable, he said.

“China’s growth model is dependent at this point on a more confrontational approach with the rest of the world,” he said.

While many developing countries relied on investment and exports to fuel early growth, China is an outlier for how low its consumption is, and its sheer size. In a report, Rhodium estimates that if China’s consumption share equaled that of the European Union or Japan, its annual household spending would be $9 trillion instead of $6.7 trillion. That $2.3 trillion difference—roughly the GDP of Italy—is equal to a 2% hole in global demand.

The sources of this underconsumption are deeply embedded in both China’s fiscal systems and its policy choices.

Chinese incomes are highly unequal, and because the rich spend less of their income than the poor, this automatically depresses consumption. Rhodium cites data that says the top 10% of households had 69% of total savings, while a third had negative saving rates.

Other countries address such disparities by taxing the rich more heavily and boosting the spending power of lower and middle classes through cash transfers, and public health and education. China does much less of this. Just 8% of its tax revenue comes from personal income taxes, compared with 38% from value-added taxes, similar to sales taxes, which fall much more heavily on lower-income families, Rhodium estimates.

China also spends less on health and education than major market economies, forcing poor and middle-income families to spend more of their disposable income on both.

Meanwhile, suppressed wages and interest rates depress household income and spending while boosting the profits of state-owned enterprises. The limited taxing authority of local governments forces them to raise revenue by selling property for manufacturing and infrastructure, which further inflates investment.

A decade ago top Chinese policymakers shared Western economists’ perspective that, at the macro level, China needed to rebalance away from investment to consumption. In 2013, the ruling Communist Party said growth would henceforth rely on market forces and consumers.

President Xi Jinping ended up going in the opposite direction; consumption stayed weak while state control over the economy grew. He has replaced reformers with loyalists more preoccupied with sector-specific targets than overall growth.

The bedrock principle behind trade is comparative advantage: countries specialise in what they do best and then export it in exchange for imports. Xi rejects this principle. In pursuit of “independence and self-reliance,” he wants China to make as much and import as little as possible.

Officials in China boast that it is the “only country to produce in every single one of the United Nations’ industrial product categories,” notes Andrew Batson of Gavekal Dragonomics.

Even as China targets advanced products such as electric vehicles and semiconductors, it refuses to surrender market share in lower-value products: “Establish the new before breaking the old,” Xi has instructed his bureaucrats , my colleagues have reported.

As a result, Rhodium argues , “China provides fewer opportunities as an export market for emerging countries while competing head-on with them in the low-tech and mid-tech space.”

Countries that once saw China as a customer now see a competitor. “Many Chinese businesses are manufacturing intermediate goods, which we mainly export,” Rhee Chang-yong , the governor of the Bank of Korea, said last year. “The decadelong support from the Chinese economic boom has disappeared.”

Mexican Finance Minister Rogelio Ramírez de la O complained last month , “China sells to us but doesn’t buy from us and that’s not reciprocal trade.”

Ironically, foreign officials have tended to see the U.S. as the biggest threat to the world trade system, ever since President Donald Trump in 2018 imposed steep tariffs on China and narrower tariffs on other trading partners. He has promised to expand those tariffs if elected this fall.

And yet Trump’s tariffs should be seen as a reaction to China’s beggar-thy-neighbour economic model, one that has proved impervious to existing trade rules.

Still, no single country can fix the problem. Like a dike deflecting floodwaters, U.S. tariffs have diverted Chinese exports to other markets.

Those other countries are now taking action. Mexico, Chile, Indonesia and Turkey have all announced or said they are considering tariffs on China this year. This week Canada announced steep new tariffs on Chinese electric vehicles, steel and aluminum, aligning with those already announced by the U.S.

Yet the world thus far lacks a unified solution to Chinese underconsumption, because China refuses to accept that it’s a problem.

Xi has rejected fiscal support for households as “welfarism” that breeds laziness. In April, Treasury Secretary Janet Yellen complained that China’s “weak household consumption and business overinvestment” were threatening jobs in the U.S. The state news agency Xinhua called it a pretext for protectionism. Earlier this month the International Monetary Fund advised Beijing to spend 5.5% of GDP over four years buying up uncompleted homes. Beijing politely declined.

With China dug in, more friction is sure to follow, and an already fragile world trading system will be stressed to its breaking point.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

There’s a China-Shaped Hole in the Global Economy

China’s low-consuming, high-investing economy guarantees conflict with other countries

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.