China’s total factor productivity (TFP) growth has resumed an upward trajectory in recent years, signaling a recovery from a period of deceleration during the 2010s. This changes a lot, because efficiency gains have been disinflationary and been a net positive effect on the nation’s economic landscape. In particular, automation and digitalization have significantly accelerated efficiency improvements. Through these two policies, they have directly contributed to China’s rising export competitiveness, specifically in the manufacturing sector.
Tariffs notwithstanding, China’s exports have recently performed quite strongly even in the face of these higher tariffs from the United States. Further, our export sector has proven to be unbelievably resilient. This strength has more than offset weak domestic demand, pushing the current account (C/A) surplus to its highest level since 2011. Standard Chartered’s economists noted that China’s exports have held up remarkably well this year despite the higher US tariffs. At the same time, they noted China’s corresponding imports have continued to lag behind other Asian countries. In fact, net exports propelled growth in Q3, more than offsetting anemic domestic demand. At the same time, the current account (C/A) surplus hit its all-time high, the highest C/A balance since 2011.
Though exports from China have proved surprisingly strong, imports have performed much worse than other countries in the region. This contrast underscores the exceptional complexity that characterizes China’s economy. The shifting 15th Five Year Plan (FYP) is all about tech. It aims to increase trade in services, paving the way for China’s next stage in economic development.
The signing of the recent US-China trade agreement represents a major turning point in the developing trade war between the two countries. This deal includes reciprocal concessions on tariffs, export controls, and other trade restricting measures, designed to be effective for one year. According to Standard Chartered’s economists, “The latest US-China trade agreement marks a significant de-escalation of tensions. The deal features mutual concessions on tariffs, export controls and other restrictions, and is intended to last one year.”
Moreover, China’s rare earth controls have proven an efficient bargaining chip in trade negotiations. These controls will likely continue to be influential in the months ahead, giving China the upper hand in any continuing conversations.