Adam Tooze on the Big Misconceptions of the Chinese Economy

economy slowing. And so I guess one question I have, or one thing that seems very noteworthy to me that I would love to dive into a little bit more,

is Chinese growth has been slowing. Yeah, the Redman bee has been appreciating and there have been all these new trade restrictions since the Trump administration and continuing into the Biden administration as well, And yet China's current account surplus and I know there's some discussion about how accurate the official numbers might be, et cetera, et cetera, but the surplus is going up again, which seems kind of remarkable.

an economy in crisis. We're facing their worst challenges since dune shell paying or whatever is sort of slow down, and it's hard to like they fit together in some way, but on some level, like I still have a hard time reconciling the dual China narratives right.

like consumer stimulus or something like that. So yeah, you're right, it does feel like a strange moment.

for health care. Like every country has different rules. So like part of me wonders, like what is it about China and the sort of state directed capitalism that they have there that's like particularly like, oh no, this crosses a line and the rules of trade don't really work

with them. And then two, you know, this idea of like overcapacity and dumping, like I get that perhaps intuitively in a pure commodity such as say steel, but when it comes to some other things like solar or petrochemicals or things that really you know, are very or cars like I have I struggle with this that like it's a useful concept, but maybe it is.

It's been too long.

were introducing this. I don't get it. I mean, I think maybe it's easier to define in sectors where the technology is relatively static and where we have relatively straightforward industrial economics models of trajeatory strategy that would involve building massive amounts of capacity, maybe sliding down a cost curve, or maybe just establishing some sort of credible threat where folks will believe that you're going to fight for market

share because you've just got so much sunk cost. So you could look at industries like steel and aluminium in those terms, and I think the Chinese themselves would admit that, you know, they went hard on urbanization and so they

built enormous capacities in steel, cement and so on. That's one sort of sector I think where it gets I just find kind of vaguely puzzling is in new sectors where, thanks to the kind of new world that we're in with climate planning, where we use that word advisedly and we have an idea of what we need to do to get to net zero, and that's apparently taken seriously

by Western governments. And we know that the demands in terms of the buildout of green electricity capacity, transmission, and then end use in the form of electric vehicles are just huge, and for them all, we're pretty uncertain about the technologies that are ultimately going to come and dominate those sectors even over the medium term. And it's hard for me to really kind of to say that the world has got too many photovoltaic panels just seems, you know,

not for my daughter and granddaughter's future. I think the more photovoltaics the better, to be honest. And the fact that the price is crashed, you know, enables this this extraordinary story about Pakistan importing thirteen gigawatts of photovoltaic capacity in the first six months of this year, Pakistan which is in real serious financial trouble, and that's because they're so damn cheap, and that's because the Chinese have built

out this huge capacity. So those are the areas where I find the story just a little hard to really wrap my head around. And I think it's obvious tactical motivation. You can see how the argument is being used by

Western politicians. But even when you look at the steel sector, like you know, if you actually look at the share of Chinese capacity that's being sold onto global markets, generally speaking, it's a relatively small share of these absolutely immense industries the Chinese have built, which are overwhelmingly directed towards their own home markets.

isn't it there's been this shift away. I mean, the big thing in the background here is that there's been such a powerful shift in American economic policy discourse away from thinking in terms of consumer interest or holistically in terms of the balancing of consumer and producer interest, towards a really rather monolithic focus on producer interests. And you don't, of course, generally talk about corporate profits in that context.

You talk about American workers, especially as what the Americans called middle class, in other words, for the rest of the world, working class, blue collar jobs, and that becomes the center of policy discourse. And in that context then you can kind of see how overcapacity begins to sound like a looming threat as opposed to a free gift to American consumers all of a sudden get to benefit

from whatever subsidies. Ultimately Chinese taxpayers are going to end up footing the bill for so I think this shift towards a worker centered vision, and this operates, you know, in a purely nationalist mode, a rather masculinis mode on the Donald Trump side, and it is a huge part of the Biden folks interpretation of why they lost in twenty sixteen and why the Democrats had to fashion this new vision of economic policy which was essentially around restoring

the prospects of the American working class. And I think that's where the sort of the work is being done and the segues are being established.

I don't think it does work. In general, there are a whole bunch of things wrong with the conditions of life for working class of Americans that aren't reducible to the availability of so called you know, good paying blue

collar jobs. And I think it's a mistake on the part of Democratic Party in progressive politics to focus excessively on this, because it distracts from what should have been a much broader agenda of improving the conditions for the service sector, which makes up the vast majority of the US economy, and thinking hard about how to improve the quality of life, conditions of work, and also to think, you know, because the standard argument is it's always a

manufacturing that you get the productivity increases, Well, maybe it's time to think harder about how we could think about the service sector also as a driver of productivity and improve quality of provision, quality workplace upskilled the workforce in those sectors. So and there was a moment in the early Biden administration with a Build Back Better agenda which was more promising, and I think a lot of people may be hoped that Kamala Harris might also be more

amenable to this. But once Manchin got to work on the agenda, and Biden's I think just habits of mine euas after all, the very old man. And so he comes out of an era in which American industrialism was really the trump card, and so we kind of regressed into that mode of thinking about industrial policy. And then in political terms, it's incredibly easy to sort of form a segue where you have a strategic industrial sector that

China has sort of gobbled up. You have a crisis of the American working class and deaths of despair and Angus Deaton and Case and so on. Then you have the working class voters for Trump, and then you have the fentomyl epidemic. And you pile all of these things

together and you've got yourself a real stack there. And the common problem in each case is in a sense of China, and you know that's an overcapacity fits quite nicely into that, because overcapacity is the result of the you know, the unbalanced Chinese growth model that I mean

over capacity is. You could more charitably say, it's a relatively neutral and technocratic way of describing an accusation against China that could be put in more forceful than aggressive terms along the lines of you stole our ip and screwed us, and instead you say no, no, let us explain to you, we think you have an overcapacity problem. Let us help you think this through and figure out how we deal with it.

And then I know there have been some rumblings about maybe like increasing I think she called it domestic circulation or something like that, but it doesn't seem like there's been a real push to boost the services sector or boost consumption.

rather the opposite. They actually now have this dual circulation model where they recognize there is an external sector, but that's very vulnerable to external shocks, and the center is really domestic production. You know, if you were to look at steel, for instance, you know, in a good year in China either too. And before they did the whole gearshift with urbanization and construction and real estate, I mean ninety five percent, certainly ninety two to ninety three percent

of Chinese immense steel production was consumed domestically. Right, They produced a billion tons of steel and would explore sixty to seventy million tons. The vast majority of it is being consumed at home. If you look at Adam Wolfe's amazing breakdowns of the Chinese motor vehicle industry, you see exactly the same thing. Right, The vast majority of Chinese motor vehicle production is domestic. The vast majority of their ev the electric vehicles, the ones that everyone's up in

arms about, are also being consumed in China. And that's one of the really impressive things you see on the streets and the highways around Shanghai just one fancy ev after another, stuff you've never seen before. Gull wings, it's so futuristic, you know, it's over. The competent is extraordinary.

But so far it's really largely internal. The big surge in Chinese motor vehicle exports which has made them all of a sudden, this huge force in the industry, which is hugely disruptive to the Europeans, notably is actually in internal combustion engines, so as it were, lower tech Chinese manufacturing,

and a lot of it is joint ventures. In other words, Western firms who can no longer find markets in China for their now defunct and stigmatized You know, folks in China really don't want to be driving, especially American badged cars now, and so when what we see is the export surge. But to attribute that to policy, I think is a nonsecutar. There is an industrial policy in China which is driving towards modernization. And then what mediates between the two things, what hooks these two things up is

the Michael Pettis argument about macroeconomic imbalance. The real issue is they have this very very heavy driven industrial policy and they don't have the macro demand to sustain it, and so it spills over as a result of corporate strategies of desperation, basically gambling for salvation through looking in foreign markets. That I think is a convincing overall picture. When you look at there's one sector where I think you could tell us slightly different stories and always have

been able to, which is fault voltaics. Because they're about half of output is exported. They've so overbuilt in Fota voltaics that that really is they basically decided we're going to be the monopoly supplier to the entire energy transition worldwide. There was already the case ten years ago when they

built out to meet European demand for photovoltaics. But across the board in the Chinese economy, I think it's more convincing to tell a story of industrial policy, which is primarily domestically orientated, this huge Chinese innovative scrambling response to that strategy, which then generates such fierce competition within China, especially in light of the Michael pektis demand constrained situation that then the firms go looking for foreign markets to

to find the demand. A story like that I think is more convincing than to say Beijing is aiming at export led growth.

consumer has been very weak. And so if you just look at like train miles traveled or restaurant bookings or things like that, it still looks very mediocre. On the other hand, despite the lack of sort of direct in the pockets of consumer stimulus, I see convincing things from time to time that, like the real goal of economic policy improve everyone's standard of living is still going on, that there's still growth and improvement in the standard of

living in Chinese society. I've never been to the mainland. You were there this summer, and I assume it was not your first time. When you're there and when you talk to people, does it seem like overall that whether it's clearly measurable in retail sales or whatever, that the current model is continuing to lift people up.

highly dynamic. It doesn't feel like a society which hasn't been invested in the last five years of ten years, like some bits of Europe feel at this point. So the technological innovation continues. And after all, I mean, even if we think the numbers have fudged, their growth rates are higher or at least on a par with the US and way above those of Europe and Japan. So it's definitely still growing and still generating affluent and the

innovation and technological change. Yet there's really no there's no question about that. But what you also hear really quite vocally, and I was surprised this isn't North Korea or Stalinism or something where everyone's worried about bugs in the walls or something. People will tell you quite openly how miserable they're feeling, and there is definitely a sense that something's broken.

The real estate markets headed in the wrong direction. The regime is not friendly to go getting just simple wealth accumulation anymore. The pressures of the intensely examined ri of an education system on young people and the parents of young people are relentless and brutal, and there is that

sense of like a system that is straining. It's not obvious where the next seven to eight percent per annum growth machine is going to come from, and it's always an adjustment to go from seven eight per cent per annum to three or four, even if three and four is still very respectable and loads of economists. I don't know whether you folks read the amazing blog Peakonology by Zishen Wong, who's now actually a student at Princeton. I don't know whether he'd agreed to be on the show.

better housing for rural to urban migrants. We could do various types of discounts scheme for parents. We could the tax system in a way it should be more beneficial. We could build out a welfare system that will be more supportive. What's really fascinating is that at the top level there seems to be and this is what this drum roll of expert opinion from within the Chinese hierarchy.

None of these people are remotely dissident. There does seem to be almost a German style level of resistance around a series of ideological ideas, crucially around wealth are dependence, which basically say, no, we should create this really tough environment in which Chinese families and households have to prove themselves and no, we're not going to, you know, just easily provide support. And it does seem to be something

of a hang up almost about a society. I guess the regime fears that China will lose that incredible restless, you know, hungry edge that drove it through the last twenty to thirty years. It's I guess all I don't have a good answer. What I'm saying is that within the system itself, people are just during this perplexity, and the answer you get back runs along the lines of, well, the higher ups just don't think that would be a good idea.

goods that American consumers would buy. Of course, American consumers also bought high end German exports directly, as did the Chinese upper middle class, but the direct link was the American aggregate demand excess provided a market for both German and Chinese exports, with Chinese industrialization providing a market for German manufactured goods. And that still is a link, and you see it in the commitment of capital goods industries

in Germany and industrial companies in Germany. Two ongoing direct investment in China, which is still live. I saw this when I was visiting, because I speak German and I'm known there. I bump into German business people when I'm in China and they will tell you flat out that they have to be there for two reasons. Fundamentally, because it's a big market and it's rapidly growing. If you're saying heavy chemicals of your basf, you can't not be there.

But the other reason why a VW, for instance, can't not be there is that if you're actually going to compete in the global market in the next generation of vehicles motor vehicles, you can't do what the US firms

are doing, which is basically retreating behind national protectionism. You have to at least try and stay with the Chinese manufacturers in the Chinese market, and so VW is doubling down on its investments in China because they just see it as the market it's already the biggest, but it's also now at the qualitative at the technological frontier, and unless you can compete there, and they've been having a brutal period of the last eighteen months, you're basically done.

You're basically going to be a legacy manufacturer of sophisticated internal combustion engines, not of the new cutting edge siemens. I think the electrical engineering firm is kind of a little bit in between the two. I think it also sees especially in like process manufacturing, so the sort of highly sophisticated, fully integrated electrollically controlled manufacturing lines which the German firms specialize in, they feel they have to still

be there. So there is this substantial investment driven, market orientated technologically you know, inspired link between Germany and China. And you see it in the way the German government maintains its relationships with China through thick and thin. And when Schultz goes, he takes these large delegations of German

business leaders with him, and they're quite outspoken. That sort of anti China consensus that you quite rightly pointed out is prevailing in the US and which I really think ways on American business leaders now doesn't prevent German business leaders openly saying, if we're in the business of car making, we need to be in China. I mean, they'll just

simply say that flat out. And BASF, who's played real hard ball with the German government over the Ukraine War and the energy costs issue, has openly said, you know, basically it's you know, you either give us the support we need or we're leaving for China. And in the end they've left for China where they will get you know,

the power plant they need. This isn't dirty stuff. That the BSF has this commitment to being carbon neutral in the foreseeable future, and so what they said to their Chinese the region where they're investing is, Hey, we need to get walt of clean power. And guess what, the wind farm, the offshore wind farm is already in the process of construction. So yes, the German relationship is different, and it's based on this division of labor industrial integration.

There's obviously the politics of immigration and so forth, Like how much of a direct line can you draw between what's going on with the economy and then sort of what's going on in the political scene.

absolutely gorgeous, hugely invested, wonderful places to live. But nevertheless, there is this reasonably well founded understanding on the part of East Germans that they are some level new to the party. They were basically bolted onto the West German experiment and had to largely accept its terms and for a traumatic period in the nineties and the early two thousands. This is largely the parents or the middle aged generation

of East Germans. There was huge unemployment and massive disruption and the industrialization of a really shocking variety, and that lingers in the political system. And if you ask the voters for the two extreme formations, one is the AfD, the Alternativa for deutschtand originally an anti Drages eurosceptic party, and the other one is Sarah Wagan connect so truly a Marxist philosopher who is also keen to make a compromise with Putin over Ukraine. So there's a left and

a right wing extreme. And if you ask their voters how they feel about their standing in German society, eighty percent plus will say we feel that second class citizens. So that's that's one key element. The second key element is the migration issue. And the AfD didn't start as an anti migrant, nphobia racist party. It started as the alternative was to Qe to Dragi, but after the refugee shock in Syria in fifteen sixteen, it became an openly racist,

openly in neo Nazi formation. Where I think the de industrialization element of the story comes in is that that removes the last best hope, if you like, of the mainstream, which says, you know, the way we're going to address these problems and as it were, integrate the ease more successfully is by Germany's economic success story that's ultimately going to take care of this problem, will achieve successful integration, and they plowed money into Intel and the Taiwanese manufacturing

chips around Dresden. That hasn't brought off the East German voters. And the real nightmare of the shift in the motor vehicle industry, which is a huge piece of the German industrial infrastructure still is that if that goes, then your antidote, if you like, to what is essentially a politics of racism and is Lamophobia, that is no longer plausible, and it isn't. I don't think that, you know, folks in Dresden or in Cheering Gear are voting AfD because they're

worried about jobs being lost in VW. It's more that in Berlin there's total panic because if you haven't got the VW model, it's not obvious that Germany really has a growth model. And in part it's the same blind spot as we were talking about with the US. In other words, they aren't actually focused on what, even in Germany is the main source of employment and GDP, which is services and not the manufacturing base. But they have

been they've trapped themselves. They are trapped by powerful interest groups, the very strong voice of organized labor in Germany, but also the industrial lobby and a kind of lack of imagination. They're kind of clinging to industrialism as really the last straw. And yeah, that's why then the threat of China is really ominous.

China dream. The extraordinary sophistication of a city like Shanghai is not matched in the Chinese hinterland, which is of course vast and its contained hundreds of millions of people, and even elementary stuff like schooling is really miserable in provincial China. We of course, think of the huge success of elite education in China, but that isn't the majority experience, and so you know, you would very easily imagine a

kind of comprehensive upskilling upgrading strategy. Implementing it would be a different thing, but that would be the way you would go. First, economy as large as China's, it's a domestics policy story in the end that will make the difference for Germany. I think it has to be a year wide that's the way to go. I mean, they could break the impast domestically over the debt break and invest and that would be one option, and that's certainly

a big priority. And there's some promising noises now mercifully finally out of the SPD, out of the Social Democratic Party, Chancellor, the Schultz Party about a frontal attack on this debt break.

So the debt break is the German version of the European debt rules, or vice versa, the European rules, or aversion of the German debt break, which limits the deficit and constraints borrowing, even when Germany pays hardly any real interest and is in need of several hundred billion euros worth of investment in every area of public infrastructure of digitization.

So that would be one way out. The other one I think has got to be Europe, and it may be shocks which you know, deliver the opportunity to do this. A Trump victory followed by disaster for the Ukrainians would I think unleash a new europe level borrowing package, maybe another half trillion years worth of borrowing, and that would be the kind of structural stimulus that would benefit the German economy quite considerably.

and these aren't the rules of global trade. Just from like the historian perspective, Is this a novel argument or has there always been this idea that like, no, you're you're doing it the wrong way, or you've built up this industrial capacity in a different way than we built up and you know, again, and it strikes me that like every country has different domestic rules and so forth. You know, in the US we subsidize education to quite a degree, and so that is a form of subsidizing

worker training that then corporations can take advantage. How novel is this claim that like, we get to do these things because we don't like the way you've developed. Has that always been part of these global trade debates.

policy spending, and it's significant. I think the most widely cited estimate puts in about one point seven percent of GDP, which when you compare it to a similarly defined measure, though I agree with Joe there's like lots of different ways of defining, but if you player the same classification to Europe and the US, that's about three times the share that they spend. So that's one element of this

that's clearly for real. Another, I think horizon against which to measure this like the regime that we had before, And I think the ferocity of this argument has to be judged against the assumption that somehow we had outgrown that kind of era of state led and state subsidized support. And in the European case, you'd have to say that

since the nineties they've taken that really quite seriously. In other words, the Europeans do have rules that bite to prevent national governments and regional governments from doing the kind of subsidy that the Chinese take for granted. Why, because the Europeans are balancing this really complicated multi European union, and so to avoid just these crazy subsidy races and Germany winning all of them, that have to be these very tight rules. And the Europeans take this seriously to

an extent that is at times quite fascical. The argument coming from the American side is a little less plausible, because that kind of subsidy never really went away, and the American states and cities have always competed in a

fairly brutal way for investment. But I think that's an horizon against which sort of the point the finger is pointed at China, which was okay in the nineties, we expected you to do this because you were still poor then, and then you did wto and then we were expecting you to get rich and grow out of this, and goddamn it, you haven't. No, in fact, you've somehow doubled down. Since the twenty tens, you've been doing it more and

more intensely. And there's a new study of China which suggests that, in fact, this was a policy learning on the part of Beijing out of two thousand and eight. So the Chinese imagine that after the great financial crisis in the West, the Europeans and the Americans would realize that finance centered growth was not a great thing, and they would double the hub on industry and to get

ahead of the game, the Chinese thought they should. And of course it turned out that no one else really ever did quite make that move, and the Chinese really did. And you know, by twenty fifteen they had made in China twenty twenty five policies. So there was an asynchronicity in which, as it were, European and American policy theory thought we would get grow out of this, So the Chinese suddenly in fact doubled down.

the Biden administration. You know, we have had this turn right, so the administration and maybe starting with Trump, but certain the administration is like pivoted away from the sort of I guess people call it neoliberal consensus of the decades that preceded it, the worker centered approach to thinking about our trade relationships, et cetera, domestic investment, maybe belatedly getting to do some of the policies that maybe we should

have implemented fifteen years ago after the financial crisis. What do you see as your role as I guess a public intellectual, someone on the left. You know, you're someone who people in the Democratic Party might read and listen to. What do you what do you see is sort of what you trying to accomplish with your writing and your public work.

And we were listened to, like you know, I know from Schumer's people that absolutely that argument that they missed a trick in two thousand and nine. It really that actually got through. After all, they did the huge stimulus early in the Biden administration, and I would argue that it delivered a miraculous macroeconomic record, right. But the funny thing is that that's the bit of Biden economics that everyone wants to forget because of the Larry Summer's invasion argument, right,

because that was anathematized almost as it was happening. Instead, the entire team have swarmed around this industrial policy element, and I think there I've discovered a new role. So I think in the first phase I felt okay, there was policy learning that was going on, and the kind of left critique of the Obama administration was making a

very positive contribution in feeding that. Then we came to what actually emerged in the industrial policy, and I have to say that a lot of folks that I would you know, consider allies, friends, whatever, shifted roles to essentially the role of a kind of cheerleading around the Biden administration. And I get it right, they're Americans. I'm not an American non American citizen. For them, this is life and death fate of the Republic. We have to rally behind

our team. And by joke, they did, like the Biden administration, if nothing else, was brilliant at message management and worked you know the usual suspects in the finance twitter space, incredibly hard to get everyone on side and keep pushing. And at that point I have to say I'd discovered a slightly different role, which was more that it's a

less attractive role. It's a less it's less comfortable, which is really that sort of inside critic or just simply somebody who wasn't necessarily drinking the kool aid and was saying, well, by what metric, by what scale is this really adequate? And so that was on the IRA side, the Inflation Reduction Act, where this was turned into this gigantic epic of industrial policy, and I just don't see it. I don't see it in the data. I don't see it

in the scale. I don't see it if you run any kind of counterfaction on what we would have expected anyway to have happened. I think there's been a real sort of soft kid glove treatment of this. And much more seriously, however, is the is the question of war, is the question of warm peace and the way in which natural security has come to form an essential part of even of a progressive economic policy in the United States.

And I come from the generation of Europeans whose childhood and youth was entirely dominated by the prospect that we were all going to end our lives in a nuclear incineration. And I find that turned towards a hawkish, anti China synthesis of industrial, economic and military policy profoundly troubling, and at the very least, I think the role of folks with you my kind of biography, I will become an

American citizen. But nevertheless, I feel like our role at this point is to push back because there's an element of flag waving, a kind of left American exceptionalism that comes very rapidly to the foe in moments like that, and there is a willingness to believe that, yes, you know, I don't know America can do a Green Marshall Plan

or that whole rhetoric they're very familiar with. And I've discovered a different role for myself than I really imagined in I don't know whether I've anchored anything, but that's just consistently asking the question is this And it's not a skepticism about, you know, the potentially beneficial role of US leadership. It's just actually, more often than not, a

kind of asking, are you actually serious at all? Because I see hundreds of millions and single digit billions when we all know that the problems we're talking about, if you're serious and if you actually want to compete with China, ask one hundreds of billions, if not trillions of dollars

that need mobilizing. And what I definitely don't think we should buy is the kind of weak soup of a promise of giant and dramatic action which we all kind of you know, can get excited about, when in fact what's being delivered is something far less than that.

just giving it this veneer of like scientific feeling. I thought that was really interesting because it does seem to be like maybe that has happened over the past year or so.

continuing to be a major source of strain. We all know the frustrations that people have with like university costs, or childcare costs or elder care costs, things like that. And so when we think about like economic growth and where productivity gains are going to come from, we default

to the manufacturing sector. Mean, while there's this huge swath of our economy that I think many people intuitively feel like we're losing ground on that we're getting the same thing, but it's more expensive every year, and that perhaps the sort of big challenge or a task that we should take up at some point is like, why do we make our services cheaper?

negative vibe. And maybe it's just because you know, GDP growth has been weak, but it feels like, at least again there's all secondhand for me that there is like something something wrong going on there with the way the domestic population perceives how the economy is unfolding.

of people at this point. But conversely, if you look at China, China had massive stimulus posts two thousand and eight, and people have even described China as saving the global economy in that time period, And I think you kind of have to wonder like if that stimulus had been somewhat scaled down, would that have made I guess the transition or the post two thousand sort of twelve years a little bit easier like the US, if we had scaled up fiscal sooner post two thousand and eight, maybe

things would have been better. But conversely, if China had maybe scaled some of it down post two thousand and eight, would it have been better for the economy. It maybe enabled it to move more to you know, market driven consumer demands. That's interesting.

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