The ongoing global tariff war tests China’s economic resilience but also offers an opportunity for the nation to establish itself as a key player in shaping the future of the free trade system.
By adopting a comprehensive road map that focuses on the core principles of zero tariffs and subsidies, a unified market and pension system, and separate domestic and overseas markets, China has the potential to successfully navigate the uncertainties of the tariff war.
Embracing a bold policy of zero tariffs and zero subsidies for exports and foreign investment would not only showcase China’s dedication to open markets and fair competition but also position the nation as a trailblazer in shaping the future of international trade. China’s implementation of zero-tariff policies with 43 countries, including 33 African nations, highlights its role as a key trade leader, particularly for the Global South. The substantial reduction in tariffs to only 0.1 percent on the Association of Southeast Asian Nations goods sold in China since January 2010 has significantly boosted trade volumes between China and ASEAN countries.
Diversifying trade partners and reducing reliance on the United States market are essential for China’s future growth. Prioritizing negotiations for a free trade agreement with the European Union offers a significant opportunity for China to leverage Europe’s increasing skepticism toward US protectionist measures. By strategically pursuing these initiatives, China can position itself as a key influencer in promoting global trade liberalization and fostering stronger economic ties with the EU.
China’s previous dependence on subsidies for foreign investment has been crucial in propelling its rapid industrial growth. However, as China’s economy matures, there is a growing imperative to gradually phase out these practices to prevent market distortions and ensure fair competition, particularly for domestic private enterprises.
Shifting the focus from export subsidies to boosting domestic consumption can aid in rebalancing China’s economy toward internal demand. In 2024, the trade surplus surged to a record $992.2 billion. Redirecting attention from export subsidies to stimulating domestic demand can promote sustainable growth and mitigate vulnerabilities linked to external economic factors.
A unified domestic market plays a crucial role in strengthening China’s economic stability, while a comprehensive social safety net is key to promoting internal consumption. To improve efficiency and competitiveness, it is essential to address issues such as local protectionism, redundant industrial policies, and regulatory disparities within China’s domestic market.
The upcoming decade will play a pivotal role in determining whether China can effectively transition from a manufacturing powerhouse to a well-rounded superpower. This transition would involve leveraging both its industrial strength and soft power to reshape global economic dynamics and establish new norms
The electric vehicle sector in China serves as a notable example of the importance of reallocating subsidies toward research and development to spur innovation and elevate industry performance. The significant decrease in the number of EV manufacturers from over 500 in 2019 to about 100 in 2023 underscores the need for efficiency with investment in the sector.
Implementing a centralized regulatory framework and advocating for resource optimization are key measures in promoting internal market integration and fostering sustainable growth within the EV industry and the broader economy.
China’s subdued domestic consumption is influenced by high household savings, often driven by concerns related to education, healthcare, and housing expenses. The triple household financial challenges have become a heavy burden that stifles domestic consumption. Therefore, it is key to address this issue by implementing a unified pension and welfare system. China’s pension system has come a long way. But lingering structural problems remain — above all, inequalities. Currently, there are significant disparities in basic pension standards among various regions. Taking the four municipalities as an example: Chongqing has a basic pension of 125 yuan ($17.26) per month, Tianjin 317 yuan, Beijing 887 yuan, and Shanghai 1,300 yuan. The national minimum standard for basic pensions for peasants and migrant workers is as low as 123 yuan per person per month.
By ensuring broader access to pension benefits and providing financial security for retirees, China can potentially stimulate domestic consumption. This could lead to a more balanced and sustainable economic model that relies less on export-led growth and more on domestic demand.
Navigating the challenges posed by tariff wars requires a strategic approach that balances domestic and international markets. While safeguarding key industries at home, global production capabilities need to be improved. CATL and BYD are cases in point — they have successfully established factories in Asian and European countries, including Hungary. By adopting a global expansion strategy, Chinese firms have strengthened their presence in the world market, which, in turn, will mitigate the impact of tariffs.
Despite China’s substantial global manufacturing dominance — which accounts for one-third of global output — its service industry trails behind those of more developed nations. China should prioritize bolstering its service sector by harnessing its cultural soft power. Examples such as the blockbuster movie Ne Zha 2 and the popular video game Black Myth: Wukong demonstrate how China’s soft power can facilitate export diversification and accelerate economic expansion. By promoting and exporting cultural products that appeal to global audiences, China can strengthen its soft power and expand its influence beyond manufacturing.
Instead of engaging in a fruitless tit-for-tat tariff war, China’s optimal strategy involves surpassing the US by cultivating a more resilient, innovative, and globally integrated economy. The upcoming decade will play a pivotal role in determining whether China can effectively transition from a manufacturing powerhouse to a well-rounded superpower. This transition would involve leveraging both its industrial strength and soft power to reshape global economic dynamics and establish new norms.
The author is an associate vice-president at the University of Hong Kong, and the founding director of the HKU Institute for China Business.
The views do not necessarily reflect those of China Daily.
