The PRC’s economy is larger than those of the next four economies - Japan, Germany, the United Kingdom, and India – combined. Its largest province, Guangdong, has a nominal GDP larger than Canada’s. The Yangtze River Delta, centered around Shanghai, has a GDP roughly the size of Germany’s.
The PRC bucked global trends and posted positive global growth through the pandemic, albeit in a very uneven fashion, as demonstrated in the graph below. Irrespective of the COVID-19 crisis, the PRC’s growth rate has slowed in recent years. The country is facing a shrinking workforce, reforms that reduce debt-fueled growth, mounting provincial debt, and trade turmoil with the United States.
While the dynamism of the PRC’s private sector has resulted in economic development that has led hundreds of millions of people out of poverty over the past several decades, the country is still not considered a ‘developed’ economy on a per capita GDP basis. The U.S. GDP per capita in 2021was almost six times as large as the PRC’s.
The government’s “zero-covid” pandemic policies have depressed household spending and private business activity, which will have a negative impact on its annual growth target of 5.5 percent. In July of 2022 the International Monetary Fund (IMF) adjusted its 2022 GDP growth prediction for the PRC down to 3.3 percent. Real growth in private consumption is estimated to drop from 5.2 percent to 2.0 percent.
The trade relationship between the PRC and the United States has been long characterized by ongoing trade disputes. This includes the PRC’s use of intellectual property (IP) theft, forced technology transfer, and myriad market access issues that impede U.S. firms from operating on equal footing with local PRC firms. The United States has responded with trade policy actions including tariffs, sanctions, and export controls.
In 2021, U.S. exports of goods and services to China were $188.3 billion, up 13.9% from 2020, and imports from China were $527.6 billion, up 17.1% from 2020. As a result, the trade deficit with China increased to $339.2 billion.In 2021, exports to China accounted for 7.4% of total U.S. exports, and imports from China accounted for 15.5% of total U.S. imports. Exports were led by industrial supplies and materials, which accounted for 26.3% of U.S. exports to China, and imports were led by consumer goods except food and automotive, which accounted for 48.2% of U.S. imports from China.
The PRC continues to pursue a wide array of industrial plans and related policies that seek to limit market access for imported goods, foreign manufacturers and foreign services suppliers, while offering substantial government guidance, resources, and regulatory support to local industries. The beneficiaries of these constantly evolving policies are not only state-owned enterprises but also other domestic companies attempting to move up the economic value chain.
The PRC’s State Council industrial plans are a threat to U.S. exports. This includes Made in China 2025 (published in 2015) and the 14th Five Year Plan (published in 2021) which target 10 strategic sectors, including advanced information technology, automated machine tools and robotics, aviation and spaceflight equipment, maritime engineering equipment and high-tech vessels, advanced rail transit equipment, new energy vehicles (NEVs), power equipment, farm machinery, new materials, biopharmaceuticals, and advanced medical device products. While ostensibly intended simply to raise industrial productivity through more advanced and flexible manufacturing techniques, these policies are emblematic of the PRC’s approach to “indigenous innovation,” which is evident in numerous supporting and related industrial plans. Their common, overriding aim is to replace foreign technologies, products, and services with local technologies, products, and services in the PRC market through any means possible to enable local companies to dominate both the local and international markets.
These policies seek to build up local companies at the expense of, and to the detriment of, foreign companies and their technologies, products, and services through a multi-step process over 10 years. Their primary goal is to ensure, through various means, that local companies develop, extract, or acquire their own technology, intellectual property, know-how, and their own brands. The next goal is to substitute domestic technologies, products, and services for foreign technologies, products, and services in the PRC market. The final goal is to capture much larger worldwide market shares in the 10 targeted sectors.