Joe Biden’s claim that China “will never surpass” the US in economic terms has sparked fresh debate among analysts everywhere. Yet count prominent mainland economist Justin Lin Yifu among those who aren’t buying the outgoing American president’s math.
Lin, a former World Bank chief economist, predicted 31 years ago that China’s gross domestic product (GDP) would top the US’ as early as 2030 and by 2035 at the latest. Speaking at the Asian Financial Forum in Hong Kong on January 13, Lin said that “under normal circumstances” his prediction “should remain unchanged.”
Caveats abound, of course. One is that Lin’s take on the changing of the GDP guard is based partly on exchange rate movements as China lets the yuan rise. Any move by Xi Jinping’s Communist Party to devalue or manipulate the yuan for years to come could, in theory, impede China’s GDP trajectory.
But there’s nothing particularly “normal” about either the state of US finances that Biden’s government leaves behind or the giant trade war Donald Trump is threatening. Between Washington’s US$36 trillion national debt and the Trumpian trade clashes to come, there are plenty of reasons to worry about self-inflicted US headwinds, old and new, clouding the outlook.
Then there’s the inflation surge to come if Trump makes good on his tariff threats, including a 60% blanket tax on all Chinese imports. In December, US consumer prices were rising at a 2.9% rate year on year.
Wall Street rallied on the news, largely because prices are rising less rapidly when volatile food and energy goods are removed from the basket. “The Federal Reserve is ok with watching the headline CPI go up temporarily if that increase does not spill over into the core CPI, and this is what happened in December,” says Eugenio Aleman, chief economist at Raymond James.
Yet economist Robert Frick at Navy Federal Credit Union adds that “core inflation rising less than expected may portend good news for inflation in the months ahead, but this was a particularly painful report for consumers.” Frick notes that the “cost of necessities that hurt household budgets, especially for lower-income Americans, were among the top reasons inflation rose in December.”
If and when Trump layers on ever more taxes on imports, upward price pressures may intensify. Many economists worry Trump’s 60% tariff on China and 25% levies on Canada and Mexico to start might have the Federal Reserve mulling rate hikes instead of cuts.
As such, “US equities may now need clear relief from hawkish policy to make a sustained move higher,” says Goldman Sachs strategist Dom Wilson. “We think equities may remain more fragile until we reverse the perception that the ‘Fed put’ is now struck lower.”
This reportedly has Trump considering a more gradual imposition of tariffs, so as not to suddenly push inflation significantly higher.
“If the focus is more on deregulation, tax cuts and potential sweeteners than changes to tariffs and immigration, then growth could be much stronger in 2025,” says Diane Swonk, chief economist of KPMG. “Otherwise, risks are for higher inflation and weaker expansion.”
What’s more, many doubt Trump, considering the array of China hawks he’s gathered in his next cabinet, will have the discipline to forge a giant trade deal.
Trump’s “transactional approach won’t work everywhere, and in some cases, it will backfire,” warns Ian Bremmer, CEO of the Eurasia Group. “China isn’t prepared to offer meaningful enough concessions to achieve a grand bargain, especially amid an absence of communication and management channels.”
Bremmer notes that “early tariff hikes and mounting US provocations, at least as perceived by Beijing, in the coming months are likely to cause a breakdown in US-China relations this year,” not an economic partnership.
Here, Biden’s hubris about his economic legacy also seems unhelpful.
Arguably, Biden’s presidency did more to hobble key Chinese industries than Trump 1.0 did. Whereas Trump relied on blunt-force tariffs, Biden prioritized more nuanced and targeted curbs on mainland technology and limited China Inc’s access to vital materials.
Biden also pivoted somewhat toward building economic muscle at home. The Trump 1.0 era was about tripping China on the race course. Biden focused more on limbering up to compete with China the organic way and over the long term.
The CHIPS and Science Act that Biden signed into law in 2022 deployed $300 billion to strengthen domestic research and development. Biden took other steps to incentivize innovation, raise America’s semiconductor capabilities and boost productivity.
It was a significant change from the Trump era, the centerpiece of which was a $1.7 trillion tax cut that did little to raise competitiveness or increase domestic capacity. Had Trump’s tax scheme innovation – or Biden’s policies been more ambitious – boosted innovation and productivity, US inflation might not be rising nearly 3%.
The risk is that Trump bows to partisan politics and scraps all Biden-era policies aimed at increasing US competitiveness at home. In their place, he’s apt to resort to blanket tariffs that inflict as much harm at home as they do in China. And additional stimulus that fans inflation.
Trump’s economic toolbox doesn’t seem to have been updated since the mid-1980s. Along with taxes on Chinese goods, Trump’s signature “reform” was a return to Ronald Reagan’s “trickle-down economics.” As such, Trump 1.0 did little to incentivize chieftains to compete with China by getting the US economy in better shape domestically.
The last batch of Trump tariffs didn’t increase US productivity, unleash new waves of entrepreneurship or build new economic muscle at home. Nor will the onslaught of Trump 2.0 taxes coming Asia’s way. The 60% tax on Made in China goods could easily rise to 100% or more. So might the 20% blanket across-the-board tax Trump is mulling for all goods entering the US economy.
These policies may hurt middle-class US households, depressing GDP in the medium-to-long terms. Trump’s plans to begin mass deportations of allegedly undocumented immigrants will further tighten the labor market and raise wage-push inflation.
Another problem with Biden’s hubris and Trump’s overconfidence is that both men miss how different China is today relative to 2017, when Trump 1.0 took office. For one thing, its reliance on the American consumer has been significantly reduced. China’s steady efforts to recalibrate trade routes to Global South nations make China less vulnerable to Washington’s exploits.
For another, US officials may be missing the ways in which China has raised its economic game. Over the last decade, Xi’s inner circle has been implementing his “Made in China 2025” strategy.
Though China faces daunting challenges, not least of which is a giant property crisis, Beijing has been investing big in semiconductors, electric vehicles, biotechnology, aviation, robotics, renewable energy, artificial intelligence and high-speed rail.
China’s success in EVs has Honda Motor and Nissan Motor rushing to join forces. Few Japan watchers saw that tantalizing realignment coming.
Then there are the ways China might retaliate against Trump’s trade war. As former World Bank economist Lin said in Hong Kong this week: “We hope Trump will be reasonable, because to charge 60% of tariff rates on China, or 25% of tariffs on other countries, I don’t think that is good for the US, certainly, that’s not good for the world [either].”
Lin concludes that “we have no control over the trade policies from the US. But if the US is unreasonable, we should be reasonable. And if we maintain togetherness, I think we will be able to weather through any challenges.”
But then, China could slap across-the-board taxes on US companies most on the frontlines of Trump 2.0’s decoupling ambitions, including Amazon and Walmart. For instance, Xi could tax, block business transactions or even seize the assets of Apple, Microsoft, Tesla and other household name companies. Team Xi could also dump large chunks of Beijing’s $770 billion stockpile of US Treasuries.
As the US threatens trade wars, China is honing its innovative skills. As Asia Times contributor Han Feizi pointed out this week, China will see a tripling of its STEM workforce in the next two decades. Meanwhile, American students are leaning away from jobs in science, technology, engineering and mathematics.
There’s a view, too, that this STEM boom will ensure a productivity surge that softens the blow from China’s deflation trend.
As Han notes, the globe hasn’t experienced a sustained period of prolonged supply-driven deflation since America’s post-Civil War years from 1873 to 1899. That wave of industrialization saw massive investments in manufacturing technology, roads, railways, steel production and other sectors to increase economic efficiency.
Looking forward, in light of Lin’s forecasts, it’s worth noting that the United Nations reckons that China’s role in global manufacturing could hit 45% in the next five years, versus just 30% in 2022.
This, of course, assumes that Xi’s inner circle accelerates steps to realize his Made in China 2025 dream. And that the People’s Bank of China (PBOC) succeeds in keeping deflation from getting out of control.
The US, meanwhile, needs to supersize efforts to revitalize its semiconductor sector. Scott Bade, senior analyst at Eurasia Group, notes that Biden’s CHIPS Act was a tool to address several problems: reshoring domestic chip manufacturing for national security use, advancing the US’s position toward becoming a world leader in advanced semiconductors, keeping advanced chips manufacturing out of China – through guardrails on companies that receive funds – and de-risking Taiwan.
“Directionally,” Bade says, “the CHIPS Act is making progress on all these priorities. But with many players and billions of dollars at stake, rebuilding domestic chips infrastructure in the US was always going to be a long and complex process.”
Unlike countries such as Japan that have robust ecosystems already in place, it will take many years and likely multiple subsidy packages to fully grow a US ecosystem that can entirely meet those objectives.
Regardless of the politics, the US tech industry still faces significant structural constraints. “Recreating a semiconductor ecosystem in a short period of time was always going to be challenging as companies establish supply chains, train workforces, and overcome the typical growing pains of starting up brand new facilities,” Bade adds.
Japan, says Stefan Angrick, an economist at Moody’s Analytics, has used foreign direct investment to great effect to avoid threatened trade restrictions. “Setting up manufacturing plants in the US contributed to local production, GDP and jobs, reducing political pressure for tariffs or quotas,” he says. “This may serve as a blueprint for managing future trade frictions.”
During Trump 2.0, Japanese car and auto-part manufacturers will be under pressure to shore up investment in the US. Similar considerations apply to South Korean and Taiwanese electronics producers, Angrick notes.
Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung are already major investors in the US, but Trump may push for more, notwithstanding mixed pre-election messaging on the CHIPS Act.
With Trump, “the only certainty is uncertainty,” says Ryan Sweet, chief US economist of Oxford Economics: “With … Trump promising wide-ranging tariffs, mass deportations of undocumented workers and adjustments to both the Inflation Reduction Act and CHIPS Act, these changes could be substantial.”
But even before Trump arrives, is the Biden White House over-reaching in its final days?
Yanmei Xie, an analyst at Gavekal Research, observes that Biden’s Commerce Department has been rolling out a final volley of tech restrictions aimed at China. Along with slowing China’s progress, they seem aimed at locking in controls that Team Trump can’t easily reverse with a new trade deal, thus solidifying a trade bloc that excludes Xi’s economy.
The risk, though, is that the rules backfire and much of the world decides it would rather buy cheap Chinese tech than join forces with US protectionism.
As Xie puts it, “future supply chains could bifurcate differently: a high-cost one to serve the picky US market and a low-cost one to serve not just China but much of the rest of the world. In that case, US protectionism will be a qualified success, but at the risk of making the US, not China, the isolated market.”
Follow William Pesek on X at @WilliamPesek
