The trade war may be painful but it could be just what the country needs to bring down domestic barriers to growth
Relying on brute strength has never been the Chinese way of fighting. A smaller fighter with superior inner balance and core strength can overcome a larger opponent. As China faces an escalating
economic war with the United States
, this timeless knowledge still holds true.
Beijing shows little enthusiasm for negotiations and harbors no illusions about them.
trade conflict with President Donald Trump’s United States
will come to an end shortly. The Chinese leaders have realized that unlike the trade disagreements during Trump’s initial term, the current American strategy goes beyond just rebalancing trade; it aims at systematically hindering China’s economic progress.
If reducing the trade deficit was the aim of the U.S., the solution would be straightforward. The United States indeed offers goods that China wishes to purchase. For years, semiconductors, automobiles, and machinery have been significant American exports to China.
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In 2022, semiconductor purchases amounted to $12.1 billion in China, which made them the largest consumer of American microchips, representing one-fourth of all U.S. exports within that industry. Instead of leveraging this significant demand, however, the United States chose to go in the reverse direction—implementing restrictions.
increasingly strict export controls
, especially concerning advanced technology. By 2023, semiconductor shipments to China had fallen to $10.2 billion, largely due to restrictions imposed by Washington.
China is digging in for a long fight. In the near term, it could use fiscal stimulus to mitigate the impact and buy time. But the real key is for it to resolve its own economic weaknesses. Chief among them, I believe, is the fragmentation of China’s domestic market.
To grasp this concept, let us look back about 16 years into the past.
In 2009, China faced the global financial crisis when export demand plummeted. In Gongan County within Hubei Province, officials sought desperately to bolster the region’s tobacco sector. They implemented a rule requiring all government workers to exclusively purchase and consume locally produced cigarettes; failure to comply would result in penalties. Educators and state personnel received individual targets each month for buying these specific smokes, and stores were prohibited from offering competing products. Authorities went further by checking waste bins in communal areas, punishing those responsible should discarded remains of foreign-brand cigarettes be discovered. Although this measure was quickly rescinded due to widespread disapproval, it highlighted the extreme measures taken under regional favoritism policies.
Gongan was not alone in this practice. In 2006, neighboring Hanchuan County instructed government employees to drink local liquor to boost the area’s economy. This requirement became so extreme that some offices felt compelled to finish three bottles daily just to comply with the directive. Reports from sources like People’s Daily have highlighted similar instances, underscoring a broader issue within China’s administrative system: even though the country has centralized control, regional boundaries create fragmented markets internally. Officials were motivated primarily by GDP targets; thus, they created de facto tariffs through various means such as additional fees, restrictions on external products, and manipulation of market dynamics. Essentially, these actions formed hidden trade barriers akin to import duties.
The expenses associated with this approach are enormous. Domestic logistics expenditures account for approximately 14 percent of China’s gross domestic product (GDP), which is almost twice the worldwide average, as reported by the China Federation of Logistics and Purchasing. Goods traveling across different provinces within agriculture often encounter up to five inspection processes, leading to spoilage levels that reach 30 percent—a rate six times greater than what occurs in the United States, based on data from the World Bank. The State Council’s Development Research Center calculates that these internal obstructions result in an annual loss equivalent to 3-5 percent of China’s GDP. In contrast, even though President Trump imposed significant trade duties, they were projected to reduce China’s GDP by only up to 2.4 percent, according to analyses by Goldman Sachs.
Acknowledging this weakness, Beijing initiated the ”
National Unified Market Initiative
In 2022, this initiative was clearly positioned as a safeguard against outside disruptions. The objective is ambitious: to eliminate regional fiefdoms, simplify regulatory processes, and integrate China’s 31 provinces into one cohesive economic zone. However, progress has varied, largely due to deep-seated forces opposing these changes. Ironically, the U.S.’s aggressive trade tactics might provide just the push required to overcome this stalemate.
In China’s case, progress depends on two key areas. Initially, fiscal stimuli can help soften immediate economic shocks. Secondly, should the integrated market be completely implemented, it has the potential to drive productivity improvements far exceeding those influenced by foreign import duties. Just think about the advantage gained if transportation expenses were cut in half, or if new businesses could expand across the country without facing an intricate web of regional regulations.
Historical evidence indicates that China tends to implement rapid reforms under pressure. Although the trade conflict causes significant pain, it could hasten the elimination of longstanding economic inefficiencies. As Friedrich Nietzsche posited, “That which doesn’t destroy me strengthens me.” In this context, Beijing’s true triumph would be achieving greater efficiency, autonomy, and resilience rather than merely imposing higher tariffs than those set by Washington. This principle echoes an age-old adage found within traditional Chinese martial arts philosophy.
The path forward is filled with challenges, yet should local protectionism diminish, the tariffs imposed by Trump might unintentionally accomplish what years of domestic advocacy failed to do: a genuinely integrated Chinese marketplace that can transform external pressures into unwavering resilience.
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The article initially appeared on the South China Morning Post (www.scmp.com), which is the premier source for news coverage of China and Asia.
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