Faced with US tariffs, China needs to liberalise its economy

The East Asian country must move towards a sustainable model based on higher domestic consumption

- Natale Labia

The tariffs are starting to bite. Data out this week showed that China's exports to the US plunged by 34.4% last month, the sharpest drop since the Covid-19 pandemic, according to Bloomberg. This decline occurred despite the temporary trade war “truce” announced by US President Donald Trump in May.

This precipitous drop is undoubtedly a blow to China’s critical export machine. Yet, it underscores a broader, more important economic question: can China pivot its massive economy away from export-led growth towards a more sustainable model predicated on higher domestic consumption?

Underlying the data was the strength of the Chinese export machine. Remarkably, despite the collapse in exports to the US, China’s total exports rose nearly 5%. But the bigger challenge lies in transforming the economic model that has driven China’s breakneck economic expansion for decades.

The call for China to rebalance its economy away from selling to consumers in other countries is not new. Economists have long warned that its reliance on domestic savings funding investment into manufacturing foreign exports is unsustainable. The Trumpian trade war has merely sped up the urgency of its need to make this transition across the economic Rubicon.

Scepticism is rife as to whether the Chinese Communist Party (CCP) has the means, or political will, to foster such a shift to a consumption-led economy. It would not be without its political and social risks. History has shown that when people become better off, and economically freer, they tend to demand equivalent political freedoms.

Yet, the question might not be whether the CCP wants or is able to allow such a shift. Rather, can it afford not to do it? China must, in a sense, evolve or die. And signs are that it is indeed taking this plunge.