China on Alert Against US and Europe, Draws Economic 'Red Lines'

The Chinese government is aggressively defending its economic policy of prioritising support for high-level industry over boosting domestic consumption. Beijing’s confident stance was demonstrated ahead of important trade negotiations with the United States and the European Union. President Xi Jinping is scheduled to hold several face-to-face meetings with US President Donald Trump this year. Meanwhile, the European Union has set an October deadline for Beijing to resolve disputes related to China’s trade surplus, which has exceeded US$1 trillion. Western countries view China’s economic model as mercantilist and contrary to global trade rules. Beijing’s prioritisation of the manufacturing sector over household spending is seen as flooding the global market with cheap products, ultimately eroding local industries in its trading partners’ countries. Pressure from the United States through import tariffs of over 100 percent was previously held back after China leveraged its dominant position in the rare earths supply chain. Meanwhile, the European Union, which records a daily trade deficit of US$1 billion, has begun implementing domestic industrial and procurement policies to protect its market. German Chancellor Friedrich Merz even openly criticised Beijing for allegedly deliberately keeping its currency exchange rate low. However, reports from the OECD and the Bank of Italy indicate that around 75 percent of China’s export growth and market share gains are strongly driven by government subsidies and weak domestic consumption. Despite the criticism, a top-level meeting of the Chinese Communist Party confirmed the continuation of this policy direction. Beijing opted to provide targeted support to industry rather than unleashing consumer-oriented stimulus. The Ministry of Commerce firmly rejected Western accusations of industrial overcapacity in an official position paper, assessing that the overcapacity narrative is logically flawed and based on ulterior motives. The party’s theoretical journal, Qiushi, also defended the country’s low consumption levels as a historically justifiable outcome of an investment-led development model. However, the journal acknowledged that historical justification does not equate to long-term justification, and that gradual economic model adjustments are still necessary. Senior Economist at the Economist Intelligence Unit, Xu Tianchen, assessed that Beijing’s firm signal is intended to help other countries understand the background of its internal policies while setting a ‘red line’. ‘China is making it clear that it will not accept discriminatory actions or rules targeting its companies or export products,’ he said. The Chinese government asserted that its export products are not only cheaper but also of increasingly higher quality thanks to technological investment. Premier Li Qiang responded to Western warnings about a ‘China shock 2.0’ scenario—where advanced Chinese manufacturing displaces Western competitors—by describing the phenomenon as a ‘China opportunity 2.0’ for the global economy. Rhodium Group Co-Founder Daniel Rosen noted, ‘China’s arguments are now being made more frequently and formally because evidence of systemic domestic economic problems affecting the whole world is mounting more rapidly.’