China’s Mercantilism Exposed

Recently, Trump became President-Elect, and one thing that I have read in a few articles is that Trump is going to bring back mercantilism. The concept of mercantilism is nothing new; however, it would be ignorant to claim Trump is bringing back mercantilism. So, I decided to research and figure out how mercantilism has played a role in the geopolitical world in an obvious way.

United States has embraced globalization. However, it appears the US has been misled by other countries who promote globalization while simultaneously practicing mercantilism. In reality, any country that prioritizes maximizing exports and minimizing imports, as many do, is fundamentally mercantilist and not globalist.

Some might argue that Germany practices a milder form of mercantilism, given its annual exports exceeding $1.6 trillion and its substantial trade surplus. However, China stands out as the most egregious offender. China’s overarching objective is to become the world’s dominant manufacturer, importing raw materials, undermining industries in other countries, and exporting finished goods with the single-minded goal of accumulating wealth and maximizing dollar reserves. 

China’s exports exceed $3.4 trillion annually, with a trade surplus nearing $1 trillion in 2024. This raises a critical question: if China is generating such a massive surplus, why is its economy struggling?  Or is a struggling economy good to keep wages low, which makes manufacturing more competitive?

To understand China’s economic situation, we need to reassess our perception of the country. We’ve been conditioned to view China as a successful nation with over a billion people. However, it’s more accurate to see China as a vast landmass—complete with diverse landscapes and a large population—governed by the Chinese Communist Party (CCP).

The CCP operates much like a massive corporation that exerts control over all aspects of the country. It can be viewed as the world’s largest corporate conglomerate, prioritizing the accumulation of US dollars as its most prized possession, rather than the Yuan.

The Chinese Communist Party (CCP) operates with a single-minded goal: to maximize its own profits. The primary tactic for achieving this is classic mercantilism – maximizing exports while minimizing imports. China implements this strategy through various means.

A key aspect of the CCP’s strategy is focusing on specific industries and systematically achieving global dominance within those sectors. Here’s a list of industries where China has established a commanding presence:

a. Electric Vehicles

b. Textiles, shoes, and apparel

c. Electronics

d. Machinery

e. Shipbuilding

f. Solar panels

g. Batteries

h. Rare Earth Mineral processing

i. Copper processing

j. Low cost microchips

k. And many more

By concentrating on these key areas, China effectively leverages its manufacturing capabilities and consolidates its position in the global market.

Undercutting Competitors: China systematically undercuts the prices of local manufacturers in countries like Argentina, the Philippines, Brazil, Indonesia, Sri Lanka, and Pakistan, effectively stifling the growth of their domestic industries.

Undermining the Dollar: China deliberately weakens the US dollar as a reserve currency by sabotaging other countries’ ability to maintain strong economies and participate in global trade using the dollar. The resulting dollar scarcity in nations like Argentina, Pakistan, Egypt, and Sri Lanka is not accidental; it’s a calculated strategy by China to destabilize the dollar’s role as the world’s reserve currency.

Exploiting Economic Vulnerability: In each of these economic crises, China seizes the opportunity to offer a solution: abandon the dollar in favor of a new BRICS currency or accept the Yuan. This allows China to expand its financial influence and weaken US economic power.  Argentina and Pakistan the Yuan is readily traded by the domestic population.

Currency Manipulation and Subsidies: China manipulates its currency and provides extensive subsidies to domestic industries, allowing them to undercut competitors worldwide. By offering cheap loans (often with little expectation of repayment) and issuing directives for strategic industrial development, China gains an unfair advantage in the global market.

Grooming Countries to be Raw Material Suppliers: China, if it is going to be the manufacturer to the world needs steady supply of raw materials, that is where it has groomed certain countries (and destroyed their own industrial base). Brazil comes to mind, so does African countries, Australia, as well as Russia.

A crucial aspect of China’s mercantilist strategy is minimizing imports. Currently, China is focused on dominating two high-value industries: electric vehicles and semiconductors. Each sector employs a distinct mercantilist approach to boost exports and restrict imports.

Case Study One: Semiconductors

China currently imports approximately $400 billion worth of semiconductors and circuit boards annually. These are primarily used in manufactured goods for both domestic consumption and export. With China’s 2024 trade surplus exceeding $1,000 billion, achieving self-sufficiency in semiconductor production could potentially increase that surplus to $1.4 trillion per year.

This illustrates how reducing reliance on foreign semiconductors aligns with China’s broader mercantilist goals. By controlling semiconductor production, China aims to:

• Reduce import costs: Eliminating the need to import semiconductors saves China significant capital.
• Increase exports: Domestic semiconductor production allows China to manufacture more goods for export, further boosting its trade surplus.
• Gain technological dominance: Controlling semiconductor production gives China a strategic advantage in various technological fields.

China’s strategy of heavily subsidizing its semiconductor industry, potentially to the tune of over $500 billion, is a calculated investment. While the investment appears massive, the potential payoff for China is enormous, with projected profits (in dollars) reaching $4 trillion over the a decade.

However, the true cost to China is significantly less than the headline figure suggests.  Most expenses, including infrastructure, labor, and salaries, are covered in Yuan, essentially printed money. The only substantial costs are for imported equipment from companies like Lam Research, ASML, Applied Materials, KLA, and Axcelis.

If China succeeds in dominating the semiconductor market, it will have significant global repercussions.  The primary losers will be the United States, Singapore, South Korea, Taiwan, Malaysia, Europe, and other semiconductor-producing nations.  Specifically, major semiconductor companies like Nvidia, Broadcom, On Semiconductor, Intel, Samsung, Advanced Micro Devices, and Qualcomm will face intense competition and potential displacement. Some will certainly go out of business.

China is acutely aware that invading Taiwan would likely result in its exclusion from the global semiconductor market. It is essential that China have its own successful internal market before the invasion can take place.  Two potential scenarios could unfold:

1. Economic Isolation: The West could impose sanctions and cut off China’s access to advanced technology and semiconductors, crippling its manufacturing sector and severely damaging its economy.
2. Mutually Assured Destruction: China anticipates that an invasion would devastate Taiwan’s semiconductor fabrication facilities (fabs). However, by establishing a robust domestic semiconductor industry, China could “win” a war against the US even if China is not successful in claiming the island of Taiwan.
   1. If a retreating China, bombs the fabs in Taiwan, yet mainland China has a suitable back up, then even the United States may have to cave in and buy chips from China.
   2. If China wins the war, and the United States bombs the fabs, the United States may have no choice but to buy chips from China as they had a suitable back up.
   3. The only solution is for the United States and its allies to have chip fabs outside of China and Taiwan, that is sufficient enough to meet demand.
   4. If the United States tries to sanction China then clearly another financial transaction network will come and replace the SWIFT system.

Essentially, China is pursuing a strategy to control Semi-Conductors in order to save sending out $400 billion dollars from their reserves to buy chips.

Case Study Two: Electric Vehicles and Oil Imports

By 2030, China aims to have 90% of its cars and vehicles running on electricity, essentially eliminating fuel consumption in its transportation sector. Based on 2022 estimates, China’s transportation sector consumed roughly 5.3 million barrels of oil per day. At an estimated import cost of $70 per barrel, this equates to $135 billion annually (paid out of China for imports). While oil demand for chemical and plastic production will remain, China stands to significantly reduce its oil imports, saving at least $100 billion per year.

This transition to electric vehicles has two major implications for China’s mercantilist strategy:

• Reduced Oil Imports: By 2040, China’s trade surplus could reach nearly $1.4 trillion per year, fueled partly by this significant reduction in oil imports.
• Increased Vehicle Exports: China is poised to become a major exporter of electric vehicles, generating billions of dollars in additional revenue.

Winners and Losers

The clear winner in this scenario is the CCP, which stands to further increase its annual profits. However, this shift poses a significant challenge to major global automakers like Fiat, Ford, Toyota, General Motors, Hyundai/Kia, Honda, and Renault, who will face increased competition from Chinese electric vehicle manufacturers.

Case Study Three: Past Mercantilist Tactics – Volkswagen in China

Volkswagen once aspired to dominate the Chinese car market. However, it was ultimately exploited until China developed its own competitive domestic automakers. For years, Volkswagen thrived in China, even poised to potentially surpass Toyota as the world’s largest automaker. However, as China implemented its mercantilist strategy, Volkswagen’s position became increasingly untenable.

The CCP could not allow Volkswagen to siphon profits out of China. Under the CCP’s economic model, dollar profits are reserved for the CCP itself. Dollars are only permitted to leave China under specific circumstances:

1. Loans and Investments: China lends money to other countries or companies, often strategically.
2. Foreign Aid: China provides aid, frequently linked to its Belt and Road Initiative.
3. Essential Imports: China purchases goods and services from its competitors when necessary.

The CCP is actively working to reduce the outflow of dollars, particularly profits earned by foreign companies operating within China. Volkswagen’s experience serves as a prime example of how China utilizes foreign companies to achieve its own industrial goals before ultimately replacing them with domestic competitors.

The 2035 unwritten Chinese goal is that China only imports raw materials and nothing else.  This would further widen China’s trade surplus and that means even a higher percentage of manufacuturing takes place in China.

Let this message be clear:  If you are investing in China expecting to take your profits home in dollars – Don’t invest in China as you are not welcome.

Case Study Four: Contrasting Approaches – Globalism vs. Chinese Mercantilism

The United States has championed globalism for the past 80 years, promoting the exchange of cultures and ideas, and fostering interdependence among economies. China, however, adheres to a different philosophy.

While China has temporarily allowed foreign companies access to its market, it has consistently worked towards replacing them with domestic competitors. It’s doubtful that Apple iPhones will still be sold in China by 2035, as China continues to develop its own technology companies.

Furthermore, China restricts access to platforms like Google, Facebook, and X (formerly Twitter), while the US permits the operation of Chinese platforms like TikTok, Alibaba, Temu, Baidu, and Shein. Worryingly, companies like Shein and Temu thrive by exploiting loopholes in US trade policies, such as shipping individual items to circumvent tariffs.  The entire business model to these companies is technically to break a law via a loophole.  This is ethically wrong and the businesses should be banned from the United States.

This contrasting approach highlights the fundamental difference between the US’s globalist approach and China’s mercantilist strategy. While the US embraces open markets and cultural exchange, China prioritizes its own economic and technological advancement, often at the expense of foreign competitors.

Case Study Five: Brazil – A Strategic Alliance Forged Through Mercantilism

China has cultivated a strong alliance with Brazil, exemplified by over $160 billion in trade deals signed recently after Brazil hosted the G20 summit. This partnership, however, has contributed to Brazil’s economic challenges.

In the 1980s, Brazil boasted a robust industrial sector, protected by high tariffs. This allowed Brazil to produce domestically and maintain a strong export market. However, the rise of China and its free trade zones marked the beginning of a 40-year decline for Brazilian industry.

This decline was exacerbated by the leftist PT government’s expansion of public sector employment, which swelled from 500,000 to 2 million since 2003. While initially sustainable during the commodity boom of the mid-2000s, this employment expansion became a burden after the 2008 recession. Brazil’s fiscal reserves dwindled, culminating in a “lost decade” starting in 2015, characterized by:

• A declining industrial sector
• A stagnant service economy
• Diminished consumer spending
• A bloated and inefficient public sector rife with corruption

The Brazilian government’s attempts to balance its budget through increased taxation have further burdened the private sector and hampered manufacturing. As the economy declined, the government lost tax revenue, leading to a cycle of increased taxes and further economic deterioration. This downward spiral occurred while China pressured the ruling PT party to lower tariffs, allowing China to flood the market with cheap goods, ultimately harming Brazil’s industrial sector.

Meanwhile, the US, preoccupied with wars in the Middle East and clinging to outdated notions of unwavering alliances, neglected its relationships in Latin America. This allowed China to strategically fill the void, establishing strong economic ties with Brazil and Argentina.

China’s initial goal with Brazil was to increase trade and gain influence. However, under Xi Jinping, China recognized the strategic advantage of prioritizing trade with countries like Brazil, Argentina, Indonesia, Malaysia, Japan, Russia, South Korea, South Africa, and Australia over the US. This strategy aims to create indispensable economic relationships that could prove crucial in a future conflict.

Furthermore, recognizing its growing environmental challenges and need for food security, China strategically concentrated its agricultural imports from Brazil and Argentina, deliberately minimizing imports from the US. By offering Brazil a massive trade surplus, China secured a key ally and furthered its own mercantilist agenda.

This case study highlights how China leverages trade to achieve geopolitical goals. The US, by neglecting its relationship with Brazil, has inadvertently strengthened China’s position in the region, potentially jeopardizing its own interests in a future conflict.

Conclusion:

China’s mercantilist strategy is evident in its targeted approach to trade relationships:

• Surpluses with Competitors: China deliberately runs trade surpluses with competitors like Turkey, Mexico, and the United States. This allows them to accumulate wealth and maintain economic leverage over these nations.
• Balanced Trade or Deficits with Allies and Partners: China maintains balanced trade or even runs deficits with countries it seeks as allies or economic indespinsible partner, including Japan, South Korea, Indonesia, Russia, Malaysia, Australia, Argentina, Brazil, and South Africa. This fosters economic dependence and strengthens diplomatic ties.

China strategically focuses on major economies and potential future global leaders, largely ignoring smaller countries. This is illustrated by its trade relationship with Brazil:

• China imports over $122 billion from Brazil, while the US imports less than $40 billion.
• While Brazil previously ran a trade deficit with the United States, that has recently changed.  Brazil’s current trade strategy with the US appears focused solely on maintaining balance, indicating a cautious approach and a prioritization of its relationship with China.

This targeted approach to trade highlights how China utilizes mercantilism as a tool to achieve its geopolitical ambitions. By strategically running surpluses and deficits, China strengthens its economic and political influence over key nations while weakening its competitors.

Addressing the Critics

Those who criticize Trump, claiming he is disrupting the status quo and pursuing mercantilist policies, are misguided. Trump is simply attempting to level the playing field and allow the US to compete in a global economy that has been dominated by mercantilism, primarily driven by China, for the past two decades.

Historically, similar interventions occurred when Japan’s economic rise threatened US dominance. It is now time for a similar intervention to address China’s mercantilist practices and restore balance to the global economic system.

Mercantilism: An economic theory and practice where a government regulates its economy to increase national wealth and power. Mercantilist policies aim to achieve a favorable balance of trade by maximizing exports and minimizing imports.

Key Characteristics of Mercantilism:

• Economic Nationalism: Mercantilist policies prioritize building a wealthy and powerful state. This aligns with China’s focus on national strength and self-sufficiency.
• Favorable Balance of Trade: Mercantilists strive for a surplus in the balance of trade by maximizing exports and minimizing imports. China consistently exemplifies this, unlike the United States.
• Wealth Accumulation: Mercantilists seek to accumulate wealth, traditionally in the form of bullion (gold and silver). The Chinese Communist Party (CCP) is notably the largest buyer of gold globally.
• Zero-Sum Game: Mercantilism views wealth as finite and trade as a zero-sum game, where one country’s gain is another’s loss. China’s actions reflect this belief.
• Government Regulation: Mercantilist policies rely heavily on government intervention in the economy. China’s tightly controlled economy, with its subsidies and strategic industrial policies, demonstrates this characteristic.
• High Tariffs: While China’s official tariffs may not always be high, it employs various non-tariff barriers, including unspoken agreements and embargos, to restrict access to its market.
• Colonial Expansion: China exhibits tendencies towards colonial expansion, demonstrated by its ambitions regarding Taiwan, the South China Sea, and border disputes with India.

In essence, China’s economic policies closely align with the core principles of mercantilism, using trade and economic control as tools to enhance its national power and global influence.

In contrast to mercantilism, globalization emphasizes increasing integration and interaction among people, companies, and governments worldwide. It’s a historical process driven by technological advancements and human innovation.

Globalization promotes interdependence in various spheres:

• Economic: Free trade and the movement of capital and labor.
• Cultural: Exchange of ideas, values, and cultural products.
• Political: Increased cooperation and collaboration among nations.
• Environmental: Addressing global environmental challenges collectively.

A key aspect of globalization is the free movement of goods and services, where consumers naturally gravitate towards the most affordable options. However, China deviates from this principle. While eager to sell its products globally, it actively restricts access to its own market, contradicting the core tenets of globalization.

Policy Solution to China’s Mercantilism

To counter China’s abusive mercantilist practices, the most effective approach is for its primary customers to reduce their reliance on Chinese goods. China sustains its large trade surpluses with key partners like Brazil by exploiting excessive trade imbalances with regions like Europe, the United States, Mexico, India, and Turkey.

The United States should implement a targeted tariff strategy:

• 300% Tariff on Key Products: Impose a 300% tariff on all products from China that can be readily sourced from alternative markets.  This should be eased in at 20% initially and six months later 280% more.
• Ban on Food Imports: Prohibit the import of food products from China.  For alls we know China will eventually try to corner the chocolate market.  Banning segments of the future will prevent these industries from rising in China today.
• Tariff Based on Chinese Content: Implement a tiered tariff system for goods from all countries based on the percentage of Chinese components. For example, a product with 10% Chinese content would face a 10% tariff, a product with 30% Chinese content would face a 30% tariff, and so on.  What ever the case Chinese components should never reach the shores of the United States.

This approach has several advantages:

• Reduces China’s Surplus: By decreasing US imports from China by $300 billion and prompting other countries to reduce their reliance on Chinese components by $600 billion, China’s trade surplus could decrease by at least $500 billion to $600 billion.
• Encourages Diversification: This strategy incentivizes countries to diversify their supply chains and reduce dependence on China.
• Convince Europe: To raise some tariffs against China, so that their trade imbalance is also 1 to 1.
• Avoids a Trade War: The tariff system targets Chinese content specifically, avoiding blanket tariffs that could escalate into a trade war.

By implementing these measures, the US can effectively challenge China’s mercantilist practices, force them to re-engage in fair trade negotiations, and promote a more balanced global economic system.