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The costs of China’s ‘economic fortress’

Emboldened by its success in neutralising US tariffs, Beijing plans to reinforce its dominance of global manufacturing despite persistent deflation at home and rising tensions with other trading partners.

By Joe Leahy, Tom Hale and Arjun Neil Alim With additional contributions from Cheng Leng and Wenjie Ding in Beijing Data visualisation by Keith Fray

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At a recent high-level government conference in Beijing, senior officials basked in China’s success over the past year year in its trade war with the US. “Our five-year planning system ensures policy consistency and continuity — something western politicians can never achieve given their constant changes of government,” one senior cadre told the gathering.

For Beijing, the tariff war is the clearest evidence yet that President Xi Jinping’s strategy of investing heavily in high-tech production and industrial self-reliance is paying off, despite deflation at home and complaints from abroad about Chinese trade surpluses.

US President Donald Trump’s attempt to impose tariffs on Chinese goods last year ended in October with him being forced to agree to a one-year truce at a summit in South Korea.

The stand-off, during which China threatened to block US access to the rare earth metals vital to many advanced manufacturing processes, demonstrated for the first time Beijing’s ability to stop even America from closing its markets to Chinese-made products.

Analysts say it will embolden China to push ahead with its export-led growth model. Beijing’s five-year plan for 20262030, due for release in March, envisages it dominating both legacy industries and future technologies, such as robotics and artificial intelligence.

“This is a zero-sum game,” says Joerg Wuttke, a partner at consultancy DGA Group and former European Union Chamber of Commerce in China president. Wuttke predicts China could raise its global share of manufacturing from about 30 per cent to 40 per cent.

“They’re telling other countries, don’t mess with us, don’t compete with us, you can’t beat us,” he says.

But even as China tightens its grip on global manufacturing — trade figures released in December show it is set for its first surplus in goods of more than $1tn in 2025 — vulnerabilities are building in its domestic economy.

A prolonged property market slowdown has undermined local government finances, household sentiment and domestic demand, leading to deflation and falling wages.

“In the past few years, it’s been the property sector dragging down the economy,” says Hui Shan, chief China economist at Goldman Sachs. “At this juncture, I think the economy is now dragging down property.”

The IMF’s managing director, Kristalina Georgieva, said in Beijing last month that China needs “more forceful measures to be implemented with greater urgency”, urging it to fix its “imbalances” in its economy. Such a large country cannot survive on exports alone, she added. “Boosting consumption would unlock . . . a more durable source of growth.”

At the Communist party’s Central Economic Work Conference last month, the meeting that sets priorities for the following year, Xi and other senior leaders celebrated China’s “significant enhancement of its hard power” over the past five years, according to state media.

Three years after China’s economy emerged from strict Covid controls, its global export market share has risen to 15 per cent and is set to rise to 16.5 per cent by 2030, according to a study led by Chetan Ahya, chief Asia economist at Morgan Stanley. China’s share of global manufacturing value added has risen to 28 per cent.

Its trade goods surplus with the US had fallen to $239bn as of September 2025 on a 12-month trailing basis from a peak of $418bn in December 2018, according to US Census Bureau data — though much of the difference is thought to have been products redirected to the US through other countries, such as Vietnam and Mexico.

Ahya attributes part of China’s latest export success to its state-led model, which pushes investment into emerging sectors such as green energy. China backs its bets with state investment in infrastructure and manufacturing, lending, tax incentives and subsidies.

Other economists say China’s society is geared towards production, from the financial and education systems down to rules governing residency that create a huge pool of cheap migrant labour.

China’s strategy is to reduce its own dependence on other countries while increasing their reliance on its supply chains, analysts say. The next fiveyear plan should call for “substantial improvements in scientific and technological self-reliance”, according to recommendations from the Communist party’s Central Committee.

The aim of the leadership is to build “an economic fortress”, says one government adviser in Beijing, achieving self-reliance in everything from food to tech but keeping trade open for Chinese exports and to absorb foreign technology. Setting up factories in other countries will allow it to circumvent tariffs and further embed Chinese companies into global supply chains.

In the meantime, China would welcome foreign investment into its domestic market, said the senior government official at the conference in Beijing, provided it fostered “advanced manufacturing, modern services, high-tech industries and sectors related to energy conservation and carbon reduction”.

The days of US, European and Japanese manufacturers using China as a cheap assembly line are ending. Many such companies report a growing sense that they are unwelcome in China unless they bring superior technology.

A recent report from the EU Chamber of Commerce in China, “Dealing With Supply Chain Dependencies”, stated that “European companies in some strategic sectors are being pushed out, due to regulatory barriers or formidable competition that has benefited from China’s industrial policies.”

On a recent visit to Beijing, one senior European businessman says he was shocked by the reception he received at one of the ministries. Previously welcomed as a valued foreign investor, he says a senior ministry figure treated him as a diplomatic adversary and accused Europe of being an unreliable partner.

“We like Donald Trump,” another official told him. “Why? Because he doesn’t talk about Ukraine and human rights. We can make deals with him.”

“China is single-handedly focused on the US,” the businessman says. “The Chinese believe that ‘we can always deal with Europe on our terms. And if it’s not on our terms, we don’t talk to them’.”

Yet for Europe and China’s other large trading partners, the country’s increasing trade imbalances are becoming, in the words of French President Emmanuel Macron, “unbearable”.

In an article in the FT last month, Macron called on China to “address its internal imbalances” or “Europe will have no choice but to adopt more protectionist measures”. China’s goods surplus with the EU last year was €305.8bn, compared with €297bn in 2023.

Aside from China’s industrial policies and market barriers, a further problem for its trading partners is its currency. The renminbi depreciated by about 8 per cent against the euro last year in nominal terms, and economists say the real effective exchange rate — a weighted average against a broader basket of currencies — has fallen 18 per cent from its peak in March 2022.

This real depreciation is being driven by China’s persistent deflationary pressures; producer prices have declined every month for more than three years as supply outstrips domestic demand.

The decline in prices also masks an increase in the volume of China’s exports, which has increased its global market share. “In real terms, the increase in that gap between exports and imports has been larger than in nominal terms,” says Louis Kuijs, chief economist of Asia Pacific at S&P Global Ratings, who estimates that China’s goods export volumes have risen 43 per cent since early 2020 while imports were up by just 15 per cent.

China’s real exchange rate is likely to continue falling for two to three years, given Beijing’s limited efforts to combat domestic deflation, according to New York-based Rhodium Group.

“That leaves European policymakers with hard choices: either accept evergrowing exports from China . . . or move towards structural action that restricts trade,” it said in a December report on the outlook for the renminbi.

For China’s trading partners, using tariffs or other steps to counter its surpluses is bound to meet with stiff resistance. “Other countries will find it increasingly difficult to impose tariffs on China because . . . the supply chain leverage that China has is indeed quite powerful,” says Goldman’s Shan.

China’s control of rare earths — it accounts for 90 per cent of global refining capacity — is mirrored across several other industries, such as batteries for electric vehicles and drones and the refining of the lithium and cobalt that goes into them, says Eddie Fishman, author of Chokepoints.

“We saw earlier this year, even if big US tariffs might be able to inflict pain on China, you can’t do it without causing a recession at home,” Fishman says.

One of China’s most frightening supply chain chokeholds from a western perspective, he says, are active pharmaceutical ingredients used to make medicines. In some, he estimates that China has 80 per cent market share.

As China moves up the value chain, dominating the technologies of tomorrow such as electric vehicles, the US and other countries are becoming more vulnerable, he adds.

While the US retains a technological edge in semiconductors, China’s strong position in legacy chips was shown during a recent dispute at Nexperia. When the Dutch government seized temporary control of the Netherlands-based but Chinese-owned company, Beijing blocked Nexperia’s exports.

“If China is allowed to persist with this economic model . . . and the west doesn’t respond with anything besides hoping that market forces sort it out, then yes, China is going to seize more chokepoints over time,” says Fishman.

Emerging economies, which need Chinese inputs for their own manufacturing sectors but are at risk of losing their industry because of cheap imports, are especially vulnerable. “Chinese mercantilism is at least as big a threat, if not bigger, to the prospects of emerging countries as US tariffs,” says George Magnus, research associate at Oxford university’s China Centre and former chief economist of UBS.

Athousand kilometres from Beijing, in China’s ancient capital Xi’an, Chen does not share the confidence of the party’s economic cadres. “It was better in previous years,” says the food stall owner, who declined to give his full name, as he watches tourists strolling round the Grand Tang Dynasty Everbright City shopping district.

“Sales began to decline [in 2024] and have not been good [in 2025].”

The buildings here are modelled on those of the dynasty that ruled China from the 7th to the 10th century, and many tourists rent period costumes to pose for photos. But there are few other signs they are spending money.

Since last year, President Xi has emphasised the importance of domestic demand, with the party’s magazine Qiushi releasing a collection of his past speeches on the subject in December.

The party has announced birth subsidies, lifted restrictions on real estate prices and, in a bid to tackle deflation, launched a campaign against “involution”, seeking to stop companies engaging in destructive price competition.

But these piecemeal moves have failed to decisively lift sentiment or reflate the economy. Retail sales expanded 1.3 per cent in November against a year earlier, the slowest pace of growth since December 2022, when China lifted its Covid restrictions. Property prices and investment have plunged. While some of the investment fall could be due to statistical issues, analysts believe some of it is real.

The faltering domestic economy, weakened by a property slump that started in 2021 when Beijing sought to deleverage the sector, is the alter ego of China’s export boom. Deflation makes China’s goods more competitive on international markets, but at home it erodes corporate profitability and increases leverage. Private sector economists have warned for years about the limits of China’s export and investmentled growth model, but now even some government advisers are chiming in.

At the conference in Beijing, a government adviser from a prominent state think-tank noted that China’s GDP deflator, the widest measure of prices in the economy, had been negative for a record 10 consecutive quarters, surpassing the record set during the Asian financial crisis in the late 1990s. “Persistent price declines create a disconnect between the data and how the economy feels, since they affect both household incomes and corporate profits,” the adviser said. “They not only distort perceptions but also dampen expectations, making it harder to boost consumption or drive investment.”

To boost domestic demand, the adviser argued, China should increase the share of fiscal spending devoted to public services such as education, childcare, healthcare and social security — measures that would indirectly lift household purchasing power.

Goldman’s Shan says tackling the root macroeconomic causes of the domestic slowdown, such as the property slump, would be the best way of reflating the economy. But for now there is no end in sight for Xi’s supply-side driven economic path. “Policymakers think of [the supply-driven model] as a success, not a failure,” says Shan. “And with the rare earth leverage helping China to manage trade tensions, it’s going to extend the runway for China’s exports too.”

We must stop dealing with youth inactivity as a technocratic puzzle and start treating it as a crisis of social cohesion (“It’s beginning to look a lot like holiday job season”, Opinion, FT.com, December 20).

Many in my generation — I am 21 — find that “holiday jobs” are no longer a festive rite of passage, but the permanent ceiling of their career aspirations in a low-wage gig economy. Many view home ownership not as a milestone, but as a historical curiosity. Many realise that the traditional link between hard work and financial security has been severed.

But many have also, in the face of this exclusion, found new ways to be useful. Some have surged into politics to demand a stake in their future. Some have sought solace and community in religious services, which have seen a resurgence among Gen-Zers. Many more are leading community projects — from knife crime prevention to peerto-peer mentoring — proving that a desire to contribute remains in the wake of an alienating economy.

If the state does not want to disenfranchise this generation further, it must harness this desire for community and stop treating work experience as a “nice-to-have”. To achieve this, the state must look beyond the unpopularity of this past proposal and introduce a mandatory year of national service for 16-yearolds, structured around professional development rather than combat.

To make such a scheme a success, students should have a choice between a military stream — offering technical tracks in medical care, radio operations and engineering similar to the Norwegian model — and a civil service stream focused on public administration and logistics.

Decades of liberalism have enriched previous generations, yet they have left mine psychologically and economically destitute. We have forgotten that with great freedom comes great responsibility; if we do not provide a structured catalyst for this collective meaning, we surrender the young to the empty promises of populist politics. Hubert Kucharski

Head of Media and Communications Leeds Policy Institute,

Leeds, West Yorkshire, UK

The costs of China’s ‘eco­nomic fort­ress’

Emboldened by its suc­cess in neut­ral­ising US tar­iffs, Beijing plans to rein­force its dom­in­ance of global man­u­fac­tur­ing des­pite per­sist­ent defla­tion at home and rising ten­sions with other trad­ing part­ners.

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