China's trade surplus: Mercantilism or the West's own goal?

Editor's note: Warwick Powell is a special commentator on international affairs for CGTN. The article reflects the author's opinions and not necessarily the views of CGTN.

Robin Harding's recent Financial Times column, "China is Making Trade Impossible," rehearsed a familiar lament: China is flooding the world with cheap manufactures while importing almost nothing it cannot make better or cheaper itself. To drive the point home, Harding dusted off Lord Macartney's 1793 audience with Qianlong Emperor, when Chinese officials supposedly told the British envoy that the Celestial Empire had already possessed all things in prolific abundance and lacked nothing. Two centuries later, the complaint is the same, only now wrapped in indignation about electric vehicles, solar panels and batteries.

The diagnosis is seductive, but it survives only as long as one stares fixedly at one corner of the ledger. Widening the lens even slightly, the picture will collapse.

Begin with the basics that almost never appear in these jeremiads. China is the world's largest importer of agricultural products ($220–240 billion annually, mostly soybeans, meat, dairy and grains), the largest importer of crude oil and LNG, the largest importer of iron ore, copper concentrate and most critical minerals, and a persistent net importer of services (a deficit of $100–150 billion every year). In energy and raw materials alone, the country sends roughly half a trillion dollars abroad each year. These are not trivial footnotes. They are structural dependencies that no mercantilist power in history has ever tolerated.

China's current-account surplus, far from the predatory excess imagined in Western capitals, has hovered between one and two percent of GDP for the past decade. That's lower than Germany's for most of that period, and a fraction of the eight to 10 percent peaks reached by Japan in the 1980s or Germany in the mid-2000s. Classical mercantilism is not like that.

The Macartney anecdote itself is worth a closer look. The British delegation did not, in fact, meekly accept the emperor's rebuff and sail home empty-handed. They returned half a century later with opium and gunboats, forced the Qing Dynasty (1644-1911) to open ports at cannon-point, and extracted centuries of unequal treaties. To invoke 1793 as evidence of timeless Chinese mercantilism while airbrushing the Opium Wars in the mid-19th century from the story is historical revisionism dressed as moral high ground. The West has never taken "no" for an answer when it really wanted a market; it simply changed the terms of the conversation and pursued its aims militarily.

Even the manufacturing surplus shrinks under scrutiny. A large share of China's exported value-added is captured not by Chinese firms but by foreign multinationals that assemble in China, sell to China and globally, and repatriate profits through transfer pricing and offshore havens. Apple, Volkswagen, Tesla and BASF are among the biggest "Chinese" exporters if one counts by factory gate, yet the margins largely flow to Cupertino, Wolfsburg, Austin and Ludwigshafen. Adjust for profit repatriation and the bilateral imbalances that so exercise Washington and Brussels diminish sharply.

Ironically, the West's own policy choices have done as much, or more, than any Chinese industrial policy to inflate the very manufacturing imbalance it now deplores.

Consider semiconductors – the commanding heights of modern technology. Until 2018, Chinese entities were enthusiastic buyers of American, Dutch and Japanese chips and chip-making equipment. In 2021, China imported roughly $350 billion worth of semiconductors – that's more than it spent on crude oil. Washington then embarked on the most sweeping export-control regime since the Cold War, progressively choking off advanced logic and memory chips, high-end GPUs and, critically, the lithography machines required to make them.

The results have been precisely the opposite of those intended. Direct sales losses to US firms alone are approaching $60 billion since 2022, with Nvidia, AMD, Intel and Qualcomm writing off tens of billions in foregone revenue. Nvidia once commanded 95 percent market share in its key product segments, and now, that is down to zero. More importantly, the controls have triggered the largest forced industrial policy experiment in history. China has responded with $150–200 billion in sector support, talent repatriation programs and an explicit target of full-stack self-sufficiency.

The supply-chain reconfigurations that followed have been devastating for Western suppliers. Chinese fabs that once bought American tech tools, Japanese photoresists and Dutch lithography systems now source domestic alternatives or redesign around whatever they can still obtain. Huawei alone has substituted more than 13,000 foreign components with Chinese parts and redesigned 4,000 circuit boards. Upstream chemical and materials firms in the US, Germany and Japan have seen orders evaporate as Chinese capacity comes online at warp speed.

The irony is bitter. By attempting to deny China the crown jewels of technology, the West has handed China both the incentive and the justification to build an entirely separate technology stack. Ten years ago, China produced less than one percent of the world's semiconductor equipment sold globally; today, domestic vendors have already claimed 15 to 20 percent and are advancing fastest in the very sub-segments the controls have tried to protect.

The manufacturing surplus that so alarms western commentators is therefore partly an artefact of Western policies. Had the US and its allies continued selling $30–40 billion a year of advanced chips and tools – as they happily did until not so long ago – China's import bill in this category alone would offset a sizable chunk of its exports of EVs and solar panels. Instead, Washington catalyzed a national mobilization in China that is now spilling over into downstream industries.

All this exposes the poverty of an analysis that paints China as an incorrigible mercantilist while ignoring the West's own role in manufacturing the very imbalances it finds intolerable, and we haven't even discussed the failure of western policy makers to address declining competitiveness caused by rising energy costs and failure to successfully promote and adopt product and technology innovation. In saying that it could halve the costs of developing electric vehicles by pursuing a“Made in China”strategy, German automotives giant Volkswagen admits that the western manufacturing ecosystem has fallen far behind.

A genuine rebalancing of global trade – in financial terms, at least – will require two things the current discourse studiously avoids: Firstly, an honest accounting of where money actually flows once profits are repatriated and raw-material bills are paid. Secondly, a recognition that strangling high-tech exports to the world's largest market does not reduce dependence – it simply redirects it inward and accelerates the creation of competitors.

Macartney's successors eventually discovered that China could be forced open. Today's policymakers might ponder a different lesson from that sorry history: When you burn down the bridge you still need to cross, do not be surprised if the other side builds its own roads, reaching old and new markets alike and transforming the contours of global economic value flows and power along the way.

In invoking Macartney, one wonders whether somewhere in the recesses of Harding's subconscious, he is dreaming of, or calling forth, a modern day Western response along the lines of the Opium Wars. We can only hope not.