Policy Implications
After decades of continuous growth and economic development, China is beginning to face the challenges of other middle-income and some advanced economies. In cities, as employment opportunities in manufacturing and construction decline, more people are entering the labor-intensive service sector, where wage growth is stagnant. Moreover, these workers face an uncertain future because they lack access to high-quality health insurance, pensions, and other support.
But while most economies have experienced a relative decline in manufacturing employment relative to the service sector as they have moved from middle-income to high-income status, China’s workers may find it harder to transition to white-collar jobs because of low education levels. Access to education is increasing in China but lags behind other middle-income countries. Finally, data from villages also show that rural China is still suffering with low employment and wages, a trend exacerbated by the Covid-19 pandemic.
High inequality, especially when it takes the form of unequal access to education and health services, will hamper overall economic growth, but it will also undermine efforts to achieve technological upgrading and raise productivity. Uneven educational levels and inadequate skills could hold back the growth of the most innovative parts of the economy. Advanced tech companies may be constrained to operating near regional innovation hubs rich in talent and be unable to tap into the growing number of underemployed, undereducated workers. Expanding access to high-quality education and strengthening the social safety net for urban and rural residents alike may be the key to whether China can move toward high-income status.
Additionally, persistently high inequality in a period of lower economic growth may have broader implications for social cohesion and political stability. In past decades of high growth, survey researchhas found that inequality had little bearing on China’s political stability. Although wealth became more concentrated in the hands of few, real wages rose for almost everyone from the 1980s to the 2010s, leaving most better off. Hence, even the relatively poor had a positive outlook thanks to reasonable prospects of upward social mobility. The rising informality of the economy and stagnating wages for unskilled workers may cause large swaths of the population to lose this confidence, introducing new fragility in the social system. Higher rates of crime and other problems, including protests, could follow, sowing the seeds of political instability.
Professor Rozelle’s findings show that China’s broad development targets and aims to become a high-tech power, particularly in advanced manufacturing, may be harder to achieve than many imagine. Similarly, if a large portion of China’s population has stagnant real wages and continues to save for a rainy day, their ability to consume will be limited. This means that rather than a consumption-driven economy, China’s growth will continue to depend on state-driven investment, which will translate into expanding debt—a vicious cycle that will also weigh down growth.
What does this mean for U.S. policymakers? If the economic shocks of the past two years have proven anything, it is that economic and social issues in the world’s most populous country and second-largest economy have a large impact on the United States and the rest of the world. There are at least three key areas of action.
1) Policymakers in the United States should plan for a China that is simultaneously highly competitive in certain areas and weighed down in others by substantial problems, such as low growth, persistent inequality, an aging population, and rising debt. Although these trends are well known, there is still limited planning for the policy implications. For example, the National Intelligence Council’s Global Trends in 2040identifies the risk posed by high inequality to China’s continued economic growth in the next decade, but it fails to incorporate the likelihood of Beijing struggling with internal domestic issues in its future scenarios.
China is almost certainly going to continue to prove itself a formidable economic competitor for the United States in the coming years, but it will also face significant hurdles to achieve continued economic growth and development. As a consequence, the United States will need to prepare to compete against China at the leading edge of industries as well as deal with a country grappling with internal social challenges. These trends can reinforce China’s statist tendencies, meaning a continued use of industrial policy tools to benefit strategic domestic industries. The United States will need to integrate and align tactics with like-minded economies to simultaneously deal with the consequences of Chinese successes and weaknesses.
Persistent inequality also has potential implications for China’s foreign policy. A China that is less economically dynamic and more exposed to economic volatility could turn inward and be more isolationist. However, China’s leaders could also be more tempted to use an aggressive foreign policy to unite an otherwise fragmenting populace. Such a destabilizing outcome could have disastrous effects for the United States and the rest of the world. Thus, Washington should closely track and measure inequality and internal discontent in China, looking for signs of whether the leadership is drumming up external tensions for domestic political purposes.
2) If Washington wants to compete effectively with China, it needs a strategy to reduce the United States’ own glaring gap in wages between skill-intensive and labor-intensive service jobs, rebuild the economy’s infrastructure, and enhance the competitiveness of U.S. industries and the American workforce. The United States cannot simply hope that China’s economic growth will falter without enhancing its own strength.
A policy aimed at “slowing down” China through tariffs and export restrictions without complementary policies to improve domestic economic competitiveness is unlikely to succeed in the long term. Related legislation currently being considered in Congress, including the United States Innovation and Competition Act of 2021, could be a significant step in this direction, but the executive branch and state and local governments will need to stay committed to these goals over an extended period.
The Biden administration has outlined a “worker-centered trade strategy” that includes seeking better protections for workers in the United States and abroad while defending U.S. economic interests and building more domestic resilience. But the United States’ competitiveness also comes from openness, including the international network of U.S. partners and the country’s attractiveness to international talent. Retaining this advantage means allowing more students, immigrants, and foreign investors to study, live, and work in the United States. And at the same time, it means maintaining access to foreign markets and strengthening U.S. manufacturing that can fuel American exports. Protecting workers and creating more business opportunities should be seen as complementary agendas, not competing ones.
3) While the United States and China are competing, they may also find ways to collectively address some of these common challenges, especially issues posed by automation. Despite the two countries’ differences, they face surprisingly similar kinds of labor and wage challenges. There may be opportunities for educational exchanges and bilateral or multilateral discussions at the academic level or within international organizations, such as the World Trade Organization (WTO) or the International Labour Organization, which has already been working on the issue. One useful area of discourse could be how to best educate and train the workforce for the twenty-first century to mitigate the uneven effects of globalization. If cooperation with China proves too challenging, there may be fruitful opportunities to engage with U.S. partners, particularly those in the Organisation for Economic Cooperation and Development (OECD) or possibly the nascent Indo-Pacific Economic Framework (IPEF).
Finally, the WTO has made trade liberalization its dominant focus, and it has not yet provided satisfactory solutions to the impact on workers and wages of widespread automation, wage gaps, and regional underemployment caused by globalization. To address this gap, the United States should push the WTO to put these issues on the agenda of its upcoming ministerial meeting in June. Overall, the data in this study call for paying closer attention to how factors in the labor market, inequality, education, and rural development play out and interact with each other—at home and abroad.
