Last Halloween, I wrote about how the devilish US sugar program makes candy more expensive. This year, as headlined by The New York Times, Halloween candy is even pricier. The New York Times article cites non-controllable factors like bad weather and high fertilizer costs, among other problems but curiously misses the US sugar program as a reason contributing to elevated sugar prices. Actually, the piece even goes as far as to blame US reliance on sugar imports as part of the problem:

The United States relies on sugar imports from Mexico, which saw sugar production fall by more than 15 percent this year as a result of drought conditions, according to the U.S. Department of Agriculture. The price of raw sugar traded in global markets, recently around 27 cents per pound, was the highest since 2011.

Parts of Asia, home to several top sugar producers, have also experienced dry weather that hit harvests. India, one of the largest sugar producers in the world, has restricted sugar exports to protect its domestic supply.

The U.S. candy consumer is essentially paying the price for poor crops in Mexico and also Asia,” said John Stansfield, a senior sugar analyst at commodity data platform DNEXT.

So, before I get to this year’s trade-related Halloween topic, I would like to fill in some of the gaps in this article. Firstly, while the price of raw sugar traded in global markets was indeed recently around 27 cents per pound, the US price was almost 43 cents per pound. The US sugar program’s purpose is to maintain a higher price for US sugar, thus the domestic sugar price is routinely almost double the global price (see the chart below).

Secondly, the US sugar program implements supply restrictions to keep domestic sugar off the consumer market to maintain a higher price—as my colleague, Colin Grabow puts it, the US government “is, in essence, the leader of a nationwide sugar cartel.” Lastly, the sugar program has strict tariff-rate quotas on imports of sugar so that extremely low quantities can be imported duty-free, but the excess is subject to tariffs reaching close to 100 percent.

To characterize the US as “reliant” on sugar imports and imply this reliance causes higher sugar prices is misleading. Consumers are paying higher prices because of the US government’s active reduction of the domestic sugar supply and taxes on sugar imports. When uncontrollable factors like weather impact the yields of foreign suppliers, consumers indeed pay even higher prices, but the original culprit of monstrous sugar prices (and thus, candy prices), is the US sugar program.

Now, to this year’s story.

Halloween is the biggest holiday for chocolate sales. Indeed, Americans’ love for chocolate is demonstrated in the time-honored tradition of Halloween candy trading with friends and family; most Americans say they would trade their gummy candy for chocolate treats.

The US chocolate trade is relatively free as most cocoa-based products and chocolate have zero or very low tariffs. The sugar program creates some hurdles but, overall, the story of bean to bar is a prime example of globalization:

Cacao trees can only grow in specific climates—primarily in Côte d’Ivoire, Ghana, Ecuador, Cameroon, and Brazil. The beans are then shipped around the world to be processed (roasted and ground into cocoa) and then made into cocoa butter, for chocolate manufacturing.

As illustrated in the figure below, based on 2022 trade flows, Germany, Belgium, and the Netherlands are the largest producers and exporters of chocolate and other cocoa-based food products, while the United States, France, and Germany are the leading importers of finished chocolate goods. Note, Germany, the Netherlands, and Belgium are leading exporters and importers of chocolate. (If you take our globalization quiz, you’ll learn that often the biggest exporters are also the biggest importers.)

Thanks to globalization, chocolate is integral to US culture, not only serving as currency on Halloween but as a gift on special occasions, and even a daily pick-me-up.

Senator Bill Cassidy (R‑LA) wants to slap a tariff on carbon-intensive imports. Last week he told reporters: “What we’re proposing is not a domestic carbon tax, and it is not intended to lead to a domestic carbon tax.” In an article published by Foreign Affairs, Senator Cassidy referred to his carbon tariff policy as a “foreign pollution fee.” One may quibble with the labels, but three things are clear: 1) Senator Cassidy’s proposal is a carbon tax on imports, 2) it will hurt American consumers and some manufacturers, and 3) it lays the groundwork for a domestic carbon tax.

What’s in a Name?

Let’s begin by defining the terms “tariff,” “fee,” and “tax.” According to Merriam-Webster, a tariff is “a schedule of duties imposed by a government on imported or in some countries exported goods.” Merriam-Webster defines a fee (in the payment context, not the real estate ownership context) as “a fixed charge.” Likewise, Merriam-Webster defines a tax as “a charge usually of money imposed by authority on persons or property for public purposes.”

Whether we use the terms tariff, fee, tax, duty, or charge is a matter of semantics. I prefer to use the word tax because people know what a tax is—and a tariff is just a tax on imports. No matter how you slice it or which name you give it, Senator Cassidy’s proposal boils down to the federal government taxing imports based on their carbon intensity. It’s a carbon tax. It may only apply to a narrow set of energy-intensive imported goods, but the partial application of a carbon tax doesn’t change the fact that it’s a carbon tax.

[Note: I’m intentionally leaving out the word “dioxide” after carbon for brevity—the compound in question is carbon dioxide or CO2 (or CO2 equivalents in the form of other greenhouse gases).]

Taxing Imports Hurts American Consumers

Senator Cassidy’s plan would establish an import tax based on the carbon intensity of certain imported goods, such as steel from China. Although his Foreign Affairs piece does not mention the level of the tariff or the specific industries and countries involved (apart from targeting China), we know how tariffs tend to reduce the quantity of imported goods and raise prices for consumers.

The economic case against a carbon tax on imports mirrors the case against tariffs in general. Tellingly, the Foreign Affairs piece takes the perspective of American manufacturers of tariff-targeted goods rather than consumers (note that Senator Cassidy’s tariff would also hurt domestic manufacturers who use imported steel in their manufacturing process). The Foreign Affairs article refers to “manufacturing” or “manufacturers” more than a dozen times while failing to mention consumers.

An early passage in the article illustrates its anti-consumer bias:

The difference in environmental regulation enforcement between China and the United States lowers the cost of manufacturing in China, thereby encouraging US manufacturing and the jobs associated with it to migrate overseas. Such losses for the United States’ economy put downward pressure on its industrial base and American standards of living.

Low-cost manufacturing in other countries challenges domestic manufacturing. I do not dispute that point. I disagree, however, when the senator characterizes low-cost manufacturing in China as a loss “for the United States’ economy.” American consumers (including consumers of imported materials, some of which are manufacturers themselves) are also part of the economy. Consider this quote from French economist Frederic Bastiat:

There is a fundamental antagonism between the seller and the buyer. The seller wants the goods on the market to be scarce, in short supply, and expensive. The latter wants them abundant, in plentiful supply, and cheap. Our [trade] laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance.

A carbon tax on imports would hurt consumers just like other tariff protections enacted on behalf of domestic producers. Cato scholars have pointed out how “the US government systematically ignores consumer or broader ‘public interest’ impact when imposing trade remedy taxes on imports.” Given the lack of attention paid to the consumer by lawmakers, it is no surprise that so many companies can successfully lobby for tariff protection at the expense of consumers. Unfortunately, the consumer is missing from Senator Cassidy’s analysis.

Getting Closer to a Domestic Carbon Tax

Despite Senator Cassidy’s claim that his foreign pollution fee “is not intended to lead to a domestic carbon tax,” that is exactly what it would do, for at least three reasons. First, the foreign pollution fee concept may not be workable under World Trade Organization (WTO) rules without a domestic carbon tax. Second, applying a carbon tax on imports would require a new bureaucracy to keep tabs on the carbon intensity of traded goods. Third, a carbon tax on imports would require translating carbon emissions into dollar amounts, which is one of the biggest hurdles faced by advocates of a domestic carbon tax.

Regarding WTO rules, the CLC stated in a September 2023 report:

Commentators and some countries have raised concerns about the consistency of these measures with the rules of the [WTO], particularly to the extent that they rely on national average carbon intensity values for covered products, are not paired with a domestic carbon price, or attempt to address concerns about economic competitiveness in addition to reducing greenhouse gas emissions.

If advocates of a foreign pollution fee are faced with the choice of pairing it with a domestic carbon tax to satisfy WTO rules or dropping the scheme, which will they choose?

Regarding the new bureaucracy needed to count carbon, Senator Cassidy and others have drafted legislation called the PROVE IT Act to clear that hurdle. The PROVE IT Act would establish the Department of Energy as the carbon counter in chief. The act was introduced by Senators Chris Coons (D‑DE) and Kevin Cramer (R‑ND) and co-sponsored by Senator Cassidy along with Senators Angus King (I‑ME), Lisa Murkowski (R‑AK), Martin Heinrich (D‑NM), Lindsey Graham (R‑SC), Sheldon Whitehouse (D‑RI), and John Hickenlooper (D‑CO). This looks like a “who’s who” of bipartisan carbon taxers, but don’t take my word for it. The pro-carbon tax Niskanen Center said:

If the PROVE IT Act becomes law, it will be a meaningful step toward collecting product-level emissions data. Getting better at measuring, reporting, and validating product-level emissions is critical for implementing a border adjustment under a carbon tax.

Regarding the level of the carbon tax on imports, any legislative proposal (or the agency implementing it) will have to come up with a dollar amount to tax carbon dioxide emissions. Economists believe this is an all-important step—according to Pigouvian theory, the level of the tax determines whether it increases or decreases social welfare. But the “correct” level of a carbon tax is difficult to estimate and depends on a host of politically charged decisions, like how to count costs (and benefits) and whether to weigh impacts in the distant future heavily (by applying a low discount rate) or lightly (by applying a high discount rate).

Critics of carbon pricing are correct to point out that the “correct” level of the tax—the marginal social cost of carbon emissions—is so dependent on input assumptions as to be useless in guiding public policy. A neutral perspective might be that there is a lot of wiggle room. Interestingly, carbon tax supporters admit the same thing:

There is considerable uncertainty about the magnitude of the social cost of carbon. Under the Obama administration, a task force consisting of 12 US government agencies was put together to employ several climate-economy models and come up with an estimate of the social cost of carbon. They came up with a range—actually, a very wide range. They couldn’t rule out the possibility of a near zero social cost or a cost of around $100 a ton.

Further, establishing the level of carbon tax through protectionist trade policy almost guarantees the process will be guided by politics rather than a thorough, scientific, and economically informed attempt to price carbon at the marginal social cost of emissions. I predict that whatever carbon price is implied in defining the “foreign pollution fee” in Senator Cassidy’s plan will be held up by advocates of a domestic carbon tax, who will say “Aha! This is the magic number we’ve been looking for!”

Conclusion

Senator Cassidy’s foreign pollution fee proposal is a carbon tax on imports, and it would hurt consumers just like other tariffs. Contrary to the senator’s stated intentions, it would take us one step closer to a domestic carbon tax—one based on protectionist trade policy rather than environmental economics.

Last week I mentioned the use of bleak language by members of the commentariat to describe the state of US manufacturing, but I had no idea such a prime example of this mistaken rhetoric would present itself so quickly thereafter. Writing in the Wall Street Journal last week, Oren Cass called for raising tariffs to rescue an industrial base he described as “reeling.” But both Cass’s premise and prescribed remedy are badly flawed. United States manufacturing remains in robust health and new tariffs will only undermine the sector.

Although various metrics exist for assessing the state of manufacturing, perhaps the best one is output. The goal of manufacturing is production, so how much stuff is being produced? The answer, as I explained in a recent essay, is quite a lot. In fact, the sector’s output is currently only five percent off its all-time high.

Other metrics painting an even rosier picture. In terms of real value-added, the sector reached a record high last year.

And measured by value-added per worker, U.S. manufacturing is significantly ahead of other advanced economies such as South Korea and stands head and shoulders above China.

Such productivity allows Americans to produce massive quantities of goods with fewer workers than in decades past. And the quantities produced are massive indeed. In 2019, US firms exported over $1.3 trillion in manufactured goods. This includes high-tech products such as aerospace and aircraft parts ($60.1 billion), integrated circuits ($41.2 billion), and medical instruments ($29.4 billion).

The United Nations’ 2022 edition of its International Yearbook of Industrial Statistics found that the United States was the world’s third-leading exporter of medium-high and high-technology manufactured goods.

United States manufacturing is not only deep but broad. Beyond high-technology products, UN data show the United States is also a leading producer in numerous other areas, including paper and wood products, beverages, and coke and refined petroleum products. Of 23 manufacturing categories examined by the International Yearbook of Industrial Statistics, the United States was either the leading or second-leading manufacturer in 21 of them.

And yet we are to believe that is an industrial base that is reeling?

Given such realities, Cass’s task of finding the data to portray US manufacturing as being under siege is a difficult one indeed. To marshal evidence for his case, the executive director of American Compass states the following:

Whereas real manufacturing output doubled from 1980 to 2000, it rose only 7% from 2000 to 2020. As a result, after holding steady for 50 years, manufacturing employment collapsed by one-third, eliminating more than four million jobs. Automation is not the story here. To the contrary, manufacturing productivity has declined over the past decade—a shocking trend incompatible with a well-functioning capitalist system—leaving the sector far less competitive.

The passage, however, is self-refuting. If manufacturing output has steadily increased yet employment has fallen by a third, it defies credulity to claim that this is anything other than an automation story. How could it be otherwise?

Data further point toward the role of automation. From 2000 through 2010, manufacturing labor productivity increased by approximately 45 percent, while from 2010 to the present it dipped by just under 3 percent. In other words, manufacturing labor productivity is significantly higher today than at the turn of the millennium—exactly what one would expect given rising output and a notable decline in employment.

Little wonder a 2015 study found that productivity growth was responsible for 88 percent of manufacturing job losses in recent years. 

Furthermore, the modest decrease in productivity since 2010 has correlated—not surprisingly—with an increase in manufacturing employment.

But even if US manufacturing was in poor health, Cass’s prescription of increased tariffs is an odd elixir. As with many US industries, imported inputs play an important role in allowing manufacturers to keep costs down and stay competitive. Raising tariffs, and thus the cost of inputs purchased from abroad will only undermine the ability of US manufacturers to compete in the global marketplace.

After all, we’ve been down this road before. In 2020 economists Kadee Russ and Lydia Cox calculated that the increased cost of steel and aluminum—an important input for numerous manufacturers including automakers and machinery producers—due to tariffs imposed by President Trump led to approximately 75,000 fewer jobs in manufacturing. Notably, that figure does not count additional losses suffered by US exporters resulting from retaliatory tariffs imposed by other countries on US exports.

Despite such public policy missteps, the United States continues to enjoy a thriving, dynamic manufacturing sector. The threat that the country’s manufacturers should be on guard against is not imports, unbalanced trade, or other alleged bugaboos but quack cures being peddled to relieve American industry of non-existent or exaggerated ills.

It has become conventional wisdom among many in Washington that a once-vaunted US manufacturing sector has become a shell of its former self. Language used by members of the commentariat and politicians to describe the state of US industry is often bleak, sometimes bordering on the apocalyptic. In August, for example, columnist David Brooks flatly stated “we don’t make things anymore.” Talk of rescuing the so-called “Rust Belt” and American manufacturing have been staples of recent presidential campaigns, and once in office President Biden and President Trump have both pushed a spate of protectionist measures to resuscitate the allegedly beleaguered sector.

But aside from the economic harm inflicted by such actions, the underlying premise that American manufacturing needs saving doesn’t square with the facts. As I explain in a new essay, reports of the sector’s demise are greatly exaggerated—if not entirely fictitious.

Simply put, the United States remains a manufacturing powerhouse. In 2020 it was the world’s fourth‐​largest steel producer and in 2021 was the second-largest automaker and largest aerospace exporter. Accounting for nearly 16 percent of global manufacturing output in 2021—second only to China, which has four times the population of the United States—the US had a greater share than Japan, Germany, and South Korea combined. By itself, the US manufacturing sector would constitute the world’s eighth‐​largest economy.

Such facts perhaps come as a surprise to Americans accustomed to regularly purchasing consumer products that are made overseas. If the United States is such a manufacturing stronghold, they might reasonably wonder, where is all the stuff that American firms make? The answer: all around us. US manufacturers make many of the products we use, ranging from the gasoline in our cars (not to mention the cars themselves) to the sophisticated medical instruments in our hospitals to the advanced commercial aircraft that transport us to destinations around the globe.

Even many of the products Americans consume from overseas still have a considerable US influence. Nike shoes, for example, are produced abroad while design work takes place at its headquarters in Oregon. Similarly, numerous designers are employed by Apple in the United States as a key part of the production process for devices sold worldwide. Such highly skilled work may not take place on the assembly line, but manufacturing would be impossible without it.

Beyond our everyday shopping experiences, perceptions of US manufacturing decline may also be due to the declining number of Americans who work in factories. From a peak of 19.5 million workers in 1979—22 percent of the nonfarm workforce—manufacturing employment has dropped to approximately 13 million today and just 8.3 percent of nonfarm workers. But employment is not the same as output—far from it. While manufacturing employment has declined by about one-third, output is only slightly off its record high. Manufacturing’s value-added, meanwhile, last year stood at an all-time high.

This ability to produce more stuff with fewer workers reflects the incredible productivity of US workers. Measuring manufacturing value added on a per-worker basis shows Americans to be the world leader at over $141,000. That’s 45 percent higher than second-place South Korea and over seven times that of workers in China. Such high productivity helps explain why manufacturing attracted over $55 billion in foreign direct investment last year—more than any other sector.

Along with higher productivity, reduced manufacturing employment reflects Americans’ increased appetite for services over stuff. Instead of buying proportionately more manufactured products as they become more prosperous, Americans are spending their money on services and experiences such as dining out, travel, and entertainment.

This is hardly a uniquely American phenomenon. Across a range of highly developed countries the same pattern holds, with countries seeing less manufacturing employment as they become richer. Germany, a country long synonymous with manufacturing prowess, has seen its share of workers employed in the sector nearly halved from approximately 37 percent in 1973 to barely 19 percent as of 2016. Japan, another long-time manufacturing titan, had just 16 percent of its workers employed in manufacturing as of 2016.

It’s not clear that this should be a source of distress given the relatively low wages of such employment. As a 2018 Congressional Research Service report points out, “…production and nonsupervisory workers in manufacturing, on average, earn significantly less per hour than nonsupervisory workers in industries that do not employ large numbers of teenagers, that have average workweeks of similar length, and that have similar levels of worker education.” Other sources comport with this finding, as I note in my new essay:

A senior economist at the Federal Reserve Bank of St. Louis pointed out that, while the average manufacturing worker earned $0.50 more per hour than the average private‐​sector worker in 2010, by 2022 the average manufacturing worker was earning $1.12 less. This finding comports with a 2019 Bureau of Labor Statistics report noting that in 1990, production workers in manufacturing had hourly earnings approximately 6 percent greater than those of production or nonsupervisory workers in the total private sector ($10.78 versus $10.20) but that by 2018, such workers were earning about 5 percent less ($21.54 versus $22.71). In addition, a 2022 paper found that the wage premium for manufacturing jobs has disappeared and noted that manufacturing wages rank in the bottom half of all jobs in the United States.

Of course, none of this is to suggest that manufacturing employment is somehow bad or that the sector should be looked down on, but those calling for a manufacturing renaissance and to put more Americans to work in factories should perhaps first take a deep breath.

This is also not to say that the state of manufacturing cannot be improved. While there is certainly no reason for doom-mongering, plenty of scope exists for eliminating obstacles that hinder the sector’s growth and competitiveness. Removing tariffs on steel and aluminum, for example, would boost the fortunes of manufacturers that rely on these metals as key inputs, while scrapping Jones Act shipping protectionism would bolster the US steel industry (among others). Changes to the tax code that allow for full, immediate expensing of capital investment and a more sensible, streamlined immigration system would benefit both manufacturers and a range of other industries.

But perhaps the best assistance legislators can offer is to back off and resist temptations to engage in new misadventures in protectionism or industrial policy.

Contrary to common perception, US manufacturing continues to be a vibrant source of growth and economic dynamism. Provided Washington can avoid ill-advised schemes to “rescue” the industry it should remain so for many years to come.

Today we’ve published three great new essays for Cato’s Defending Globalization project:

• Globalization and Growing Global Equality, by Chelsea Follett, documents how—contrary to the conventional wisdom—the last few decades of globalization have seen unambiguous declines in global inequality across a variety of metrics, including income inequality, education inequality, and more.
• The Reality of American “Deindustrialization”, by Colin Grabow, debunks the myth of American “deindustrialization” and shows instead that the US manufacturing sector remains a global powerhouse and vibrant part of the US economy.
• Globalization Has Propelled India to Prosperity, by Swaminathan S. Anklesaria Aiyar, traces India’s opening to the global economy and subsequent economic growth, while cautioning that much work remains to be done.

We also have a new video of Cato Senior Fellow Johan Norberg and me discussing his Defending Globalization essay on the supposed “race to the bottom”:

This content joins fourteen other essays and other multimedia features on the main Defending Globalization project page. Be sure to check it all out, and stay tuned for more to come. 

In December 2020, Mexico’s President Andres Manuel Lopez Obrador (AMLO), issued a decree banning genetically modified (GM) corn for human consumption. Mexico is the US’s third top trading partner for agricultural products and the number two export market for US corn. The ban poses concern for many American corn farmers because more than 90 percent of US corn is genetically modified.

The original decree was very vague and created uncertainty around the definition of “for human consumption.” In February 2023, AMLO modified the decree but the updated version does not clear up much.

The new decree explicitly states that GM corn for human consumption through “nixtamalization” (a traditional corn preparation process) or flour production for dough and tortillas is prohibited. However, it remains unclear whether GM corn used as animal feed and for industrial uses for human food would be affected by the ban. The use of GM corn for these purposes is not explicitly prohibited—the updated decree only states that GM corn used as animal feed and in products intended for human consumption should be gradually substituted.

Since Mexican law already requires permits for the use of GM corn, the decree states that the agencies administering permits for the release of GM corn seeds and GM corn for human consumption should revoke the permits and refrain from granting new ones. However, the decree provides no clarity or guarantee that permits provided for GM corn used as animal feed or for industrial uses for human food will not be revoked or granted in the future.

Although the decree is intended for the use of GM corn for tortillas, most tortillas are made with non-transgenic white corn that is already primarily supplied by Mexican production. However, Mexican production cannot completely satisfy demand. Nonetheless, in June 2023, Mexico announced it would temporarily apply a 50% tariff on white corn imports, which was initially suspended last year to help ease inflationary pressures.

Complicating matters is that the GM corn ban and the application of these tariffs is likely illegal under the United States-Mexico-Canada Agreement (USMCA). The ban could violate the agriculture and sanitary and phytosanitary (SPS) chapters, while the tariffs could violate the national treatment and market access for goods chapter.

The agriculture chapter specifically lays out agricultural biotechnology provisions. These were not included in USMCA’s predecessor, the North American Free Trade Agreement (NAFTA), and likely added to the USMCA given the problems around agricultural biotechnology and trade with Mexico. Mexico has been inactive on food and feed products biotechnology applications since May 2018, and in 2019 ceased and rejected applications for genetically modified cotton seeds, citing the precautionary principle. This principle dictates that action should be taken before there is necessarily complete scientific proof of risk. In fact, the principle is codified in the USMCA and states provisional action can only be taken to mitigate risk to human, animal, or plant life or health when scientific proof of risk is insufficient.

Moreover, the trade agreement specifically includes provisions for standards that are “science-based.” The Mexican government has not provided any scientific evidence that GM corn poses a risk to human, animal, or plant life or health, and it cannot legitimately argue that the scientific evidence about the safety of GM corn is insufficient. Mexico’s reasoning for the ban is to “reach self-sufficiency and food sovereignty,” thus it is seemingly a pretext for a protectionist scheme to keep out US corn and prop up Mexican corn production.

Some even posit that Mexico’s actions against GM corn are a retaliation against the US government’s heavy subsidization of domestic corn production, particularly since Mexico eliminated most direct subsidies to its agriculture sector when it joined NAFTA.

The US and Mexico attempted formal consultations to resolve differences on the ban but the talks failed, so the US Trade Representative, Katherine Tai, announced the establishment of a dispute settlement panel under the USMCA, in August 2023. The decision from this third-party panel remains to be seen. In the meantime, Mexican farmers, American farmers, other businesses, and consumers face uncertainty about how this decree affects their future, which undoubtedly will have consequences for US-Mexico trade.

The longer that this matter goes unresolved, not only will Mexicans and Americans lose but the disruptions to North American trade will cost Canadians too. Bypassing important trade rules only serves to create turmoil while providing little (if any) new value for Mexicans.

Since the late 1970s, when Chinese president Deng Xiaoping initiated some market-oriented liberalization, the country has been on an upward economic trajectory. As documented by my colleague Jim Dorn in a recent essay for Cato’s Defending Globalization project, these reforms yielded substantial dividends. It is estimated that nearly 800 million Chinese were lifted out of extreme poverty since 1980, coinciding with the onset of these reforms.

In recent years, particularly under the leadership of Xi Jinping, China has pivoted away from the market-oriented policies that catapulted it to prosperity and global influence.

Today, the prevailing consensus within Washington policy circles is that China is an economic juggernaut poised to surpass the United States as the world’s leading economy in the near future. Proponents contend that Beijing’s reembrace of heavy industrial policy, coupled with the abandonment of market liberalization, has energized the Chinese economy.

However, the actual reality departs from the proponents’ simplistic narrative, as I argue in my new essay for Cato’s Defending Globalization project.

Indeed, China confronts an array of short- and long-term economic challenges. 

Short-Term Headwinds

Today China grapples with several immediate challenges that are almost certain to exert downward pressure on its economy in the coming years. Xi Jinping has rapidly moved the country in an illiberal direction. The once-dynamic and thriving tech sector has been stymied by Xi Jinping’s embrace of Maoist socialism. China has cracked down on educational platforms, and its general aversion to private sector enterprises continues to exacerbate youth unemployment, which is estimated to have exceeded 20 percent.

China’s real estate sector is overinflated, and property developers are failing to deliver promised residential units, leading to a widespread middle-class boycott of mortgage payments in 2022. Major Chinese property developer Evergrande defaulted on its debt in late 2021 and then filed for bankruptcy in August.

Earlier this week, the largest Chinese property developer, Country Garden, warned that “it doesn’t expect to be able to repay all of its U.S. dollar bonds and other offshore debts,” according to the Wall Street Journal. This is a worrying sign about Beijing’s ability to stabilize the country’s beleaguered housing market. Meanwhile, local governments, reliant on land sales to fund public services, are increasingly grappling with constrained budgets.

China’s handling of the COVID-19 pandemic has been fraught with difficulties, and the nation’s increasing dependence on forced labor and repression in the Xinjiang region has drawn international condemnation. Additionally, Beijing has reneged on its “One Country, Two Systems” commitment to Hong Kong, effectively annexing it in 2020 with the passage of the national security law. Today Beijing’s galloping illiberalism has rendered the country less attractive for foreign investment.

Long-Term Headwinds

While the short-term challenges may be surmountable with different policies, the long-term headwinds pose more formidable and enduring obstacles.

First, China is facing a rapidly aging population and a diminishing workforce, which will dampen economic output, stifle innovation, and strain government services. The United Nations recently projected that India will overtake China as the world’s most populous country in 2023. Notably, China’s aging population is an accelerating phenomenon, as highlighted by a Foreign Affairs article that observed, “In 1978, the average median age of a Chinese citizen was 21.5 years. By 2021, it had risen to 38.4, surpassing the United States.” China’s fertility rate has plummeted to 1.15 births per woman, well below the replacement rate of 2.1 births per woman.

Furthermore, China is witnessing an exodus of talent as young, highly educated individuals seek opportunities abroad. Take artificial intelligence (AI), where a significant proportion of top-tier AI researchers globally obtained their undergraduate degrees in China. However, the majority do not remain in China, with 56 percent choosing the United States as their preferred destination.

Reasons for this exodus, as explained by a report from the Paulson Institute at the University of Chicago, include the “relatively relaxed and innovative scientific research environment” in the United States compared to China, China’s “authoritarian political system and restricted freedom,” and various impediments such as “language barriers, pervasive internet censorship, and environmental quality.”

Additionally, China’s workforce productivity is not expanding at the same robust pace as it has in the past. The period following Deng’s reforms witnessed a rapid surge in productivity growth, largely attributable to catch-up growth due to China’s low starting point. Today, mounting evidence suggests that productivity growth is slowing, or perhaps even reversing, representing a more pronounced decline compared to global productivity trends.

Demographic shifts and brain drain certainly play a role in this phenomenon, but China’s growing reliance on top-down central planning and industrial policy also contribute. According to a 2022 paper from the International Monetary Fund, state-owned enterprises (SOEs) are estimated to be 20 percent less productive than their private sector counterparts in the same industry. This contrasts with the period of reform between 1998 and 2005, which fostered significant private sector entrepreneurship, as detailed in a recent blog post.

Collectively, the economic reforms that China undertook from the late 1970s to 2012 propelled the nation to increasing wealth and improved living standards for the average citizen. In recent years, however, the country has veered toward illiberalism, characterized by heavy-handed state intervention and repressive human rights practices. These policies are beginning to manifest in economic data; for instance, foreign direct investment (FDI) in China has dwindled from around 4 percent of China’s GDP in 2011 to approximately 1 percent today. As economist Noah Smith has noted, FDI from G7 countries declined from $35.4 billion in 2014 to $16.3 billion in 2020.

For policymakers in Beijing seeking to rejuvenate the economy, a return to the market-oriented reforms of the past is the key to future growth.