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The U.S. trade war with China centers on the way China's economy works. The U.S. wants China to change its brand of state-supported capitalism. Whether that works or not, China's economy is changing in certain ways on its own. Here's Cardiff Garcia and Pamela Boykoff of Planet Money's Indicator podcast.
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CARDIFF GARCIA, BYLINE: Misconception about China's economy number one - that China is all about manufacturing. This is actually quite a dated view of China, but it is still a prevalent one. We think about China and we think about assembly lines and huge factories producing loads of stuff from stuffed toys to smartphones.
PAMELA BOYKOFF: Today, though, while China still does make a lot of stuff, the biggest engine of growth is not manufacturing. I spoke to this economist Nicholas Lardy. He works at the Peterson Institute for International Economics. He told me China's growth today is fueled more by domestic demands.
NICHOLAS LARDY: This population is, basically, very well fed and clothed. Some of them may be buying cars. But what most people are spending most of their extra income on is education, healthcare, travel, entertainment, recreation.
GARCIA: That's a sign of how fast China's middle class is growing, which leads us to misconception number two - that China is a low-wage economy. Politicians used to talk quite a bit about how China was taking jobs away from the United States because it has such cheap labor. But the current truth is more complicated than that because wages in China have gone up by a lot in the last decade or so.
BOYKOFF: Look. We're not trying to say that Chinese factory workers don't make less than American ones. They do. But China's no longer the cheapest labor around. Manufacturing wages are higher than in nearby economies like Malaysia, Thailand, the Philippines. Here is Apple CEO Tim Cook making the same observation at the global Fortune Forum.
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TIM COOK: The popular conception is that companies come to China because of low labor cost. And that is not the reason to come to China from a supply point of view. The reason is because of the skill and the quantity of skill in one location and the type of skill it is.
GARCIA: While many U.S. companies still manufacture in China, now they also want to sell more of their products there.
BOYKOFF: And China is still a pretty difficult place to do that. There are state subsidies, restrictions on foreign companies, a range of Chinese government policies that Washington believes are unfair.
GARCIA: And that is a good segue to misconception number three - the idea that China's economic policies are all about promoting economic growth. Growth is important to China's leadership. But there are other things that matter too, like political stability.
BOYKOFF: China is not a democracy. But its leaders, like President Xi Jinping, still have to pay attention to politics.
GARCIA: Take China's state-owned companies. Nicholas Lardy says that a lot of them are appallingly inefficient - little more than zombies in some cases. But the state keeps them alive even though they're a serious drag on the country's growth rate.
BOYKOFF: Why do you think Xi is doing this?
LARDY: It appears that he thinks having a large state sector gives him more control, gives the party more control. So he is, apparently, willing to trade off a little bit of growth - in other words, slower growth - if he has more control.
GARCIA: A decade ago, it looked like China was moving towards reforming its institutions and opening up its markets. But a lot of that has stopped since President Xi took power.
BOYKOFF: That's the frustration facing U.S. negotiators. How does the U.S. push China further along that road, especially if China doesn't want to go? The notion that China desires to transition into a more capitalist market style economy, that could turn out to be the biggest misconception of all. Pamela Boykoff.
GARCIA: Cardiff Garcia, NPR News. Transcript provided by NPR, Copyright NPR.
