Policymakers on either side of bitter trade dispute seem to confuse two issues.

Many more years of high economic expansion are only possible if the country restructures to boost domestic consumption.

A well-functioning trading regime would permit neither the large, persistent trade imbalances that characterize the current global trading system nor the perverse flow of capital from developing economies to advanced economies. Global trade needs new rules that encourage a return to the benefits of free trade and comparative advantage.

The beginning of the impact of China’s high debt-to-GDP levels is becoming more visible, and the country will need another source of real growth if the “rapid expansion” of infrastructure comes to an end.

There is no doubt that China’s economy is struggling. After Chinese President Xi Jinping ended the country’s zero-COVID policy a year ago, most economists expected growth to surge—but that never really happened, and deeper problems became apparent. So what are the exact causes of China’s stagnation?

If China’s GDP is to continue growing at 4–5 percent for the next decade, either other major economies must be willing to reduce their economies’ investment and manufacturing shares to accommodate China or China must establish policies that cause the locus of growth to shift from investment to domestic consumption. Neither is easy, and the former is very unlikely.

A discussion on the prospects of China's economy, the real estate market and the government's policies

The Contested Causes of Stagnation

Both Washington and Beijing treat rising debt as a consequence of irresponsible behavior by local institutions. But in China and the United States, rising debt is spurred by policies that have encouraged distortions in the distribution of domestic income. Until these distortions are addressed, both countries must choose between rising debt and rising unemployment.

That is why for all the excited debate, debt ceilings won’t limit the rise in US debt. They just allow Congress to pretend that it is doing something meaningful about America’s surging debt burden.