China’s Moment of Weakness: Economic Decay and America’s Strategic Opening

The China challenge facing the United States is often presented as so large and so existential that it encompasses topics as varied as military planning, technology policy, and student visa applications. But while policymakers in Washington and technologists in Silicon Valley alike have been debating what to do about the challenge, economic conditions in China itself have changed dramatically. Indeed, the strategic challenge from China today is an entirely different threat from the one the United States and its allies faced only four years ago. And, crucially, this change represents an urgent but potentially definitive opportunity for the United States.

In the current strategic balance, many analysts fail to appreciate the fact that Beijing’s policy tools for generating economic growth are fundamentally broken. China is not facing an economic crisis or a collapse, but a steady decay of its capacity to influence its economy through its fiscal and financial systems. After years of unproductive investments and amassing trillions of dollars of bad debt, the country has no way to generate sustained domestic demand from households or corporations and is entirely dependent on exports for its growth. Last year, despite the Trump administration’s trade war, China achieved its largest-ever global trade surplus, $1.2 trillion, by exporting some $3.8 trillion worth of goods, a 5.5 percent increase from the year before. The rest of the Chinese economy, meanwhile, has cooled significantly since 2022 amid the collapse of the property sector and Beijing’s overly aggressive COVID-19 restrictions.

These are symptoms of the same phenomenon: China’s domestic economic slowdown is the primary driver of its export strength, because weak domestic demand in China means that excess production is exported at lower prices. Even using Beijing’s official data, which underreports the slowdown, China peaked as a proportion of the global economy in 2021 at 18.5 percent of global GDP and has declined since then. (Beijing’s latest figures imply that the country would account for 16.7 percent of the global economy, though the actual proportion is probably closer to 15 percent.) The United States, by contrast, accounts for around 26 percent of global GDP, up from 24 percent since 2021. Not only is there virtually no chance of China overtaking the United States as the world’s largest economy, but it is also likely that the U.S. advantage in economic strength will expand further in the next decade.

As a result, the United States no longer faces a long-term systemic economic rivalry with China, and Beijing’s strategic position is significantly weaker. To maintain any growth, Beijing must remain fully preoccupied with keeping markets for its exports open, which explains much of China’s diplomacy over the past two years, both with the Trump administration and with European leaders. The consequences of weakening export growth are now much larger for Beijing than only four years ago and include domestic deflation and rising corporate debt burdens, a weaker exchange rate, capital outflows and financial instability, and the potential for a lost economic decade similar to Japan’s struggles in the 1990s. The pressure on China’s economy means it will struggle to continue modernizing its military and maintain technological innovation. Although budgets can always prioritize these efforts, China’s overall fiscal resources are trending lower.