Balancing Consumption in Global Economies: Insights from China and the US#

Consumption Dynamics in China and the US#

• United States:
  • High Consumption: Personal consumption accounts for ~68% of U.S. GDP, a cultural and economic cornerstone shaped by historical surges in productivity, reduced work hours, and sophisticated advertising since the late 19th century.
  • Trade Deficit: In 2024, the U.S. ran a US$971 billion goods trade deficit, with China accounting for ~US$355 billion, highlighting reliance on imports due to diminished domestic manufacturing.
  • Reindustrialization Push: Policies like the CHIPS Act and Inflation Reduction Act aim to revive manufacturing, but as Johns Hopkins Professor Yuen Yuen Ang notes, there’s no clear playbook for reindustrializing a post-industrial economy.
  • Challenges: High consumption, low savings rates (~3.8% of disposable income in 2024), and dependence on consumer spending make reindustrialization complex, requiring significant investment and time.
• China:
  • Low Consumption: Household consumption constitutes ~38% of China’s GDP, far below the global average (~50–60%), reflecting a high savings rate (~44%) driven by a weak social safety net, as noted by Cornell economist Eswar Prasad.
  • Manufacturing Dominance: China’s export-led growth, amplified since joining the WTO in 2001, has made it the “world’s factory,” but overcapacity in industries like electric vehicles (EVs) underscores the need for domestic demand.
  • Policy Efforts: Beijing is promoting consumption through incentives like EV subsidies, trade-in programs, and urban development, but flagging consumer sentiment post-COVID hinders progress.
  • Cultural Factors: Studies suggest Confucian traditions may contribute to lower consumption, though this is debated, similar to stereotypes like the “Protestant work ethic” in the U.S.

What Is “Just Enough” Consumption?#

• No Universal Benchmark: Economists, including Prasad, argue there’s no precise measure for ideal consumption or savings. The optimal level depends on:
  • Economic Structure: Consumption-driven economies like the U.S. require high spending to sustain growth, while manufacturing-led economies like China need enough consumption to absorb excess production.
  • Social Safety Nets: Stronger welfare systems (e.g., healthcare, pensions) reduce precautionary savings, boosting consumption, as seen in Europe (~50% consumption share of GDP).
  • Trade Balance: Excessive consumption with inadequate production leads to trade deficits (U.S.), while low consumption with high production creates surpluses (China).
• Proposed Balance:
  • China: Increasing consumption to ~45–50% of GDP could reduce reliance on exports and stabilize growth, requiring enhanced social safety nets and income growth.
  • U.S.: Reducing consumption to ~60–65% of GDP, paired with manufacturing growth, could narrow trade deficits and enhance economic resilience, necessitating industrial policy success.
• Global Implications: A balanced consumption-production mix in both nations could reduce economic tensions, such as U.S.-China trade disputes, and foster sustainable growth.

Challenges in Achieving Balance#

• China:
  • Consumer Sentiment: Post-COVID economic slowdown, property sector woes, and youth unemployment (~14% in 2024) dampen spending. Luxury goods like Swiss watches face declining demand, impacting global markets.
  • Policy Effectiveness: Initiatives like the “frugal working style” rule for civil servants (2012) and recent consumption incentives struggle against structural issues like income inequality and inadequate welfare.
  • Overcapacity: Excess production in EVs and steel requires robust domestic demand to avoid dumping on global markets, which fuels trade tensions.
• United States:
  • Reindustrialization Barriers: High labor costs, supply chain dependencies, and skill shortages slow manufacturing revival. The U.S. imported 18% of goods from China in 2024, down only slightly from 2021.
  • Consumer Culture: Deeply ingrained spending habits, reinforced by advertising and credit availability, resist moderation. Retail sales grew 3.2% year-on-year in Q1 2025, despite inflation concerns.
  • Policy Risks: Subsidies for reindustrialization (e.g., US$52 billion for CHIPS Act) may strain budgets if consumption-driven growth falters.

Broader Context and Examples#

• Historical Perspective: The U.S. consumption boom was spurred by advertising pioneers like Artemas Ward in the 1890s, who equated buying with fulfillment. China’s consumption growth, however, has been more restrained, with failed attempts at Western exports like Barbie (e.g., Shanghai store closure post-2009) highlighting cultural mismatches.
• AI and Consumption: South Korea’s AI leadership, as noted by Ray Kurzweil, could influence consumption patterns through AI-driven personalization (e.g., Samsung’s smart devices), offering a model for China to boost engagement.
• Agentic AI: Companies like i2c use AI agents to enhance customer experiences, potentially increasing spending by tailoring services, a strategy China could adopt to stimulate domestic markets.
• Global Benchmarks: Germany (~52% consumption share) balances manufacturing and consumption through strong social safety nets and export-led growth, offering lessons for both nations.

Sentiment and Implications#

• Sentiment on X: Posts on X reflect mixed views on China’s consumption push, with some praising EV incentives but others noting persistent economic gloom. U.S. reindustrialization garners support, though skepticism about execution timelines is common.
• Economic Dividends: Balanced consumption could:
  • China: Trade surpluses, overcapacity, and global tensions, while boosting living standards.
  • U.S.: Trade deficits, unemployment in industrial regions, and reliance on foreign goods, enhancing sovereignty.
• Risks of Imbalance: Persistent asymmetry could escalate trade wars, with U.S. tariffs on Chinese goods (e.g., 25% on EVs) and China’s retaliatory measures disrupting global supply chains.

Conclusion#

There’s no one-size-fits-all answer to how much consumption is “just enough” for an economy, but China and the U.S. illustrate the need for balance tailored to their unique structures. China’s push to raise consumption to ~45–50% of GDP requires robust social safety nets and consumer confidence, while the U.S. must temper its ~68% consumption share with manufacturing growth to reduce trade deficits. Both face structural and cultural hurdles, but a healthier balance could mitigate global economic tensions and drive sustainable growth. Policymakers should prioritize welfare reforms (China) and industrial investments (U.S.), while leveraging AI-driven personalization to align consumption with economic goals.