Why China Cannot Escape the Economics of Self-Sufficiency

China’s aim for greater self-reliance is becoming increasingly credible. Beijing’s new five-year plan doubles down on technological self-reliance just as rapid advances in strategic industries, from batteries to AI, are making that goal look increasingly feasible.

China has good reasons for pursuing it. Greater self-reliance can reduce exposure to global shocks and economic coercion while providing greater security of domestic supply. Its enormous domestic market, huge manufacturing base, and ability to mobilise capital make China unusually well placed to pursue that goal.

But there’s a catch. Even a far more self-reliant China cannot escape one of the most fundamental constraints in economics: scarcity.

Thanks to its size, China can currently devote vast resources to strategic industries and technologies without having to pay the full price of the opportunities it gives up elsewhere.

So long as production lines sit idle, construction sites remain unfinished, and capital searches for better returns, China still has resources to draw on. It can put underused workers, factories and capital into battery plants, semiconductor foundries or robotics production without immediately drawing resources away from other strategic activities.

The same holds true when capital and workers can shift from building apartments towards more strategic industries. The cost of drawing them away from low-value industries is relatively small when little growth is compromised in the process.

Under these circumstances, greater self-sufficiency still comes relatively cheaply for China. Yet neither source of expansion – deploying underused resources or reallocating misallocated ones – lasts forever.

The limit to such expansion is what economists call the production possibility frontier. Inside it, the opportunity cost of greater self-sufficiency can remain relatively low. At the frontier, that calculation changes: another engineer developing chips is an engineer unavailable for quantum computing; another billion invested in EV batteries today is a billion unavailable for the space industry tomorrow.

Even China cannot escape these trade-offs. Its sheer economic size has so far kept their full impact at bay. Eventually, constraints will bite, presenting China with hard choices.

So what can this teach us about China today? China is already moving closer to this point. Returns on investment are falling, its labour force is shrinking, and productivity growth is weakening; all factors contributing to China’s growth slowdown. In this sense, China’s economy is maturing.

But a mature economy is not the same as a self-sufficient economy. Pursuing the latter will increasingly come at a higher price. Pouring more resources into semiconductors, advanced aircraft or quantum technologies only gets a country so far when engineers, scientists and research capacity are increasingly valuable for competing uses. China’s shrinking working-age population will make these trade-offs even more acute.

At the frontier, technical knowledge itself becomes harder to develop. The next breakthrough may rely on specialised skills concentrated in a handful of laboratories and firms, built up over decades of research and experimentation rather than simply acquired by deploying more capital. This raises the cost of recreating at home what specialisation abroad can offer.

Frontier technologies make self-sufficiency especially difficult. Unlike domestic reserves of oil or iron that lie within national borders, chips, AI and quantum draw on talent, equipment and research from around the world. As technologies advance, they will require an ever-wider range of specialised capabilities spread worldwide.

These pressures may arrive sooner still. China’s policy choices have contributed to persistent misallocation of resources, narrowing the room for future productive expansion. China uses self-sufficiency to reduce its external vulnerabilities, but in doing so may bring those opportunity costs forward.

China is unlikely to abandon its pursuit of greater self-reliance. Where foreign dependence creates a national security vulnerability, Beijing may willingly bear substantial economic costs to eliminate it.

Yet it cannot eliminate every strategic dependency at any price. At some point, China will have to decide which technologies and industries are important enough to produce at home and which make more economic sense to source from abroad. Pursuing self-sufficiency in one area will increasingly mean sacrificing opportunities elsewhere.

China’s extraordinary size allows it to postpone those choices. But size only buys time.