Beijing feels called upon to respond because it is indeed true that a panic is beginning to spread across the West about a China Shock 2.0. That was the subject, for example, of a paper from three well-respected economists in the United States (US) Federal Reserve earlier this year. Of course, claims of overcapacity in the US’ trading partners are also the legal basis for some of the second round of President Donald Trump’s tariffs. These are false in most cases — India and Bangladesh, for example, do not have a problem with industrial overcapacity — but are probably true in the case of China, at least in certain sensitive sectors such as steel and solar panels.
In some such sectors, Chinese manufacturers have vastly increased their global dominance over the past few years. Overall, their share of global exports went up by about 1.5 percentage points in the years between 2019 and 2024; but a report by economists at Nomura found that there was particularly rapid growth in specific product lines of strategic significance. For example, exports of electric vehicles (EVs) went up by 907 per cent; batteries by 674 per cent; and solar panels by 586 per cent. (No, I didn’t leave out the decimal point.)
The first “China Shock”, following terminology coined by the Massachusetts Institute of Technology economist David Autor and his co-authors, proposed that exposure to cheap Chinese-made imports caused a localised loss of perhaps one million jobs in the American Midwest. Objectively, this is not a great amount; it is less than 10 per cent of the total jobs lost in US manufacturing from its peak, most of which was driven by technological change; and it was less than a 1 per cent impact on the total job market, and at a time when overall employment was growing robustly. But it had specific political repercussions (the backlash against trade within mainstream US politics, which helped create Trumpism) and so it has received much attention.
Fundamentally, China Shock 2.0 appears different from China Shock 1.0 along several different axes. As the economist Brad Setser pointed out in an interview with the New York Times over the weekend, the first China shock seemed to be relatively limited in geographical scope. But the second — particularly the growth in EVs — may impact Europe much more than it does the US.
He might have gone further than that. The crucial point about Chinese manufacturing growth in the decade of the 2000s and even the early 2010s is that it featured both backward and forward integration. It increased the demand for inputs from various countries, including in the developing world. (This did not always have a benign effect, of course — its enormous appetite for iron ore, for example, fed illegal mining operations in India, which distorted politics in places like Karnataka for years.)
But this time around a far more autarkic and suspicious leadership in Beijing has worked to onshore almost all its crucial supply chains — with the exception of various critical minerals, for which it dominates the processing industry anyway. As a consequence, this is not a tide that lifts all boats. The Nomura analysis examined 45 countries, mostly in the developing world, and found that those facing a surge in Chinese imports also experienced the sharpest slowdown in their own manufacturing; on the other hand, sectors exposed to China also had to deal with higher producer-price disinflation. In other words, this time the China Shock is a global phenomenon, and arguably even worse for the developing world than the developed.
There are, of course, other major differences. These are relatively high-tech products in which China is dominating, as opposed to the low-end manufacturing that comprised the first China Shock. In addition, several of them are of strategic importance. A country without an auto industry usually struggles to make weapons, for example. In addition, needing China as a source of solar panels is sometimes (perhaps incorrectly) read as poor energy-security policy, replacing a Gulf fossil-fuel dependence with an even more dangerous one.
And thus this China Shock is a vastly different geopolitical proposition from the last one. Something that hurt some unionised workers in some corners of the West is not, on a global scale, a real emergency. But this current overcapacity-led dominance has a far broader impact.
It also carries very different overtones. In the 2000s, many were optimistic that the growth of Chinese industry and its private sector through exports would wind up serving as a check on the power of the ruling Communist Party. It was widely believed that the country was being put on the path to, if not democratisation, then at least some degree of political liberalisation.
That hope failed, and now we have to deal with a fear instead: That Chinese economic power will export illiberalism alongside its control of high-end technology. That, in order to deal with China Shock 2.0 and emulate China’s success, countries will try also to emulate the party’s control over the economy and society. Or that China will weaponise its power over these crucial goods to dictate how the world works, and not benevolently. The second China Shock may be several times worse, in that case, than the first.
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