How 'China shock 2.0' will roil global markets

Why has China ramped up its exports?

Domestic economic woes have made the world's largest exporter even more reliant on sending goods abroad. Aiming to offset a major real estate bust, Beijing has made an all-out effort to boost manufacturing in the country. China's trade surplus hit nearly $1 trillion last year, more than doubling since 2019. State-controlled banks dished out a cool $1.9 trillion to industrial borrowers over the past four years, and even by conservative estimates, China spent more on industrial subsidies than it did on national defense in 2019. New factories come online daily, and upgrades enhance productivity in existing factories. China's factory output — which now includes electric vehicles, lithium batteries, and renewable energy equipment — is larger than that of the U.S., Germany, Japan, South Korea, and the U.K. combined. Now, as President Trump wages a trade war with Beijing, China won't be able to easily access its biggest and most reliable foreign market, which means that some $400 billion in cheap goods must be rerouted to other countries. "The real fireworks have yet to begin," said Michael Pettis, a professor of finance at Peking University.

Has this happened before?

The World Trade Organization officially welcomed China, already the world's sixth-largest economy, into its fold in 2001. Then-President Bill Clinton was enthusiastic: He believed China's membership would benefit the U.S. economically while also promoting democratization in China. But rather than usher in political reforms, China's rise to a global trading behemoth solidified the Chinese Communist Party's power. In the U.S., meanwhile, there were winners and losers. Consumer prices fell and service sector jobs increased, but the influx of cheap Chinese products has put a significant dent in U.S. manufacturing. Though trade pressure leveled out by 2011, the hardest-hit industries and areas, like the American South, never recovered from declines in wages. Studies on the "China shock" from economists David H. Autor, David Dorn, and Gordon H. Hanson found that trade with China accounted for 1 million manufacturing job losses between 2001 and 2011, and 2.4 million job losses overall. "We didn't see people picking up and moving to better opportunities, as in historical narratives of U.S. resiliency," Autor said.

Which countries will be affected?

"The tsunami is coming for everyone," said Katherine Tai, the U.S. trade representative under former President Joe Biden. The fears of a second, worldwide China shock predate Trump's tariffs, and the pace of the sequel may be even more rapid than the original shock that hit the U.S. at the turn of the century. Layoffs are already underway in Indonesia's textile and apparel industry, which saw roughly 250,000 job losses over the past two years, with another 500,000 cuts likely to follow. Other emerging economies like Brazil and India have to compete with China to sell internet cables and electronics. And China's rapid rise in the car and green-technology industries — China's BYD is now the world's biggest maker of electric vehicles — poses a threat to Germany.

How are those countries preparing?

Most are implementing at least some safeguards. Brazil now has a 35 percent tariff on Chinese fiber-optic cables, while Chinese textile imports face a 200 percent tariff in Indonesia. Mexico is reviewing its tariffs on China, and India has launched a probe into the dumping of Chinese goods, from solar cells to aluminum foil. Thailand and Malaysia have slapped sales taxes on lower-priced imported goods. The situation presents a conundrum for developing countries, though, since China, seeking to exert its geopolitical influence, often invests heavily in their infrastructure. Blocking imports, therefore, isn't easy. "Do you really want to complain over shoes when someone's building you a port?" asked Deborah Elms, the head of trade policy at the Asia-based Hinrich Foundation, a research firm.

Could China's domestic market be an outlet?

While there have been some signs this year that Chinese consumer spending could be on the upswing, domestic demand still isn't strong enough for the overflow of goods produced. Consumption accounts for only 53 percent of China's GDP, well below the global average of 72 percent. Previously, there weren't many signs that the government was interested in redirecting its investments from manufacturing industries to boost consumer spending, but Beijing is starting to turn its attention to people's wallets. The government has announced stimulus plans, with consumer loans and vehicle trade-in payments, among other enticements. Now, in light of Trump's tariffs, economists are urging the CCP to do even more, but there may not be a quick-fix policy solution.

Will tariffs really shield the U.S.?

Trump waged his trade war based on America's trade deficit with China, but bilateral trade data aren't always the best indicators of the overall trade relationship between two countries. In the past, China has skirted U.S. tariffs by offshoring manufacturing to countries like Vietnam. Even before the current trade war, Chinese manufacturers had already been moving operations offshore, with Chinese automakers opening or planning plants in Hungary, Turkey, and Thailand. Chinese manufacturers see the factories as insurance against U.S. trade barriers, and also a way to build local goodwill. Those factories, which often rely on parts made in China, provide a way for China's industries to ship goods to the U.S. at lower tariff rates. There may be little anyone can do to reduce China's hold on the global market, except for China itself, and that will require a major transformation of domestic economic policy that will focus less on increasing output and more on increasing domestic demand.

Why don't China's consumers buy more?

China hasn't really recovered from the Covid pandemic. After Deng Xiaoping launched China's shift to a socialist market economy in the post-Maoist era in the 1970s, the country's living standards consistently improved. But the stringent lockdown, which wasn't lifted until 2022, halted momentum, as did the real estate crisis. Youth unemployment remains elevated after hitting an all-time high of 21.3 percent in June 2023. Now frugality is the norm, as pessimistic Chinese households brace for another crisis. People have always tended to save their money in China, but reluctance to spend is even more prevalent now, including among Millennial and Gen Z consumers who hold stable jobs with decent pay. China's weak social safety net also makes households wary about long-term security. "When people feel safe about their retirement life and feel safe about their financials after some major events like illness," said Xu Tianchen, a China analyst at the Economist Intelligence Unit, "then I think they're definitely going to be more willing to spend."