A new Federal Reserve FEDS Note finds a systematic link between Chinese industrial policy interventions and export growth. The 15 most policy-targeted sectors accounted for 76% of the increase in China’s aggregate trade surplus from 2017 to 2024.
China’s $1.2 trillion goods surplus in 2025 exceeded 1% of world GDP, roughly double the peak surpluses recorded by Japan or Germany as a share of world output.
The Fed’s findings reinforce the U.S. Trade Representative’s (USTR) Section 301 four-year review and align with CPA’s own research documenting how Beijing’s overcapacity model suppresses domestic consumption, floods global markets and evades U.S. trade enforcement through third countries.
The Fed Puts Numbers to the Industrial Policy Problem
Federal Reserve staff have now quantified what trade analysts have argued for years: China’s unprecedented trade surplus is structurally driven by deliberate industrial policy. A FEDS Note published on March 23 measured industrial policy intensity across Chinese manufacturing sectors from 2017 to 2024 (1). The NIPO data capture a broad range of interventions, from direct subsidies and loan guarantees to local procurement requirements and import restrictions.
The results are striking. China’s goods trade surplus surged to a record $1.2 trillion in 2025, exceeding 6% of GDP and more than 1% of world GDP. That is roughly twice the largest surpluses ever recorded by Japan or Germany as a share of world output.
More importantly, the Fed researchers found that sectors receiving the most policy interventions exhibited the fastest export growth and the largest increases in trade balances. The top 15 sectors by policy support contributed 76% of the increase in China’s aggregate surplus over the period. The relationship is statistically significant and holds across both export growth and trade balance changes.
Computing machinery led with 1,038 policy interventions, followed by pharmaceuticals (959), chemicals (950), and motor vehicles (950) (Figure 1). These are precisely the sectors targeted under Made in China 2025 (MIC2025), Beijing’s flagship initiative to achieve global leadership in ten advanced technology sectors. As CPA documented in July 2025, MIC2025 had achieved an estimated 86% of its objectives by April 2024 (2).
FIGURE 1
CPA's Research Identified the Same Dynamics
The Fed’s conclusion that industrial policies “channel resources toward investment in tradable sectors… at the expense of domestic-demand-supporting channels” maps directly onto the structural analysis the CPA published months earlier. In its July 2025 report, How Managed Trade Can Stop the Next China Shock, CPA documented the following:
Since WTO accession, China’s consumption as a share of GDP has fallen from roughly 63% to 56% while investment has climbed from 36% to 42% (Figure 2).
Despite representing 18% of global GDP, China accounts for just 15% of global consumption but 35% of the world’s manufacturing output.
The imbalance has translated into surging trade surpluses that grew nearly 4,000% since 2000 (2).
FIGURE 2
The consequences of this model are visible in the overcapacity data. As of mid-2025, capacity utilization rates across Chinese manufacturing had declined from 2022 levels, with non-metal mineral products, autos, and textiles recording the steepest drops (2). Aggregate industrial utilization remained depressed at 75% in Q4 2025 according to China’s National Bureau of Statistics (6). Industrial inventories reached $2.4 trillion by May 2025, and only three of China’s 112 electric vehicle manufacturers were turning a profit (7). In a functioning market economy, these conditions would trigger production cuts. But not in China’s state-driven system, where firms continue operating at a loss, stockpiling unsold goods or exporting the surplus at artificially low prices.
CPA’s subsequent analysis, published in early 2026, added the dimension the Fed explicitly flags but cannot fully capture with cross-sectoral data: currency undervaluation (3). Through capital controls, state-bank intervention, and managed exchange-rate expectations, Beijing suppresses renminbi appreciation, effectively subsidizing every export its industrial policies produce. That report revealed that exports composed 33% of China’s GDP growth in 2025, the highest share in nearly 20 years.
China's Exports Now Directly Compete with U.S. and Allied Manufacturing
China’s rapid export expansion now pits its subsidized goods directly against U.S. and allied manufacturing across virtually every sector. The Fed documents that China has gained global export market share in nearly all manufacturing sectors simultaneously over the past decade, expanding into advanced products like automobiles and high-tech goods while maintaining dominance in apparel, textiles, and consumer products. The sectoral composition of Chinese exports now closely mirrors that of advanced economies, particularly Germany.
This has direct implications for the United States and its allies. As China’s export share has grown, advanced economies have experienced widespread losses in global market share, with Japan and the euro area particularly affected. China is projected to account for 45% of global manufacturing by 2030 and is already the dominant supplier for nearly 600 out of 5,000 traded products (2). At the same time, China’s imports of manufactured goods from advanced economies have grown slowly, while its import basket has become increasingly concentrated in commodities, now accounting for 44% of all Chinese imports (1). The Fed describes this as a shift in the geography of China’s growth spillovers, away from manufacturing exporters and toward commodity producers.
Section 301 Actions Confirm the Policy Direction
USTR’s 2024 four-year review of the original Section 301 investigation on technology transfer and intellectual property arrived at a related finding through a legal and enforcement lens. The 193-page report concluded that China had made no “systematic and sustained” change to the practices that triggered the original 2018 tariffs (4). That legal determination justified maintaining existing tariffs and served as the basis for new, sector-specific increases targeting what USTR identified as China’s “new three” strategic industries: EVs, solar products, and lithium-ion batteries (Figure 3). The Biden administration framed the tariff escalation around overcapacity and unfair subsidization in those sectors, though the formal 301 finding itself centered on the persistence of technology transfer and IP violations.
FIGURE 3
CPA’s Managed Trade report documented the evasion mechanisms these tariffs alone cannot stop. Chinese foreign direct investment into Mexico reached $13 billion in completed transactions from 2020 to 2023, with Chinese firms doubling their industrial space occupancy in the country. The share of Chinese content embedded in Mexican exports to the United States grew from under 5% to 21% between 2002 and 2020. In steel, the pattern is even more direct: U.S. steel conduit imports from Mexico surged 475% from 2018 to 2024 following Section 232 country exemptions. Southeast Asia ran growing trade deficits with China and surpluses with the United States in the same product categories, a telltale signature of transshipment (2).
USTR’s March 11, 2026 launch of new Section 301 investigations into structural overcapacity across 16 economies and 22 manufacturing sectors signals that Washington is beginning to acknowledge this third-country problem (5). Public hearings are scheduled for May 2026.
Why Tariffs Alone Cannot Resolve This Imbalance
Tariffs cannot resolve this imbalance alone because China’s export base far exceeds any single country’s capacity to absorb through protective measures. U.S. tariffs have reduced direct imports from China by roughly 20%, to the lowest levels in 20 years, but Beijing has more than offset those declines by redirecting excess production into less protected markets across Africa, Southeast Asia, and the European Union (Figure 4). A structural asymmetry explains why: China now accounts for 17% of global exports, while the United States represents just 13% of global imports. Further, China’s current account surplus in 2025 exceeded $1 trillion, making it the largest ever recorded (Figure 5) (3).
FIGURE 4
FIGURE 5
Washington should maintain and strengthen Section 301 tariffs while pursuing the 2026 overcapacity investigations aggressively. Equally important, policymakers should deploy the financial tools that can force macroeconomic adjustment where tariffs alone cannot. As CPA has argued, this means using existing authorities under the International Emergency Economic Powers Act (IEEPA) to impose capital-flow measures on surplus-country financial inflows, differentiated treatment of official reserve accumulation, and limits on foreign purchases of U.S. safe assets during periods of sustained imbalance. These tools would raise the cost of surplus recycling and counter the persistent, policy-driven capital inflows that prevent exchange-rate adjustment.
The Fed’s findings should settle one persistent debate. For years, defenders of China’s trade practices have attributed the surplus to macroeconomic fundamentals alone, arguing that high savings rates and weak domestic demand fully explain the imbalance. The Fed’s own cross-sectoral analysis rejects that framing. Industrial policy is shaping where the surplus concentrates, which sectors grow fastest, and how resources are allocated away from consumption.
REFERENCES
de Soyres, François, Ece Fisgin, Mike Liu, and Eva Van Leemput. “China’s Trade Dominance and the Role of Industrial Policies.” FEDS Notes, Board of Governors of the Federal Reserve System, March 23, 2026.
Torsekar, Mihir. “How Managed Trade Can Stop the Next China Shock.” Coalition for a Prosperous America, July 2025.
Torsekar, Mihir. “China’s Record Trade Surplus and Washington’s Financial Trump Card.” Coalition for a Prosperous America, 2026.
U.S. Trade Representative. “Section 301 Modification Determination.” Federal Register, September 12, 2024.
Holland & Knight. “USTR Launches Awaited Section 301 Investigations of 16 Economies for Manufacturing Overcapacity.” March 2026.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
New Fed Research Backs CPA’s Case on China’s Industrial Policy and Record Surplus
KEY POINTS
The Fed Puts Numbers to the Industrial Policy Problem
Federal Reserve staff have now quantified what trade analysts have argued for years: China’s unprecedented trade surplus is structurally driven by deliberate industrial policy. A FEDS Note published on March 23 measured industrial policy intensity across Chinese manufacturing sectors from 2017 to 2024 (1). The NIPO data capture a broad range of interventions, from direct subsidies and loan guarantees to local procurement requirements and import restrictions.
The results are striking. China’s goods trade surplus surged to a record $1.2 trillion in 2025, exceeding 6% of GDP and more than 1% of world GDP. That is roughly twice the largest surpluses ever recorded by Japan or Germany as a share of world output.
More importantly, the Fed researchers found that sectors receiving the most policy interventions exhibited the fastest export growth and the largest increases in trade balances. The top 15 sectors by policy support contributed 76% of the increase in China’s aggregate surplus over the period. The relationship is statistically significant and holds across both export growth and trade balance changes.
Computing machinery led with 1,038 policy interventions, followed by pharmaceuticals (959), chemicals (950), and motor vehicles (950) (Figure 1). These are precisely the sectors targeted under Made in China 2025 (MIC2025), Beijing’s flagship initiative to achieve global leadership in ten advanced technology sectors. As CPA documented in July 2025, MIC2025 had achieved an estimated 86% of its objectives by April 2024 (2).
FIGURE 1
CPA's Research Identified the Same Dynamics
The Fed’s conclusion that industrial policies “channel resources toward investment in tradable sectors… at the expense of domestic-demand-supporting channels” maps directly onto the structural analysis the CPA published months earlier. In its July 2025 report, How Managed Trade Can Stop the Next China Shock, CPA documented the following:
FIGURE 2
The consequences of this model are visible in the overcapacity data. As of mid-2025, capacity utilization rates across Chinese manufacturing had declined from 2022 levels, with non-metal mineral products, autos, and textiles recording the steepest drops (2). Aggregate industrial utilization remained depressed at 75% in Q4 2025 according to China’s National Bureau of Statistics (6). Industrial inventories reached $2.4 trillion by May 2025, and only three of China’s 112 electric vehicle manufacturers were turning a profit (7). In a functioning market economy, these conditions would trigger production cuts. But not in China’s state-driven system, where firms continue operating at a loss, stockpiling unsold goods or exporting the surplus at artificially low prices.
CPA’s subsequent analysis, published in early 2026, added the dimension the Fed explicitly flags but cannot fully capture with cross-sectoral data: currency undervaluation (3). Through capital controls, state-bank intervention, and managed exchange-rate expectations, Beijing suppresses renminbi appreciation, effectively subsidizing every export its industrial policies produce. That report revealed that exports composed 33% of China’s GDP growth in 2025, the highest share in nearly 20 years.
China's Exports Now Directly Compete with U.S. and Allied Manufacturing
China’s rapid export expansion now pits its subsidized goods directly against U.S. and allied manufacturing across virtually every sector. The Fed documents that China has gained global export market share in nearly all manufacturing sectors simultaneously over the past decade, expanding into advanced products like automobiles and high-tech goods while maintaining dominance in apparel, textiles, and consumer products. The sectoral composition of Chinese exports now closely mirrors that of advanced economies, particularly Germany.
This has direct implications for the United States and its allies. As China’s export share has grown, advanced economies have experienced widespread losses in global market share, with Japan and the euro area particularly affected. China is projected to account for 45% of global manufacturing by 2030 and is already the dominant supplier for nearly 600 out of 5,000 traded products (2). At the same time, China’s imports of manufactured goods from advanced economies have grown slowly, while its import basket has become increasingly concentrated in commodities, now accounting for 44% of all Chinese imports (1). The Fed describes this as a shift in the geography of China’s growth spillovers, away from manufacturing exporters and toward commodity producers.
Section 301 Actions Confirm the Policy Direction
USTR’s 2024 four-year review of the original Section 301 investigation on technology transfer and intellectual property arrived at a related finding through a legal and enforcement lens. The 193-page report concluded that China had made no “systematic and sustained” change to the practices that triggered the original 2018 tariffs (4). That legal determination justified maintaining existing tariffs and served as the basis for new, sector-specific increases targeting what USTR identified as China’s “new three” strategic industries: EVs, solar products, and lithium-ion batteries (Figure 3). The Biden administration framed the tariff escalation around overcapacity and unfair subsidization in those sectors, though the formal 301 finding itself centered on the persistence of technology transfer and IP violations.
FIGURE 3
CPA’s Managed Trade report documented the evasion mechanisms these tariffs alone cannot stop. Chinese foreign direct investment into Mexico reached $13 billion in completed transactions from 2020 to 2023, with Chinese firms doubling their industrial space occupancy in the country. The share of Chinese content embedded in Mexican exports to the United States grew from under 5% to 21% between 2002 and 2020. In steel, the pattern is even more direct: U.S. steel conduit imports from Mexico surged 475% from 2018 to 2024 following Section 232 country exemptions. Southeast Asia ran growing trade deficits with China and surpluses with the United States in the same product categories, a telltale signature of transshipment (2).
USTR’s March 11, 2026 launch of new Section 301 investigations into structural overcapacity across 16 economies and 22 manufacturing sectors signals that Washington is beginning to acknowledge this third-country problem (5). Public hearings are scheduled for May 2026.
Why Tariffs Alone Cannot Resolve This Imbalance
Tariffs cannot resolve this imbalance alone because China’s export base far exceeds any single country’s capacity to absorb through protective measures. U.S. tariffs have reduced direct imports from China by roughly 20%, to the lowest levels in 20 years, but Beijing has more than offset those declines by redirecting excess production into less protected markets across Africa, Southeast Asia, and the European Union (Figure 4). A structural asymmetry explains why: China now accounts for 17% of global exports, while the United States represents just 13% of global imports. Further, China’s current account surplus in 2025 exceeded $1 trillion, making it the largest ever recorded (Figure 5) (3).
FIGURE 4
FIGURE 5
Washington should maintain and strengthen Section 301 tariffs while pursuing the 2026 overcapacity investigations aggressively. Equally important, policymakers should deploy the financial tools that can force macroeconomic adjustment where tariffs alone cannot. As CPA has argued, this means using existing authorities under the International Emergency Economic Powers Act (IEEPA) to impose capital-flow measures on surplus-country financial inflows, differentiated treatment of official reserve accumulation, and limits on foreign purchases of U.S. safe assets during periods of sustained imbalance. These tools would raise the cost of surplus recycling and counter the persistent, policy-driven capital inflows that prevent exchange-rate adjustment.
The Fed’s findings should settle one persistent debate. For years, defenders of China’s trade practices have attributed the surplus to macroeconomic fundamentals alone, arguing that high savings rates and weak domestic demand fully explain the imbalance. The Fed’s own cross-sectoral analysis rejects that framing. Industrial policy is shaping where the surplus concentrates, which sectors grow fastest, and how resources are allocated away from consumption.
REFERENCES
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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