China’s global export share is on the rise. It’s up about four percentage points in volume terms since the global pandemic outbreak in 2020. The product mix of its exports has begun to shift as well, this time towards transportation equipment, passenger cars and industrial goods.
Its manufactured goods surplus has increased yet again this year, by more than three percentage points of its own GDP. It is this combination of ongoing export growth, industrial upgrading to advanced manufacturing meant to compete with Japan, South Korea and Western companies worldwide, plus import substitution for high tech items restricted by the U.S., that have raised concerns about a new China shock.
But there is one critical difference from the original shock, which occurred shortly after China entered the World Trade Organization in 2001, and that’s the fact that China has become the price setter in a number of goods – from solar to rare earths. If China is the price setter of a global commodity, it makes it even harder for non-Chinese rivals to compete. China can drive the price down so low that the return on investment for all sorts of key items evaporates, even when government tax breaks are included. This is the case now with solar, as CPA warned last year in a report titled “The Coming Solar Apocalypse.”
China started out as a deflationary force when it was first integrated into the global economy. But throughout that China shock period, once it took a commanding lead in supply chains, its export prices rose 45% as its wages gradually converged towards global levels. This time, though, China’s export prices have been falling, said Adam Wolfe, Emerging Markets Economist for Absolute Strategy Research [Testimony].
“We suggest that excess capacity has been the major factor behind this new China shock,” Wolfe told the Commission. “Where did this excess capacity come from? The most common answer is China’s industrial policies. The government has heavily subsidized the same broad sectors since 2009. And products in many of those sectors have been growing fast as a share of China’s overall exports, and now China has become the dominant global producer in a few of them.”
China’s pole position in solar is legendary. They house 8 of the top 10 solar manufacturers worldwide. They’ve taken their cue from Europe and the U.S. to go green and invested heavily in EV batteries and cars. EV exports have increased by a factor of 22 since 2020, making China the largest automotive exporter. Its EV battery makers are world leaders, rivaling South Korea and Japan. The U.S. and Europe are nowhere to be seen in this market, despite being the initial force behind the push for EVs.
It was Wolfe who said the U.S. looks relatively insulated from this new shock. “Its manufacturing sector isn’t particularly concentrated in the product categories where China’s exports have been surging,” he said. “It’s also not particularly reliant on exports in the first place, so has less to lose from increased competition in third markets. And its high tariff wall has protected its domestic market from a surge in China’s exports.”
But many U.S. allies are unprotected. Western Europe looks particularly vulnerable. So does Japan. Their manufacturing sectors are heavily concentrated in the areas where China’s exports are growing the fastest – cars and capital goods. China now owns robotics giant Kuka, once German. China’s Midea Group bought it from the Germans in 2016.
Like other hearings on global trade, the Commission wants to “work with allies,” a phrase tossed around by the Biden administration. The Biden administration barely succeeded at getting just two countries – The Netherlands and Japan – to agree to stop selling China machines that are used to make semiconductors.
Moreover, the U.S. ‘s relatively insulated position vis-a-vis its allies does not make it immune.
Tariffs, Industrial Policies Like the CHIPS Act, Help Protect U.S. From ‘China Shock 2.0’
The second round of the early 2000s ‘China Shock’ will impact the rest of the world more than it will the United States. Tariffs and industrial policies – like the CHIPS Act and the Inflation Reduction Act – have somewhat protected the U.S. from China’s relentless exports. Other countries are in worse shape.
“Emerging economies are now experiencing the same thing the U.S. experienced with China,” said Livia Shmavonian, commissioner at the U.S. China Economic and Security Review Commission. They held a day-long hearing on June 5 titled “Dominance by Design: China Shock 2.0 and the Supply Chain Chokepoints Eroding U.S. Security.”
Shmavonian said countries around the world are now “facing a flood of Chinese subsidized exports. Since 2021, China has shifted over a quarter trillion dollars in exports from advanced economies to emerging markets. China’s latest available trade data shows that exports to Southeast Asia grew 21% over the year before. The endless flow of Chinese exports is decimating local manufacturers there, gutting jobs, and preventing industrialization,” she said in her opening statement. [Opening Statement]
China exports to Germany are up 12% in the first five months of 2025. Exports to Vietnam are up over 18%; China exports to Thailand are up 20.9%. Meanwhile, China exports to the U.S. are down 9.7%, and that number is only that low because importers here went on a spending spree from January to March out of concern that a day of big tariffs was coming.
Source: China General Administration of Customs
Either these are Chinese multinationals importing as they set up shop outside (of mainland China) to avoid 55% tariffs; or these countries are happily opening the flood gates to China’s manufactured goods, perhaps to add value of their own.
China’s Unstoppable Export Machine
China’s global export share is on the rise. It’s up about four percentage points in volume terms since the global pandemic outbreak in 2020. The product mix of its exports has begun to shift as well, this time towards transportation equipment, passenger cars and industrial goods.
Its manufactured goods surplus has increased yet again this year, by more than three percentage points of its own GDP. It is this combination of ongoing export growth, industrial upgrading to advanced manufacturing meant to compete with Japan, South Korea and Western companies worldwide, plus import substitution for high tech items restricted by the U.S., that have raised concerns about a new China shock.
But there is one critical difference from the original shock, which occurred shortly after China entered the World Trade Organization in 2001, and that’s the fact that China has become the price setter in a number of goods – from solar to rare earths. If China is the price setter of a global commodity, it makes it even harder for non-Chinese rivals to compete. China can drive the price down so low that the return on investment for all sorts of key items evaporates, even when government tax breaks are included. This is the case now with solar, as CPA warned last year in a report titled “The Coming Solar Apocalypse.”
China started out as a deflationary force when it was first integrated into the global economy. But throughout that China shock period, once it took a commanding lead in supply chains, its export prices rose 45% as its wages gradually converged towards global levels. This time, though, China’s export prices have been falling, said Adam Wolfe, Emerging Markets Economist for Absolute Strategy Research [Testimony].
“We suggest that excess capacity has been the major factor behind this new China shock,” Wolfe told the Commission. “Where did this excess capacity come from? The most common answer is China’s industrial policies. The government has heavily subsidized the same broad sectors since 2009. And products in many of those sectors have been growing fast as a share of China’s overall exports, and now China has become the dominant global producer in a few of them.”
China’s pole position in solar is legendary. They house 8 of the top 10 solar manufacturers worldwide. They’ve taken their cue from Europe and the U.S. to go green and invested heavily in EV batteries and cars. EV exports have increased by a factor of 22 since 2020, making China the largest automotive exporter. Its EV battery makers are world leaders, rivaling South Korea and Japan. The U.S. and Europe are nowhere to be seen in this market, despite being the initial force behind the push for EVs.
It was Wolfe who said the U.S. looks relatively insulated from this new shock. “Its manufacturing sector isn’t particularly concentrated in the product categories where China’s exports have been surging,” he said. “It’s also not particularly reliant on exports in the first place, so has less to lose from increased competition in third markets. And its high tariff wall has protected its domestic market from a surge in China’s exports.”
But many U.S. allies are unprotected. Western Europe looks particularly vulnerable. So does Japan. Their manufacturing sectors are heavily concentrated in the areas where China’s exports are growing the fastest – cars and capital goods. China now owns robotics giant Kuka, once German. China’s Midea Group bought it from the Germans in 2016.
Like other hearings on global trade, the Commission wants to “work with allies,” a phrase tossed around by the Biden administration. The Biden administration barely succeeded at getting just two countries – The Netherlands and Japan – to agree to stop selling China machines that are used to make semiconductors.
Moreover, the U.S. ‘s relatively insulated position vis-a-vis its allies does not make it immune.
Commissioner Leland Miller referenced our reliance on China for rare earths, a situation that will likely force the Trump administration to ease up on Huawei and export license requirements for American companies selling advanced technologies to China.
“The time to start acting was long ago,” Miller said. [Opening Statement]. “We’re at the point where refusing to confront these issues head on risks nothing short of a national security failure.
Tariffs may be a part of the solution, but a whole of government effort is needed to develop alternatives to these supply chain choke points. The consequences of inaction could be disastrous.”
Choke points include critical minerals; active pharmaceutical ingredients and the key starting materials to make those ingredients; clean energy technologies like solar; certain machinery, and numerous other goods.
Such dependencies come with significant risks to American workers, manufacturers, communities and the defense industrial base. China’s tactics for achieving and maintaining dominant positions in global supply chains may change, but the risks to U.S. economic and national security remain the same. They could increase if Washington does not take steps to defend against these unfair trade practices and promote and protect important domestic supply chains run by American companies, as opposed to foreign owned entities.
Rebuild the Tariff Wall
Wolfe was more anti-tariff during the hearing. But Nora Todd, former Special Assistant to the President and Senior Director for International Economics and Labor in the White House, was in line with CPA’s views on trade. [Testimony]
“The United States should take early and comprehensive action to respond to China’s non-market policies and practices,” she told the Commission, adding, “Supply chain dependencies can take time to materialize, but once they do, they can be difficult to reverse.”
Todd said the Commission should advocate for updates to trade laws, including Title VII of the Tariff Act of 1930, Section 201, Section 301 and Section 232 tariffs, and rework them with today’s understanding of overcapacity and supply chain risks in mind.
“These trade statutes should be amended so that they facilitate enforcement action throughout supply chains, combat transnational subsidies, address circumvention, require enhanced import transparency and traceability, and authorize action before U.S. producers face harms,” Todd said.
Updates to the harmonized tariff schedule should also be considered to allow for more precise targeting of imports for trade enforcement and tariffs that account for new technologies and shifting strategic priorities as Congress deems appropriate, she said.
Why Working With Allies Rarely Works
Working with allies is easier said than done. Different countries have different priorities with regard to China, and many of them are not industrialized, nor do their governments seem particularly excited about industrializing.
There is no such thing as a Latin American 5G giant. It’s either Huawei, Ericsson or Nokia, and guess who has pricing power? There is no such thing as a Brazilian telecommunications equipment company that is even trying to take market share away from Huawei.
“If other countries are concerned about the impacts of China Shock 2.0, they may be wary of increasing the risk of China’s retaliation or coercion by aligning their responses with ours,” Todd explained. “They may not share our assessment of China’s risk.”
Commissioner Aaron Friedberg asked about building a unified tariff wall with allies.
Wolfe said it wasn’t plausible. He is almost certainly right on this one.
“Other emerging markets do not have the same concerns about excess capacity in higher value-added categories that developed markets have. They welcome much cheaper capital goods and industrial inputs from China,” he said.
Todd agreed that a unified tariff wall was a non-starter.
China presents an entirely new competitive landscape for American exporters worldwide. Any focus from Washington on opening export markets puts it in a pricing war with China in countries with weaker currencies, and where China’s price points will be most attractive.
If the quality of the product is the same – be it a manufactured good like an EV, or an AI platform like DeepSeek – China will win on price.
As a sidenote, it will be interesting to see if the government of Syria opts to sign a deal with AT&T for its telecommunications infrastructure now that sanctions have been removed, or if they will be outbid by Huawei. State Department muscle might win the day for AT&T. But if price is king, AT&T will have a hard row to plow.
Commissioner Cliff Sims said China was moving into Mexico to take advantage of the free trade agreement with the U.S.
“China’s companies have doubled their industrial space in Mexico in just the last three years,” he said. “They seem to be basically betting that they can keep subsidizing their way to such overwhelming manufacturing dominance that by the time the world collectively wakes up to what they are doing here, it’s too late and they have won, because they are such an industrial superpower and nobody has the capacity to compete.”
“I think their strategy is to achieve a level of dominance that puts them in positions to wield a lot of power and influence over businesses and local politics,” said Todd. “That’s why it’s imperative that we don’t get to a scenario where we are in a slow boiling pot and the pot is boiling over. We should pursue a goal of supply chain resilience and protect our ability to compete and obviously protect our national security,” she said. “Without that type of action, I fear we could be too late.”
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