What China’s ‘Return to Manufacturing’ Policy Means

Adam Wolfe, an economist with Absolute Strategy Research in Connecticut, speaking to the U.S. China Economic & Security Review Commission

Since the pandemic, the CCP has pivoted away from a domestic approach to economic growth and has returned full throttle to the old ways of an export-driven economy, dependent on consumers primarily from the West.

This approach will flood the zone with new China products, most of it high tech, high value goods, and make it difficult for domestic policies like the Inflation Reduction Act have the desired impact to reshore supply chains. The warning came from the written testimony of Adam Wolfe, an economist with Absolute Strategy Research in Connecticut, speaking to the U.S. China Economic & Security Review Commission in a hearing on March 1.

Wolfe told the Commissioners on Monday that he doubts countries will be able to tolerate the deluge of China exports, adding that he sees no end in sight to this onslaught for the time being. He also noted that talk of “de-risking” and “decoupling” from China might not really be happening thanks in large part to duty free e-commerce shipments estimated to be valued at over $160 billion last year (CPA estimated de minimis shipments to be worth around $188 billion in 2022). China products are still finding their way to the U.S. via Southeast Asia. Mexico is now being established as a beachhead for China’s automotive market into the U.S., tariff free.

China accounts for about 30% of the global value added from manufacturing, roughly equal to the United States and European Union combined. China became the world’s largest exporter in 2009, with eight years into the World Trade Organization, and the advent of its Strategic Emerging Industries Initiative. That’s when China looked at all the key manufacturing sectors the West was talking about – from electric cars to solar, microchips and new biotech – and threw money at it like a high roller in Macau. 

China’s global export share rose to about 15% in 2023. China’s trade surplus peaked at 7.4% as a share of its own GDP in 2007, and then slipped to 4.6% in 2023. But because China’s economy has grown faster than the rest of the world, its trade surplus has grown with the rest of the world, Wolfe said.

“The world is unlikely to sit back and let another China shock happen,” he said. 

The European Commission’s investigation into China’s electric vehicle subsidies is likely to be the first of many trade protectionist efforts aimed at China’s new development strategy, he predicted.

He’s right.

Less than 24 hours earlier, Sen. Josh Hawley (R-MO) introduced a bill that would impose higher tariffs on China EVs. China EVs already face around 25% tariffs. 

“China’s attempt to pivot back to manufacturing will spark a significant global pushback,” Wolfe said.

Still, he predicts China may gain further global export share over the next few years, helped by the government’s industrial policies. These efforts have already pushed China to the technological frontier in some sectors and have contributed excess capacity in nearly every industry, he wrote in his testimony.

China’s ‘Return to Manufacturing’ Policy: What’s Inside.

China’s pivot back to manufacturing has been supported by several government policies, Wolfe said. The People’s Bank of China, its central bank, has incentivized state-owned commercial banks to increase lending to manufacturers. Annual loan growth to the manufacturing sector has jumped to 26% on average since 2020, up from 5% in the five years through 2019, Wolfe said. 

Favorable lending terms are given to a handful of sectors from the 2009 Strategic Emerging Industries plan. Most of these will be no stranger to CPA members. They include: solar and wind, next-generation IT, pharmaceuticals, high-end machinery like robotics, new materials, and the electric vehicles supply chain which includes raw minerals, processing of those minerals, and manufacturing of the batteries that make the EVs run. 

China’s auto exports surged from 724 thousand cars in 2019 to 4.08 million in 2023, making it the top exporter of passenger cars globally. Some of this increase was due to the government’s support for EVs. Gas powered cars also did well. China exported 693 thousand units in 2019 and 2.94 million in 2023.

“These sectors were chosen because they were expected to become globally important and there was no dominant global leader at the time,” Wolfe said. “This could allow China to leapfrog to the technological frontier, or pass on the curve,” he said.

They already have in EVs. China EV battery makers dominate the top 10. Only South Korean and Japanese firms compare.  And China is in the top three of solar and wind turbine companies worldwide. 

China’s industrial policies tend to be less coordinated and less targeted than the centralized plans suggest. Most industrial support comes from local governments, primarily through three channels. First, local governments compete to lure industrial firms to their jurisdictions with tax incentives and other benefits30. Second, industrial land-use rights are sold at a substantial discount. On average, industrial land sold for ¥260/sq. meter in 2023 compared to ¥4090/sq. meter for residential land-use rights. Third, 47% of local government special-purpose bonds, roughly equivalent to project bonds in other countries, were used to build industrial parks, which are then rented out to firms at a discount.

Wolfe told the Commission that recent news of a property slump and bankruptcy of corporate giant Evergrande has led to the manufacturing pivot. 

“China’s economic slump is contributing to its rising global export share,” he said, adding that he doubts China corporations are being pulled from U.S. supply chains.

A Final Warning to the China Commision

Wolfe said Washington should not assume de-risking supply chains from mainland China will offer much protection from a surge in higher value-added Chinese exports from Southeast Asia, or even shifts to Hong Kong, which for Census purposes is declared a separate market from the mainland. 

He thinks U.S. import data likely underestimate actual imports from China by nearly 25% due to systematic tariff avoidance.  CPA’s chief economist Jeff Ferry has repeatedly said this number is off by at least $180 billion due to de minimis shipments from companies like Shein and Temu, to name a few.  The WSJ published an article about this on March 1. 

Commissioner Kim Glas asked about these missing numbers caused by de minimis shipments, which would point to a much larger trade gap with China than we think.

“What do we think is happening here?” she asked. “That’s a lot money. How do we assess what is happening if we don’t have accurate data about what is coming in?”

Wolfe said that, “One way this is happening is a container leaves from Shanghai, arrives in a port in Los Angeles and gets put on a bonded truck. In this case, the U.S. would not call that an import but China would. That bonded truck then goes down a bonded warehouse in Mexico and that, too, is not recorded as an import or export. From there, individual shipments can be taken out of the warehouse and shipped to the U.S. under the de minimis shipping rules which would also not be recorded in U.S. data.” 

For Wolfe, the final assembly of some China goods has moved from the mainland into India, Mexico, Vietnam, and other Southeast Asian countries, but “the Chinese value-added embedded in these products does not appear to have declined significantly. Instead, a BIS analysis using firm-level data found that U.S. supply chains have lengthened by an additional step, without any additional diversification.”

This means that the impact on the U.S. economy from a surge in Chinese exports of higher-value products is likely to continue as Chinese multinationals have moved quickly to contract manufacturing abroad, or set up shop in other countries themselves. 

“This could undermine U.S. industrial policies aimed at boosting the domestic production of electric vehicles and batteries, green energy, and semiconductors,” Wolfe warned. “Even with these new government subsidies, domestic companies in these sectors may find it hard to make a profit if China’s excess capacity weighs on global prices.”

CPA’s chief economist warned about this oversupply issue from the standpoint of solar in the Inflation Reduction Act in an article published on Feb. 28.

“The U.S. solar module manufacturing industry is heading for disaster. Although demand and installations are rising steadily, imports are rising much more quickly,” Ferry said.  “Under the stimulus of the Inflation Reduction Act, domestic production is surging to unprecedented levels. But the result will be a solar power apocalypse, in which dozens of companies go bankrupt and/or sell off their businesses. The lucky ones will be the ones that scale down their plans quickly and avoid taking on too much debt.”


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