The world is on the cusp of a “China shock 3.0” driven by exports of artificial intelligence (AI), biotechnology and robots, which could hit harder than the current wave, according to Alicia Garcia-Herrero, Senior Fellow at the Brussels-based think tank Bruegel and Chief Economist for Asia-Pacific at investment bank Natixis. China, while still a major importer of advanced chips, was developing its own AI hardware and software and planned to export them once domestic demand was met, Garcia-Herrero said. These exports could come alongside bundled data center and cloud services, and humanoid and industrial robots could follow, creating a shock that would exceed the current one, she said. “If you think about embodied AI, humanoid or industrial robots, think about the humongous shock that this is going to be, beyond the existing shock,” she said.
Garcia-Herrero said China’s cheap energy would give it the world’s lowest computing costs, carrying its competitive strength beyond industrial goods and into services. A huge economy that is competitive across the board but largely closed to imports, she argued, must be “extremely reasonable”. The term “China shock” was popularized by U.S. Economists David Autor, David Dorn and Gordon Hanson, whose research linked the surge in Chinese imports after China joined the World Trade Organization (WTO) in 2001 to the loss of U.S. manufacturing jobs and the decline of factory towns. The “2.0” wave began around 2018, though some date it to the 2020s, and has been driven by more advanced manufacturing, including cars and machinery. European and U.S. officials have accused China of overcapacity, meaning it produces far more than domestic and foreign demand can absorb, and of exporting the surplus at low prices.
China has rejected the claims. In a position paper titled “China’s Position on the So-called Excess Capacity Issue,” published on July 28, the Ministry of Commerce (MOFCOM) said China had never deliberately pursued a trade surplus and that its exports were driven by innovation and reform, not subsidies or weak domestic demand. China’s trade surplus reached USD938.11 billion in the first nine months of the year. On October 7 in Paris, the U.S. and 14 other economies, including the EU, signed a statement pledging action on structural excess capacity in sectors including electric vehicles, batteries, chemicals, chips and solar power.
Garcia-Herrero was a panelist at an event organized by the Peterson Institute of International Economics (PIIE) where Nicolas Lamp, Associate Professor of Law at Queen’s University in Canada, argued the West should invite Chinese investment rather than treat all trade as a threat. But Garcia-Herrero was more skeptical, saying Chinese carmakers’ European plants would likely be assembly operations reliant on imported parts, and that Beijing’s security rules limited technology transfer. “China is impressively careful with its tech transfer,” she said, adding that this is “rightly so.” Yeling Tan, Professor of Public Policy at the University of Oxford and a non-resident Senior Fellow at PIIE, said China needed reassurance that the West was not seeking to contain, suppress or encircle it. All sides needed to find a way forward together, she explained. “I think we need wise and courageous politicians to get us there. It’s a narrow corridor. But I wouldn’t say it doesn’t exist,” Tan said, as reported by the South China Morning Post.
