The change in China’s manufacturing is structural and the West must recalibrate as protectionism will only weaken long-term growth, argues David Dodwell, CEO of Strategic Access, in an opinion piece in the South China Morning Post. If the “China shock” of the early 2000s was about China catching up, then China Shock 2.0 is about the country redefining the boundaries of what is economically possible across manufacturing sectors, according to Columbia University professor Adam Tooze. Amid complaints about the trade and industrial policies accelerating China’s rise in many sectors – including aviation, space, artificial intelligence (AI), telecoms, microprocessors, robotics, nuclear and fusion power, quantum computing, materials sciences, biotechnology, pharmaceuticals, solar power and batteries – Tooze offers a simple warning: “The rise of China is a long-term trend to which the West must adjust.”
“The New Global Imbalances”, a report by the Center for Economic Policy Research (CEPR), is similarly blunt: “Failure to acknowledge the structural nature of these changes, and excessive emphasis on protection, will undermine long-term growth for all.” Tooze makes clear that the shock has its roots as much in the United States as in China. He distills four “truly radical forces” that define the 2.0 moment: U.S. President Donald Trump’s “trade policy rampage”, the “new and extraordinary incontinence” of U.S. fiscal policy; the AI boom; and the “gear-shift” in Chinese economic policy. Given that the China-shock narrative has been simmering for almost three decades, both Tooze and the CEPR ask three questions.
Why care? Why now? And what is to be done?
Many who say they care have built their anxieties on weak, and sometimes flagrantly false, foundations. Foremost is the “pesky foreigner” prejudice found in every continent: that plucky, innovative and efficient local companies face unscrupulous, corrupt foreign competitors. These companies cut corners and use low-quality materials to undercut local companies’ high-quality products. They collude with their governments to block access to their own markets. As Chinese companies export increasingly high-quality goods at “impossibly” low prices, the pesky foreigner thesis says their competitiveness can only come from corrupt practices. Many companies complain that China commits a wide range of unfair practices, ranging from tariffs and intellectual property theft to industrial espionage, subsidies and overproduction, enabling large-scale dumping. There are undoubtedly Chinese companies that commit such sins, but the evidence that they are any worse than companies in Europe or the U.S. is open to question. Some see subsidies as one of China’s graver sins, but subsidies are a bit like cholesterol – they can be good or bad. And the evidence of recent decades has been that China’s subsidy policies have been more effective and successful than most. Distinctively, China’s subsidies are persistent, long term and strategic rather than temporary interventions, focused on specific key sectors. The success and failings of subsidy strategies have created as many problems for China’s companies as for embattled U.S. and European manufacturers. Local firms sit at the heart of an overproduction crisis that has generated “involution” across the country – the ruthless competition and cost-cutting linked to thousands of zombie companies and profitless growth for many survivors.
Why now? This has much to do with what Tooze calls “the manifest disintegration of coherent political decision-making in Washington”. This has not only created chaos and competitive pressures for companies worldwide; it has also diverted much of China’s trade away from the U.S., generating additional pressure on European companies. The property recession in China, coupled with low household consumption, has forced many Chinese companies to target openings in the richer and more profitable Western markets. These various forces have, on one hand, radically altered the balance of global economic power and, on the other, created what many believe to be an existential challenge for Europe’s manufacturing economy.
So, what’s to be done? First, engaging the U.S. to find a globally satisfactory solution is pointless. Second, Beijing is already moving to tackle the involution problem. As CEPR’s economists summarize: “The ‘involution’/‘overcapacity’ situation is unsustainable. Exit of unprofitable firms is inevitable. Consolidation or exit will likely be not only tolerated but promoted.” Third, a policy response in Europe is taking shape. The recently drafted Industrial Accelerator Act intends to pressure Chinese companies to share technology, train workers and buy components locally. Initial engagement is likely to come from Spain, Germany, Hungary and Serbia, which appear more open to Chinese investors.
Globally, economists at Harvard’s Kennedy School suggest four responses: act in unison with other countries; invest strategically in key new fields; choose the battles Western economies can win and those the West cannot afford to lose; and protect jobs. Perhaps in addition, Western companies should remind themselves that the China shock is focused almost entirely on manufacturing, so building on strengths in services should be a priority. And finally, they should remind themselves of the impossible naivety of imagining that reintegrating a fast-rising Chinese economy of 1.4 billion people into the global economy would be simple, David Dodwell concludes in the South China Morning Post.
