[Kangkook Lee's column] China's Manufacturing Dominance, 'China Shock 2.0,' Threatens the Global Economy

Dr. Kangkook Lee is Professor of College of Economics at Ritsumeikan University in Japan and Affiliated Research Fellow at CUKPE

The term 'China shock' refers to the phenomenon in which manufacturing production and employment in developed countries, such as the United States, which are exposed to imports from China, have shrunk as China's exports surged following China's accession to the World Trade Organization (WTO) in 2001.

In fact, empirical analysis by Professor David Autor of the Massachusetts Institute of Technology (MIT) and others  shows that more than 2 million jobs were lost in the United States between 1999 and 2011 due to the aftermath of the China Shock. This shock was a significant backdrop that led to the rise of far-right populist politics and the U.S. President Donald Trump, who opposed globalization and promoted protectionism.

However, as of 2026, there are growing voices claiming that a new "China Shock" is emerging. Similar to the first "China Shock" in the early 2000s, the argument is that China's trade surplus has expanded since the late 2010s, impacting the global economy. Recently, China has been dominating the global manufacturing export market, encompassing both high-tech and traditional industries, raising significant concerns among other nations.

China Shock 2.0

Despite U.S. tariff hikes, China's trade surplus is projected to reach approximately $1.2 trillion in 2025, an increase of about 20% from the previous year, and global imbalances, characterized by China's surplus and the U.S. deficit, are expected to persist in 2026. Interestingly, the recent second "China Shock" is shaking the global economy, impacting not only developed nations but also developing ones.

Last April, the UK's Financial Times published a special feature titled " China Shock 2.0, " reporting on the second China Shock that has been ongoing since 2018. While China's export growth and trade surplus relative to GDP are smaller than during the first China Shock in the early 2000s, the intensifying competition with developed nations in highly technology-intensive industries is cited as a key characteristic of this new China Shock. It is also interesting to note that unlike in the past, China's imports have not increased, as the prices of Chinese export goods are falling rapidly due to intensifying domestic competition and the intermediate and capital goods industries have developed significantly. Meanwhile, another difference is that developed nations are strengthening their efforts to counter the China Shock, unlike in the past, as evidenced by the rapid decline in the share of the U.S. in China's exports due to U.S. protectionism.

In fact, China, whose manufacturing power has recently grown significantly, is emerging as a formidable competitor in high-tech industries once dominated by developed nations. Fueled by a massive domestic market, a vast technical workforce, and strong government support, China’s exports of high-end manufactured products—such as electric vehicles, solar panels, batteries, and wind turbines—to major developed countries have increased significantly. In particular, intensifying domestic manufacturing competition is driving down prices and lowering corporate margins, thereby making the value chains of both winning firms and Chinese companies more efficient and sophisticated.

However, it is also true that China's excessive competition and overcapacity have led to a flood of Chinese products on the global market, resulting in threats to the manufacturing industries of developed nations and trade conflicts. French President Emmanuel Macron even stated that the increase in China's exports of high-tech manufactured goods is a matter of life or death for European manufacturing. This is because, unlike the first "China Shock," China's exports to Europe have increased, intensifying competition with key European industries such as Germany's automotive industry.

Several domestic changes in China are factors further increasing its trade surplus. The real estate downturn and weak social safety net are stagnating domestic consumption, exacerbating global imbalances. Furthermore, Chinese officials deny the problem of overcapacity and have declared support for the manufacturing sector in the 2026-2030 Five-Year Plan. This is because the Chinese Communist Party plans to vigorously foster the manufacturing sector both quantitatively and qualitatively, prioritizing it over finance, services, and real estate, and aims to become a hegemonic power described as "the United States with manufacturing" based on this foundation. Industrial policies, such as the undervaluation of the real exchange rate, subsidies, tax breaks, the provision of cheap land, and low-interest financial support, are also significant factors. The Organization for Economic Cooperation and Development (OECD) reported that subsidies for Chinese companies are 3 to 9 times higher than those in the West, and because the central government shares value-added tax with local governments in production areas, local governments are competitively supporting their regional companies despite debt issues. While there are voices criticizing this, in reality, robot companies relying on government support are proliferating, and the solar power industry is also suffering from severe overproduction and deficits. Ultimately, Chinese companies focused on overseas exports, which led to a recent surge in exports of batteries and electric vehicles.

According to the Financial Times, it is particularly interesting to observe the emergence of new forms of competition and cooperation between Europe and China . Amidst increasingly fierce international competition, European companies such as Volkswagen are entering the local market by establishing R&D centers to leverage China's value chains and secure technology. Conversely, China has recently been increasing its exports of high-tech products, such as electric vehicles and machinery, as well as direct investment in factories for batteries and other equipment, to Europe. In response, Europe is actively promoting the attraction of Chinese investment while simultaneously seeking to foster the development of its manufacturing sector and create jobs through the transfer of technology via the "Made in Europe" legislation. For instance, the legislation permits only joint ventures for direct investment, limits foreign equity to 49%, and allows member states to reject investments exceeding 100 million euros in strategic industries. A fierce strategic battle is thus unfolding between Europe and China over Chinese exports and investments.

On the other hand, there is strong criticism that the U.S. strategy, characterized by tariff hikes and pressure on China, will not succeed.  Professor Autor emphasizes that the Trump administration's protectionism will increase import costs and uncertainty, thereby actually undermining the competitiveness of U.S. manufacturing; instead, he stresses the need for active industrial policies, public investment including research and development, and cooperation with allies. The argument is that while the critical awareness regarding the "China shock" is correct, the proposed solution is flawed.

The impact on developing countries

Meanwhile, the "China Shock" is also sweeping over developing countries aiming for industrialization through exports. Typically, as national income rises and the economic structure becomes more sophisticated due to economic growth, countries that grew based on the development of labor-intensive industries shift toward capital or technology-intensive industries. However, China is showing an exception to this development process. Surprisingly, even though China has reached the level of a middle-income country with a per capita GDP of approximately $14,000 by 2025, it still holds a dominant position in the global export market for low-skilled, labor-intensive industries (low-end).

According to research by Chatterjee of Johns Hopkins University and Subramanian of the Peterson Institute for International Economics , despite rapid industrialization, rising wages, and a declining share of the working-age population, China's share in terms of value added in the low-cost manufacturing export markets of 30 major developing countries has actually increased rapidly since 1995. China's share of exports in industries such as clothing, textiles, leather, and footwear rose from approximately 27% in 1995 to approximately 65% ​​in 2022. The authors refer to this phenomenon, in which other developing countries continue to be pushed back in competition with China, which possesses overwhelming competitiveness, as the "China Squeeze."

In particular, member countries of the Association of Southeast Asian Nations (ASEAN) are being significantly affected by China. Since 2021, ASEAN nations have seen a sharp increase in imports from China, leading to a rapid expansion of their trade deficits. As the share of the United States in China's exports has recently declined, the share of ASEAN has risen significantly. In fact, Indonesia's clothing and textile industries have been severely negatively impacted, with 60 factories closing between 2022 and 2025, and the Indonesian government has even announced plans to regulate Chinese e-commerce platforms. Furthermore, imports from China of finished goods and intermediate products, such as electric vehicles, batteries, and solar panels, are also increasing significantly in Southeast Asia.

China's dominance even over low-tech, labor-intensive industries is linked to the reality that, given its massive population, the stages of development differ between urban and rural areas, and income levels vary significantly by region. In fact, while the per capita GDP of China's four major cities—including Shanghai and Beijing—is higher than that of Japan, the income of the four poorest provinces is similar to that of Vietnam, with a population of 140 million in these regions alone. Furthermore, the Chinese government recently announced that it will continue to maintain and develop traditional labor-intensive industries. In 2023, President Xi Jinping emphasized that these "low-end industries" should not be abandoned, signifying an intention to sustain labor-intensive sectors while simultaneously pursuing innovation in high-tech industries. In particular, robots and automation serve as the means to counter wage increase pressures in these sectors. As the robotics industry develops rapidly thanks to strong government support, the prices of humanoid robots from Unitree, a leader in the versatile humanoid robot industry, have also been falling rapidly.

Ultimately, the "flying geese" model—where leading nations like Japan grew first and low-cost countries like Korea followed—is no longer functioning due to China's dominance in global manufacturing. This implies that for developing countries today, the success of export-led industrialization seen in East Asia in the past is becoming increasingly impossible.

In fact, with the exception of Vietnam for electronics or Bangladesh for the garment industry, it is difficult to find cases of success in manufacturing export markets among developing nations. Accordingly, Harvard Professor Rodrik has proposed a new economic development strategy centered on the service sector to create many jobs in developing countries . However, questions remain as to whether developing countries can succeed in growth and catch-up without the development of manufacturing and the expansion of exports, which have significant ripple effects on productivity improvement and growth. Indeed, since the pandemic began in the 2020s, the growth rates of many developing countries have generally declined compared to the past.

What to do with China

Currently, the Chinese government is continuing to develop labor-intensive manufacturing based on robotics technology and automation, while also fostering capital-intensive industries such as petrochemicals, machinery, and steel, centered on state-owned enterprises, through government support including subsidies and the National Industrial Investment Fund. At the same time, in new industries such as electric vehicles, batteries, solar power, high-speed rail, and humanoid robots, it is using industrial policies to establish initial ecosystems and large-scale markets to realize economies of scale and expand production, thereby encouraging dominance of supply chains. China is literally demonstrating a strong determination to dominate every sector of manufacturing.

These changes in China are delivering a significant shock to Korea as well. Since the 1997 Asian financial crisis, the Korean economy has sustained growth by increasing exports of intermediate and capital goods to China, which had become the "world's factory" since the 2000s. However, due to the recent development of China's domestic industries, these exports have declined sharply, and the trade surplus has shrunk rapidly, leading to a "China shock" once again. In particular, in new industrial sectors where Chinese companies have emerged as leaders, the growth strategy of Korean companies—which previously involved rapidly catching up with advanced nations—is no longer effective. Regarding technological competitiveness in the manufacturing sector, the reality is that most Korean industries are already lagging behind China, with the exception of high-tech sectors such as semiconductors. Korea must now learn lessons from China's experience regarding active industrial policies and effective public investment aimed at fostering strategic industries. At the same time, regarding the monopoly issues of Chinese companies within global supply chains—based on unfair competition and market distortions represented by state-owned enterprises—it is necessary to cooperate with other nations and raise these issues within the multilateral trading framework.

Chatterjee (Johns Hopkins University) and Subramanian (Peterson Institute for International Economics) also emphasize that for China to become a true hegemonic power holding a leading position in the international community, it is crucial not only to dominate the global market but also to strive for the development of poor nations. They argue that for China to truly become a global leader, it needs to open up manufacturing space for developing countries and expand both domestic demand and imports. Of course, despite pressure from the international community, China will not change easily. However, constant pressure on China is necessary for a balanced global economy and shared prosperity, as the future of the world economy largely depends on China's transformation.

(This article was originally published as a column in Hankyoreh in Korean and translated into English with the help of Google Translate. The views expressed in this article are those of the author(s) and do not necessarily represent the official stance of the center.)