THE CHINA GLUT
As the country’s domestic economy slows, Beijing is relying on manufacturing, exporting its industrial surplus — and economic pressures — abroad
Twenty-five years ago, a wave of inexpensive Chinese imports transformed the American economy, contributing to the loss of around three million manufacturing jobs and reshaping the country’s political landscape. Economists later dubbed it the “China Shock”.
Today, a second China Shock is rippling across Europe, Southeast Asia, Africa and Latin America, raising fears of deindustrialisation, factory closures and political unrest. On Friday, German Chancellor Friedrich Merz and French President Emmanuel Macron called for coordinated action to shield European industry from a surge of subsidised Chinese imports.
The latest export boom stems from Beijing’s response to the collapse of its property market, which wiped out an estimated $10 trillion in household wealth. From 2020 onwards, Chinese authorities shifted investment from real estate to manufacturing, pouring resources into industries such as electric vehicles (EVs), lithium-ion batteries and solar power. However, manufacturing capacity has expanded far faster than domestic demand. Consumers cannot absorb the growing output of vehicles, machinery and electronics, forcing Chinese companies to seek buyers overseas. Chinese customs data shows exports rose 18 per cent in the first half of the year compared with the same period last year.
“There’s been a huge increase in manufacturing capacity over the last five or six years, and not enough domestic demand growth to absorb it,” said Julian Evans-Pritchard, Head of China Economics at Capital Economics.
A new export wave
Unlike the first China Shock, which centred on labour-intensive goods such as clothing and footwear, the latest wave is driven by advanced products including EVs, semiconductors and renewable energy technology. Following China’s entry into the World Trade Organization in 2001, Chinese imports displaced around 2.4 million US manufacturing jobs. While consumers benefited from lower prices, many factory towns declined, fuelling political discontent. The United States has so far escaped the worst effects of the latest export surge, largely because of tariffs introduced under President Donald Trump. Chinese exports to the US have remained broadly unchanged, although American data suggests imports from China have fallen.
Many Chinese manufacturers have bypassed US tariffs by routing exports through countries such as Vietnam, Mexico, Thailand and Cambodia, where limited processing changes the products’ country of origin. Guangzhou-based manufacturer LC Sign said business recovered after Washington and Beijing eased trade tensions. “After the tariff situation stabilised, our presence returned to its previous levels,” said Tony Zhu, the company’s Head of Marketing. “The agreement our government reached with the American government on tariffs was a great help.”
China’s exporters also benefit from a currency that the International Monetary Fund estimates may be undervalued by as much as 21 per cent, effectively making Chinese products cheaper for overseas buyers.
Unlike the early 2000s, when rising exports were matched by increasing imports, China has sought to reduce dependence on foreign suppliers while relying on overseas markets to sustain manufacturing. Imports stagnated last year even as exports continued to rise.
China’s share of global merchandise trade has also grown dramatically, rising from around 4 per cent in 2000 to roughly 16 per cent today, according to research by economists within the US Federal Reserve System.
Domestic weakness
Despite its export success, China’s economy remains under pressure. US officials argue the country’s export-led model is unsustainable. Treasury Secretary Scott Bessent has urged Beijing to boost household consumption rather than industrial subsidies, echoing warnings made by former Treasury Secretary Janet Yellen before the US imposed 100 per cent tariffs on Chinese electric vehicles.
Official figures show China’s economy expanded by 4.3 per cent in the second quarter, its weakest growth in more than three years. Many economists believe the true picture is weaker, arguing that official statistics overstate economic performance. “The Chinese economy is absolutely in a weak spot,” said Shehzad Qazi of China Beige Book International. “It’s not a disaster, but it’s considerably weaker than we’ve seen in recent years.”
The prolonged property crisis continues to weigh heavily on consumer spending. Real estate accounts for nearly 70 per cent of Chinese household wealth—around twice the share in the United States. With house prices still falling, many households remain reluctant to spend. President Xi Jinping has called for policies to encourage consumption, but government priorities continue to favour strategic manufacturing industries. Economists say policymakers understand the need to rebalance the economy but have shown little urgency.
Europe under pressure
While President Trump is expected to host Xi later this year, countries including Britain and Canada have negotiated agreements to preserve access to the Chinese market despite rising imports. Europe, meanwhile, is tightening its trade stance. The European Union plans to reduce tariff-free steel imports and is considering wider industrial subsidies and domestic-content rules, with further measures expected in Sept as Germany’s industrial slowdown deepens.
Germany, Europe’s manufacturing powerhouse, is particularly exposed. For years Berlin resisted tougher trade measures against Beijing, fearing damage to its own exports. Even after the EU imposed tariffs on Chinese electric vehicles in 2024, Chinese manufacturers maintained strong sales by shifting towards hybrid models. More than one million Chinese-built cars entered the EU last year. At the same time, German manufacturers have lost market share both in China and at home. Volkswagen reportedly plans to close four factories in Germany and cut around 100,000 jobs as it restructures to compete with Chinese rivals.
Chinese manufacturers can already produce roughly twice as many vehicles as they can sell domestically and continue expanding capacity. With demand at home weakening, overseas markets have become essential. “There’s no real money to be made selling into the extremely competitive and oversupplied Chinese market,” said economist Brad Setser of the Council on Foreign Relations.
