China shock 2. 0 is a real economic earthquake
Ten years ago, economists Gordon Hanson, David Autor and David Dorn identified what they called “the China shock. ” That referred to the supercharged economic growth in China triggered by its entry into the. . .
Ten years ago, economists Gordon Hanson, David Autor and David Dorn identified what they called “the China shock. ” That referred to the supercharged economic growth in China triggered by its entry into the World Trade Organization in 2001 and the access to U. S. and European markets that followed. The ensuing flood of low-cost imports is reckoned to have cost 2. 4 million U. S. jobs. Now, they warn of “China shock 2. 0. ” In this case, China, building on that export base, expands its prowess to leading technologies. China shock 2. 0 threatens to inflict similar damage on Europe and displace the U. S. as the world’s leading technology power. Developed economies are waking up to the threat, but their reactions aren’t just slow, they’re inadequate. While consumers around the world benefited from lower-cost China-produced goods, the U. S. in particular paid a heavy price as its labor force was decimated. It is estimated that the shift of low-cost manufacturing from the U. S. to China cost about a quarter of all U. S. manufacturing jobs. That export onslaught has not let up. In a new paper for the Council for European Reform, economists Sander Tordoir and Brad Setser detail how, since the COVID-19 pandemic, China’s export volumes have increased by more than 40% while imports have barely grown. Last year, China’s overall export volumes grew at more than twice the pace of global trade. In the first quarter of 2026, its export growth hit 15%. The 2025 METI (Japan’s trade ministry) white paper on international trade agrees, noting that “China has expanded its diverse manufacturing capacity at an unprecedented speed and scale. Guangdong and Jiangsu provinces alone generate industrial value added comparable to that of Japan. ” Last year, China’s trade surplus hit a historic $1. 2 trillion. This steady growth occurred despite U. S. targeting of Chinese exports (like that of all its trading partners). There has been one important result of that campaign. As ace reporters of the Associated Press noted, “the world’s second biggest economy is exporting more products than ever. It’s just redirecting them away from the U. S. tariff wall and toward more open markets in Europe and elsewhere in Asia. ”Tordoir and Setser credit subsidies for much of China’s success, pointing to International Monetary Fund estimates that put that support at $800 billion a year, or about 4. 4% of gross domestic product. The Organization for Economic Cooperation and Development, the club of the 38 richest nations, estimates that Chinese manufacturers receive subsidies that are 3 to 9 times those available to businesses in advanced economies. Chinese experts disagree. In a paper that has received considerable attention precisely because it challenges the prevailing wisdom (and the OECD analysis in particular), economists Zhu He and Guo Kai counter that subsidies go to old economy sectors, not the hot new technology companies. Whatever the cause, the wave of exports has European leaders up in arms. French President Emmanuel Macron has warned that Chinese exports are “literally killing a large part of the European industry’’ and the bulk of the paper by Tordoir and Setser details ways that the German economy is being damaged by the Chinese juggernaut. Analysis last month from Capital Economics, a macroeconomic consultancy, echoes the conclusion that a new wave of Chinese exports “could hollow out European industry. ” They note that China’s export profile looks most like Europe’s and its gains in export market share are mirrored by Euro-zone losses, which is “broad based, spanning sectors from machinery and industrial equipment to vehicles. ” This analysis matches that of researchers at the Federal Reserve and the Federal Reserve Bank of St. Louis. Ultimately, this could reduce euro-zone GDP growth by as much as 0. 2 percentage points a year. Japan is not exempt. Another analysis from Capital Economics concluded last month that intensification of the China shock could reduce Japan’s GDP by around 0. 3 percentage points per annum. If those other nations are angry, it’s hard to tell. At last week’s Group of Seven summit of leading industrialized nations, the Leaders Statement for a more balanced, durable, resilient growth never mentioned China and the statement on geopolitics merely noted “with concern that global imbalances have been persistent and widened in recent years. ” The only reference to China in that context welcomed its participation in the Global Convergence for Growth Summit. Tordoir and Setser warn that “waiting for the China shock to correct itself is choosing to let deindustrialization run its course. ” After visiting China last year, Robin Harding, the Financial Times columnist, concluded that change will not occur and expects the situation to only worsen. “There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to. ”Thus far, the analysis and the complaints that followed have had limited impact on Chinese policy. The Chinese government says it recognizes the scope and scale of the problem but action invariably lags. The most recent five-year plan continues to privilege exports as domestic stimulus for the economy remains weak. Writing in The New York Times last year, Hanson and Autor argued that China shock 2. 0 represents an important shift in Chinese exports. Having established itself as a manufacturing power, accounting for 16% of global exports, the world’s leader, it is now focused on “key technologies of the 21st century … aggressively contesting the innovative sectors where the U. S. has long been the unquestioned leader: aviation, artificial intelligence, telecommunications, microprocessors, robotics, nuclear and fusion power, quantum computing, biotech and pharma, solar, batteries. ”China experts at RAND concur. A new analysis from that venerable think tank finds that “Under Xi, China’s techno-industrial policy has shifted from a focus on growth and catch-up toward national security, technological self-reliance and frontier leadership. ”This should sound familiar: It is authoritative confirmation of the argument that I have been making for several years: China aims to set the pace for leading-edge technologies and policy orthodoxy is not up to the challenge. Hanson and Autor concede that they no longer believe that “hands-off” trade policy, the traditional approach, works. Like me, they call for cooperative, collective action among like-minded nations. They embrace an industrial policy that aggressively promotes innovation and experimentation. That requires insulation from the tides of politics; that’s a lot to ask but even parts of Biden’s industrial policy agenda have survived the Trump administration. Shrewd investments — i. e. , in red states — may be the key. Finally, policies have to reduce the pain of adjustment; there must be ways to support workers that lose their jobs and industries that have been hollowed out. In short, this is another of your regular reminders that real economic security demands a holistic framework that guides national responses, not the piecemeal, ad hoc policies that dominate thinking today. Brad Glosserman, a senior adviser at Pacific Forum, is the author of “Peak Japan. ” His latest book, “Tech-Gemony,” on the geopolitics of high-tech, will be released by Hurst Publishers this summer.