Economic analysts and policymakers are increasingly vocal about the potential for a “second China Shock,” a phenomenon reminiscent of the significant global economic shifts that followed China’s accession to the World Trade Organization (WTO) in the early 2000s. While the initial “China Shock” was primarily characterized by massive job displacement in manufacturing sectors in developed economies, particularly the United States, warnings suggest the next wave could be more complex and widespread.
The original “China Shock,” extensively documented by economists like David Autor, David Dorn, and Gordon Hanson, saw a surge in Chinese exports, leading to factory closures and job losses in industries like textiles, furniture, and electronics in countries like the U.S. This period was marked by a rapid reordering of global supply chains and a significant impact on local labor markets.
Today, concerns about a “next China Shock” stem from China’s current industrial strategy, which heavily emphasizes state-led investment and subsidies in high-tech and emerging industries. Sectors like electric vehicles (EVs), lithium-ion batteries, and solar panels, often referred to as the “new three” growth engines, are seeing rapid expansion and production capacity that some fear exceeds domestic demand.
U.S. Treasury Secretary Janet Yellen has been among the prominent voices raising these concerns. During her visits to China, she has highlighted the potential for China’s overcapacity in these sectors to flood global markets, undermining industries in other countries and posing risks to the global economy.
“China’s overcapacity can make it difficult for companies in other countries to compete. This is not healthy for China, and it is not healthy for the global economy,” Yellen stated during an engagement in Guangzhou in April 2024. “We are seeing this in certain emerging industries like electric vehicles, batteries and solar products.”
Similarly, European Union officials have launched investigations into Chinese subsidies, particularly concerning electric vehicles, citing concerns about unfair competition. The fear is that heavily subsidized Chinese products could destabilize nascent green industries in Europe and elsewhere, hindering their development and leading to similar job displacement seen during the first shock, but in more advanced and strategic sectors.
Analysts suggest that a potential “next shock” could be more severe due to several factors: the strategic importance of the affected industries (clean energy, advanced manufacturing), heightened geopolitical tensions, and the potential for a broader impact across various economies. Unlike the first shock which largely affected traditional manufacturing, the new wave could impact a wider array of technologies and skilled labor, potentially leading to more complex economic and social ramifications globally.
Policymakers in several countries are exploring various responses, including tariffs, trade defense measures, and domestic industrial policies aimed at bolstering local manufacturing capacity to withstand potential disruptions from a global glut of Chinese-made goods.
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