China Shock 2.0: The Monster Is Unleashed

Everyone, today let’s talk about that “China Shock 2.0” monster that’s been repeatedly hyped by foreign media. Just yesterday, this monster was nothing more than a legend, but now it’s made its way into the Federal Reserve’s statements and the European Commission’s agenda—it’s really gaining traction. What was the “China Shock 1.0”? Back then, after China joined the WTO, a flood of cheap goods poured in, and Western workers lost their jobs. So what about this “2.0” version? China’s industries have upgraded, and its high-tech sectors are now directly competing with the West—which has the West in a panic, scrambling to respond. Last year, a pioneer of Version 1.0 published an article in *The New York Times* warning that an even greater disaster was looming. China used industrial policies to “prop up stocks.” With the central government prioritizing economic sovereignty and strategic interests, local governments piled on additional pressure, forcing companies to expand production capacity and cut costs—even at the expense of profitability. This pushed every link in the supply chain to its absolute limit. Thus, the “unbelievably cutthroat competitors” emerged—they had the best products but could only sell them at rock-bottom prices. With production capacity exceeding domestic demand, they had no choice but to export. The trade surplus grew ever larger, and once they entered overseas markets, they were unbeatable. Local companies were simply unable to compete, forcing host-country governments to implement industrial policies to protect their domestic enterprises. Spain and Hungary welcome Chinese investment in factory construction, while France emphasizes that Europe must remain strong, imposing restrictions on Chinese investment regarding local hiring, equity stakes, intellectual property, and sourcing—especially technology transfer—to ensure Europe does not become merely an assembly line but remains a complete industrial base. Germany, which maintains close economic and trade ties with China, has its own agenda. The Center for European Reform, an EU think tank, issued a report admonishing Germany, stating that it should not envy China’s manufacturing sector nor constantly blame EU bureaucrats for its problems. Instead, Germany must learn to identify the primary contradiction: the root cause lies in the strength of China’s manufacturing sector, which is taking business away from German exporters. Overall, Chinese exports are facing significant headwinds. Many countries label China’s industrial policies as unfair trade practices, and their response has been to provide policy preferences for high-tech manufacturing while restricting foreign competition. So just how strong are these headwinds facing Chinese exports? Many countries label China’s industrial policies as unfair trade practices; in response, they are also tilting policies toward high-tech manufacturing and restricting foreign competition. This trend affects not only developed nations in Europe and the United States but also many developing countries, which are feeling the so-called “Chinese squeeze.” In the past, global development followed a proven model: upgrade your economy, and you become the leader. However, China’s internal diversity and industrial completeness have enabled us to compete on all fronts—not merely by following the playbook of the older generation of leaders, but by charting a completely new course on our own. This poses a groundbreaking challenge to the global economy. The dialogue between Justin Yifu Lin and Furman is very enlightening. Justin Yifu Lin’s New Structural Economics emphasizes the necessity of industrial policy, arguing that it is an inevitable means for late-developing countries to achieve economic catch-up; historically, no country has ever caught up without relying on industrial policy. Furman, former chair of the Council of Economic Advisers and deputy director of the National Economic Council during the Obama administration, is generally a market advocate. He believes that industrial policy offers little benefit from an economic standpoint but is a necessary cost that must be borne for the sake of national security. The U.S. government’s current support for high-tech industries such as semiconductors and drones is a necessary evil—understandable given the current historical context—but political support for industries is easily distorted by interest groups. Furman believes that the U.S. opposition to China’s industrial policy is fundamentally misguided, as America’s problems are not caused by the so-called “China shock.” The slowdown in wage growth and the widening wealth gap began in the 1970s, when there was virtually no trade between China and the U.S. By the 1980s and 1990s, although the scale of trade was still small, the problems had already begun to worsen. In fact, after China joined the WTO, U.S. economic problems actually eased because cheaper imported goods indirectly raised Americans’ real wages, with middle-income households seeing greater wage increases than high-income households. Many people think that cheaper consumer goods just mean buying a few more T-shirts—which isn’t much of a benefit—but in reality, industrial intermediate goods account for more than half of U.S. imports. These help the U.S. manufacturing sector reduce costs and increase export volumes. As a result, after China joined the WTO, the U.S. unemployment rate actually fell to a 50-year low. China has been more of a help than a hindrance to the U.S. economy; 85% to 95% of Americans have benefited from it. As for the remaining 5% to 15% who have suffered, that is due to problems with U.S. labor policies and the social security system. Furman believes that the economy can result in a win-win or a lose-lose situation, but there is no such thing as a one-sided win. In today’s global landscape, politics has spilled over into the economic sphere, and competition between nations through industrial policy is inevitable. Europe’s efforts to prevent industrial hollowing-out are also aimed at closing off opportunities for the far right to exploit the issue—this is part of their internal political maneuvering. It is true that China’s economy is so massive that even the slightest shift has far-reaching implications for the global economic landscape, triggering power struggles both between nations and within them. What does this mean? It means that if China’s economy places too much emphasis on exports, it will be at a significant disadvantage in international politics. However, I believe there are still two issues here. First, industrial policy has shifted from being a fringe concept to becoming mainstream in today’s world. Second, his perspective remains too static; he views it as useful only during the catch-up phase. Once a country achieves comprehensive leadership, it cannot afford to hoard resources to plan and subsidize every industry. The key lies in the government maintaining an active, rather than a passive, role—a principle that holds true for any country. In fact, the very originator of the “China shock” concept—who is now even suggesting that the U.S. should attract Chinese investment to spur American companies and enhance their competitiveness—argues that the government must draw on the Chinese model to build a high-tech ecosystem, maintain long-term, stable investment in key industries, and ensure job security. This is a classic example of an active government; the only question is whether it can actually pull it off.