The world is suffering from the “China shock”... Will it continue to invade global markets?

China is strengthening its economic position through a massive production cycle that makes it the largest supplier of all required goods in the world at competitive prices that are unmatched in any industrialized country. But the superiority of the Chinese giant has become a source of concern for industrialized countries whose factories have stopped, creating what is called the “China Shock,” while Beijing seeks another wave of conquest of global markets by manufacturing batteries, raw materials for biotechnology, renewable energy, electronic chips, and others, which paves the way for the “China Shock.” 2".

Right now, the Chinese economy is going through a painful transition as Beijing tries to pull it out of the post-coronavirus recession and mortgage debt crisis.

Chinese leader Xi Jinping's administration supports what it calls the "three new" industries of solar cells, electric cars, and lithium batteries to push its economy toward growth.

Manufacturers in China are exporting such large quantities of solar panels that the resulting global glut and collapse in prices has led people to cover their garden fences with the once-prized product.

This is just one of the industries the world is preparing for in the next phase of the “China Shock.”

Features of China's first shock

“China Shock” is a term coined by David H. Autor, David Dorn, and Gordon Hanson wrote in a 2016 paper on the country's economic renaissance and its impact on global trade and labor markets.

After being mired in poverty, Communist China began to adopt a reformist economic policy in 1978 when it opened the doors to diversification of its economy and allowed the increase of private enterprise.

At that time, the country's growth accelerated, and its GDP multiplied more than 80 times.

This growth was driven by rapid industrialization, which elevated China to the position of the “world’s factory.” The massive manufacturing sector produced millions of products that it exported at low cost.

The world welcomed China, in the era of globalization from which companies in the United States and the whole world benefited. At the time, policymakers saw that the East Asian giant would become more open economically and politically as a result of this integration.

Consumers also benefited from lower inflation, but this shift came at a heavy cost to the United States, which was dependent on manufacturing, and other countries. A large number of workers lost their jobs to China, which provides products very quickly and at lower prices. This is the "China shock."

The second China shock

Right now, China is targeting three new strategic industries that the rest of the world is also eyeing.

But this time, discontent is growing, and Western countries will not allow Beijing to have its way so easily, especially since China aims to develop its supply chain ecosystem in these areas.

In this context, international economist and author of “Asian Megatrends”, Rajeev Biswas, told Business Insider: “Advanced economies face the combined impact of moderate GDP growth in China in the medium term on global demand, as well as competition from a wave of industrialization.” New in China.

This development does not stem only from China's move towards manufacturing final products in the fields of electric cars, lithium-ion batteries, and solar cells. Not only that, China is working to develop global supply chains for important raw materials that will supply large vital industries.

Here, Biswas argues, “the industrialized economies of the OECD countries face new economic challenges from China’s strategic competition in these key growth industries.”

This competition is now more intense due to deflation in China, which is the only major economy in the world dealing with negative consumer prices.

Meanwhile, China's slowing economic growth also means it is not buying as much from other countries, exacerbating trade tensions.

Official data showed that China's imports of goods from the rest of the world decreased last year by 5.5% compared to last year.

What do the United States and the rest of the world do about the second China shock?

The world will not find itself helpless in the face of China's emerging dominance of hot new industries this time. According to Biswas: “Strategic competition between the United States, the European Union, and China is likely to continue in the long term in the areas of advanced manufacturing technologies.”

Many companies are already diversifying their supply chains away from China for a range of products.

In return, the United States is taking steps to boost chip manufacturing on its soil. The CHIPS Act provides $52 billion in subsidies for production, research, and workforce development. The US Inflation Reduction Act also works to promote investment in clean energy.

On April 2, the Department of Energy announced a $75 million investment to develop a research facility to strengthen domestic supply chains for critical minerals.

Meanwhile, US Treasury Secretary Janet Yellen is visiting China to hold meetings with senior Chinese officials. The Treasury Department said in a press release announcing her visit that it would "pressure Chinese counterparts on unfair trade practices and highlight the global economic consequences of China's excess industrial capacity."

At the Soneva solar cell plant in Georgia on March 27, Yellen said she was “concerned about the global ramifications from the excess capacity we are seeing in China” that is now hitting new energy industries such as solar, electric vehicles and lithium-ion batteries.

The EU is also taking steps to protect its domestic industries in key emerging industries.

In October, the European Commission launched an investigation into whether electric vehicle imports from China benefited from illegal subsidies that in turn threaten to harm EU electric vehicle manufacturers. The European Union also created the European Chip Code to boost domestic chip production.

China's response to the West's moves

China sees the US response as a move to undermine its growth. “The American side has adopted a series of measures to suppress the development of trade and technology in China,” Chinese Foreign Ministry spokesman Wang Wenbin said at a regular press conference on Wednesday.

“This is not reducing risks, but creating risks,” Wang added. “These are typical non-market practices.”

He stressed that China's exports of electric cars, lithium-ion batteries and solar cells rose due to the "international division of labor and market demand" thanks to the global energy shift to more sustainable energy sources.

Economist Biswas said China was de-risking through increased trade with Southeast Asia, where there is a thriving middle class. He added that other large developing markets targeted by China include Africa and Latin America.

Last year, China exported more goods to Southeast Asia than the United States for the first time, according to a Bloomberg analysis of Chinese customs data published in January, suggesting a sea change in global trade flows amid a shifting geopolitical landscape.

This year's US presidential campaign season is likely to raise some trade issues, Nomura economists wrote in a March 15 note.

“We believe that the contraction in Chinese export prices and spare capacity in a number of strategically important sectors may cause trade tensions to escalate later this year, and perhaps beyond,” Nomura Bank economists added.