While China's domestic consumer spending and investment slumped to levels unseen since the pandemic, its economy recorded a global trade surplus of $1.2 trillion last year, fueled by an export surge that intensifies competition and threatens workers in wealthy economies.
Retail sales declined 0.6% last month from a year ago, marking their first fall since the reopening from Covid lockdowns in late 2022. Home prices fell at a quicker pace in May, and fixed-asset investment shrank a deeper-than-expected 4.1% in the first five months from a year ago, according to data released by the National Bureau of Statistics on Tuesday.
The Cost of Export-Driven Growth
This domestic weakness is a direct outcome of state policies that encourage factories to overproduce and consumers to underspend. State-run Chinese banks pay low interest rates to savers while offering cheap loans to government-owned manufacturers. A flimsy social safety net pressures Chinese families to save, rather than spend, to build a financial buffer against old age and medical problems.
Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics, stated these policies are partly meant to keep factories busy and workers employed, resulting in "an excess domestic supply of manufactured products, which must be exported abroad." This systematic underpayment of labor and suppression of domestic consumption allows for the extraction of surplus value, which is then channeled into global markets.
China’s exports across electric vehicles (EVs), batteries, advanced machinery, software, and instruments are rising, intensifying competition with wealthy economies. China accounted for just 4% of global goods exports in 2000, but now its share is 16%, the highest in the world. This makes Beijing’s trade policies far more consequential than before.
Global Capital's New Battleground
The first "China Shock" began around 2001, in the twenty-fifth year since China joined the World Trade Organization, granting it low-tariff access to lucrative markets in the United States and Europe. Economists David Autor, David Dorn, and Gordon Hanson found that competition from China led to the loss of 2.4 million American jobs as many factories struggled to compete with low-cost Chinese textiles, furniture, and electronics.
Now, "China Shock 2.0" is playing out differently, with China dominating world trade and manufacturing and exporting sophisticated products. Eswar Prasad of Cornell University noted that this second shock is "characterized by its companies running the board on manufacturing exports -- from low-tech, low-wage to high-tech high value-added industries," directly hitting advanced economies in sectors like EVs and high-end robotics that many countries "had been counting on for a manufacturing revival."
French President Emmanuel Macron warned earlier this year that Chinese exports are "literally killing a large part of the European industry." Germany, once a beneficiary of exports to China, now sees China selling more goods to Germany than it buys. German companies struggle to compete with Chinese rivals in industrial machinery, construction equipment, cars, and chemicals, all mainstays of Germany’s export-oriented economy. Partly because of this competition, Germany’s economy has stagnated, shrinking in 2023 and 2024, and growing just 0.2% last year.
The State's Role in Protecting Capital
For eight years, the United States has waged "economic war" on China, imposing tariffs on Chinese products. Despite these sanctions, China redirected its exports away from the U.S. tariff wall and toward more open markets in Europe and elsewhere in Asia, achieving its record global trade surplus last year.
China’s trade practices will be a top agenda item at the G7 summit in Évian-les-Bains, France, where French officials hope for a plan to "tackle the China threat." One possibility is that the European Union and others will build a higher tariff wall against Chinese imports, following the U.S. lead. Currently, the EU imposes relatively low tariffs under World Trade Organization rules, with some specific products, like electric vehicles, facing tariffs up to 35%.
Economists warn that China’s export surge "will provoke a protectionist wave against Chinese imports worldwide" unless its leaders rein it in. Wendy Cutler, former U.S. trade negotiator, stated that "Beijing has been relying on the rest of the world to address its overcapacity problem." China has repeatedly promised to curb overproduction and boost consumer spending, a goal the United States and other countries have urged for decades, but has been "slow to act as if they mean it," according to Obstfeld. These proposed reforms within the existing system merely manage the contradictions of global capital accumulation, rather than addressing the foundational drive for surplus extraction that fuels these conflicts.