China triggers new export shock to the world amid trade war

Two decades ago, China shocked the United States with its ability to manufacture and ship products quickly and cheaply on an unprecedented scale. The resulting export boom reshaped the American economy and politics.

Today, a new Chinese shock is spreading across the globe — from Indonesia to Germany and Brazil.

As Donald Trump’s tariffs begin to cut China off from the United States, its largest market, Chinese factories are sending their toys, cars, and footwear to other countries at a pace that is reshaping economies and geopolitics.

This year, China’s trade surplus with the world has reached nearly US$500 billion (R$2.7 trillion) — an increase of over 40% compared to the same period last year.

As the two global superpowers clash over trade, the rest of the world is now bracing for an even bigger Chinese shock.

“China has a lot of things it needs to export, and regardless of whether the U.S. imposes tariffs on China, it’s practically impossible to stop changes in trade flows,” said Leah Fahy, China economist at Capital Economics.

The flood of Chinese exports is a result of government policy and a slowing domestic economy. To ease the impact of a real estate crisis that has eroded the wealth of millions of families, Beijing has, for several years, injected money into its manufacturing sectors, which are now producing far more than domestic demand can absorb.

China’s global market share in all product categories has risen sharply, according to Fahy’s analysis. That will continue despite tariffs, as Beijing is unlikely to reverse its export-oriented policies.

By redirecting its product flows to Southeast Asia, Latin America, and Europe, China has already softened the economic blow of declining U.S. demand. However, that puts China on a potential collision course with its trade partners, who are also under pressure from Washington.

Trump is threatening high tariffs on the very countries being flooded with more Chinese products, such as Vietnam, Cambodia, and Indonesia. These tariffs have been paused for now to facilitate negotiations. Some countries have benefited from a surge in foreign investment from companies seeking to shift production out of China as quickly as possible.

Others have managed to re-export some Chinese goods to the U.S. However, if they fail to negotiate significantly lower tariffs, domestic companies in countries facing severe U.S. duties in Southeast Asia and elsewhere may be crushed by competition from Chinese firms.

As much as Trump disrupted trade with tariff levels unseen in a century, the drastic shift in China’s exports had been building long before he took office in January.

China’s real estate crisis — an oversupply of housing, falling prices, and widespread bankruptcies — began reverberating through the economy in 2021. Chinese policymakers quickly redirected cheap loans from developers to exporters and manufacturers, a move that eventually offset the collapse in construction, which at its peak contributed to one-third of economic growth.

For Beijing, it was a tried-and-true strategy: throw money at the problem.
“They often overinvest to gain scale first, and then the process is supported by government policies,” said Tommy Wu, economist at Commerzbank. “That contributes to the problem we’re facing today.”

China had already launched a domestic industrial policy in 2015, known as Made in China 2025, to manufacture more sophisticated and valuable products such as advanced computer chips and electric vehicles. This initiative led the U.S. and Europe to raise tariffs on electric cars, solar panels, and other high-tech products.

But China’s push to boost manufacturing after the property market collapse went far beyond that. Even as they produced more advanced goods, Chinese manufacturers doubled down on producing cheap trinkets — the kinds of low-cost products China was known for two decades ago. China rewrote the playbook, puzzling economists.

“China is not developing the way economic theory suggests, and now we’re facing a new model,” said Priyanka Kishore, an economist based in Singapore, referring to the traditional trajectory of economies moving away from low-cost manufacturing as they mature and develop.

“This is a challenge because it exacerbates pressures on the rest of the world,” Kishore said.

As tariffs begin to realign trade flows and supply chains, the economic effects are starting to show.

In Germany, where shipments of Chinese goods increased 20% year over year last month, companies have expressed concern to Wu, the Commerzbank economist — one of the country’s largest banks. Carmakers are feeling the pressure most intensely.

China produced 45% more electric vehicles this year despite Chinese companies being locked in a fierce domestic price war due to weak consumer demand. Electric vehicle exports rose 64.6% this year, according to the China Association of Automobile Manufacturers.

Countries hit by the rise in Chinese imports have also seen steep drops in their manufacturing, leading to job losses and bankruptcies.
In Indonesia, garment factories are closing, citing their inability to compete with cheaper Chinese clothing. Around 250,000 people lost their jobs in the garment industry in 2023 and 2024, said Redma Gita Wirawasta, president of the Indonesian Filament Yarn and Fiber Producers Association. Thai auto parts manufacturers shut down due to the rise of Chinese electric vehicles. Brazilian automakers have requested that the government launch an anti-dumping investigation into Chinese cars sold in the country.

For most countries, there are two options. The first is to do nothing and watch their manufacturing hollow out, said Sonal Varma, chief Asia economist (excluding Japan) at Nomura, the Japanese bank.

The other option is to raise tariffs and use other protectionist measures in specific sectors, just as the United States has done with China. That risks China’s wrath, as it uses trade and investment as leverage in its diplomatic overtures — or it could risk tensions with the United States.
“Supply chains are splitting along geopolitical lines,” Varma said. “It has become much harder for countries to decide: Whose side are you on?”

Source: Folha de S. Paulo

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