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The World Is Not About to Let China Shock 2.0 Happen so Easily

  • China is looking to new growth drivers in solar cells, electric vehicles and lithium-ion batteries.
  • This could create a “China Shock 2.0” that would impact other economies around the world.
  • The United States, European Union and other countries are developing strategies to counter China’s emerging dominance in these sectors.

The Chinese economy is going through a painful transition as Beijing tries to extricate it from the post-Covid crisis and the real estate debt crisis.

Chinese leader Xi Jinping’s administration defends what it calls “three new” industries solar cells, electric vehicles and lithium-ion batteries to stimulate its economy.

The country already manufactures and exports these products aggressively.

In particular, Chinese manufacturers are producing so many solar panels that the global glut and resulting falling prices are prompting people to line their garden fences with the once-prized material. product.

It’s just one of the industries the world is preparing for in the next phase of the “China shock.”

What happened during the Chinese clash 1.0?

The “China shock” is a term coined by David H. Autor, David Dorn, and Gordon H. Hanson in a 2016 article about the country’s economic rise and its impact on global trade and labor markets.

Once mired in poverty, communist China began economic reforms in 1978 by opening its economy and allowing more private businesses.

The country’s growth has been meteoric, with GDP having since multiplied by more than 80.

This growth was driven by rapid industrialization, which propelled China to become a global factory. Its enormous manufacturing sector produced millions of products which it exported at low cost.

The world welcomed China into its fold, heralding an era of globalization from which businesses in the United States and elsewhere took advantage. At the time, policymakers believed that the East Asian giant would become more open economically and politically through this integration.

Consumers also benefited from low inflation.

However, this trend has come at a huge cost to communities in the United States and elsewhere that depended on the manufacturing sector. Many workers have lost their jobs to China.

This is the “Chinese shock”.

How Beijing could create the Chinese shock 2.0

Today, China is targeting three new strategic industries that the rest of the world is also interested in.

This time, however, Western countries are not letting Beijing do what it wants so easily, especially as China aims to develop its own supply chain ecosystem in these areas.

“Advanced economies face the combined impact of China’s moderate medium-term GDP growth on global demand as well as competition from China’s new wave of industrialization,” said Rajiv Biswas, international economist and author of “Asian Megatrends,” told Business Insider.

This development does not only stem from China’s desire to produce end products in the areas of electric vehicles, lithium-ion batteries and solar cells. The country is also developing global supply chains for critical raw materials, such as rare earths, that will supply these industries.

“As a result, the industrial economies of OECD countries face new economic challenges related to strategic competition from China in these key growing sectors,” Biswas said.

This competition is even more intense today due to deflation in China, which has become the only major economy in the world facing negative consumer prices.

Meanwhile, China’s slowing economic growth also means it buys less from other countries, increasing trade tensions.

Last year, China’s imports of goods from the rest of the world fell 5.5% from a year earlier, according to official data.

What are the United States and the rest of the world doing in the face of the China 2.0 shock?

This time around, the world will not be caught off guard by China’s emerging dominance in booming new industries.

“It is likely that strategic competition between the US, EU and China will continue in the long term in the areas of advanced manufacturing technologies,” Biswas said.

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

The United States is taking steps to boost chip manufacturing at home. THE CHIPS Act provides $52 billion in subsidies for manufacturing, research and workforce development. The U.S. Inflation Reduction Act is also spurring investment in clean energy.

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

Meanwhile, the United States Janet Yellen, Secretary of the Treasury is in China for meetings with senior Chinese officials. The Treasury said in a press release announcing her visit that she would “press Chinese counterparts on unfair trade practices and highlight the global economic consequences of Chinese industrial overcapacity.”

At a Suniva solar cell factory in Georgia, March 27 Yellen said she was “concerned about the global fallout from the excess capacity we are seeing in China” now hitting new energy industries like solar, electric vehicles and lithium-ion batteries.

The European Union is also taking steps to protect its domestic manufacturing sector in key emerging industries.

In October, the European Commission launched an investigation into whether imports of electric vehicles from China benefited from illegal subsidies which, in turn, threaten to harm EU electric vehicle manufacturers. If this proves true, the EU could impose tariffs on these imports. The EU investigation is ongoing.

The EU also passed the European Microchip Law to boost domestic chip production.

After all, once bitten, twice shy.

“People like me grew up with the idea: If people send you cheap products, you should send a thank you note. That’s what standard economics basically says,” Yellen told the Journal in a interview published Wednesday. “I will never say, ‘Send a thank you note’ ​​again.”

What is China’s response to Western initiatives?

China presents the American response as a measure aimed at containing its growth.

“The US side has adopted a series of measures aimed at suppressing China’s trade and technological development,” Wang Wenbin, a spokesperson for the Chinese Foreign Ministry, said at a regular news conference on Wednesday.

“It’s not about ‘reducing risk,’ it’s about creating risk. These are typical non-market practices,” Wang added.

He also said that China’s exports of electric vehicles, lithium-ion batteries and solar cells have increased due to “international division of labor and market demand” thanks to the global energy transition to energy sources. more sustainable energy.

China is also reducing risks by trading increasingly with Southeast Asia, where there is a growing middle class, economist Biswas said. Other major developing markets that China is targeting include Africa and Latin America, he added.

Last year, China exported more goods to Southeast Asia than to the United States for the first time, according to a Bloomberg analysis of Chinese customs data released in January – signaling a shift in trade flows global economies in a changing geopolitical landscape.

The campaign season for this year’s U.S. presidential election risks exacerbating some trade issues, Nomura economists wrote in a March 15 note.

“We believe that China’s export price deflation and overcapacity in a number of strategically important sectors could cause an escalation of trade tensions later this year, and perhaps beyond,” the officials added. Nomura economists.

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