HomeTop StoriesThe world has been scarred by China shock 1.0. They don't...

The world has been scarred by China shock 1.0. They don’t intend for 2.0 to happen that easily.

  • China is focusing on new growth drivers in solar cells, electric vehicles and lithium-ion batteries.

  • This could trigger a ‘China shock 2.0’ that will impact other economies around the world.

  • The US, EU and other countries are devising strategies to counter China’s emerging dominance in these sectors.

China’s economy is undergoing a painful transition as Beijing tries to steer it out of a post-COVID and real estate debt crisis.

The government of Chinese leader Xi Jinping is in favor of what it calls the “new three” industries of solar cells, electric vehicles and lithium-ion batteries to stimulate the economy.

It already produces and exports these goods aggressively.

Chinese manufacturers in particular are pumping so many solar panels onto the market that the resulting global glut and price crash is driving people to line their garden fences with the once prized product.

This is just one of the sectors the world is preparing for in the next phase of the ‘China shock’.

What Happened During China Shock 1.0?

“China shock” was 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 its economic reforms in 1978 when it opened up its economy and allowed more private enterprise.

The country’s growth was breakneck; GDP has grown more than 80 times since then.

That growth was driven by rapid industrialization, which put China in the position of the world’s factory. Its vast manufacturing sector produced millions of products that it exported at low costs.

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The world welcomed China into its fold, ushering in an era of globalization that benefited companies from the US and elsewhere. At the time, policymakers believed that the East Asian giant would become more economically and politically open as a result of this integration.

Consumers also benefited from low inflation.

However, this trend came at a huge cost to communities in the US and elsewhere that relied on the production. Large parts of the workers lost their jobs to China.

This is the ‘China shock’.

How Beijing could trigger a China Shock 2.0

Now China is focusing on three new strategic industries that the rest of the world is also looking at.

This time, however, Western countries are not letting Beijing have its way so easily – especially as China aims to develop its own supply chain ecosystem in these areas.

“Advanced economies are facing the combined impact of China’s moderating medium-term GDP growth on global demand and competition from China’s new wave of industrialization,” Rajiv Biswas, an international economist and author of ‘Asian Megatrends’, told Business Insider. .

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

“As a result, the industrial economies of OECD countries face new economic challenges from China’s strategic competition in these key growth industries,” Biswas said.

This competition is now even fiercer due to deflation in China – which has become the only major economy in the world to experience negative consumer prices.

Meanwhile, China’s slowing economic growth also means the country isn’t buying as much from other countries, increasing trade tensions.

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

What is the US and the rest of the world doing about China Shock 2.0?

The world will not be trampled this time by China’s emerging dominance in the new industries.

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

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

The US is taking steps to boost chip production at home. The CHIPS Act provides $52 billion in subsidies for manufacturing, research and workforce development. The US Inflation Reduction Act also encourages investments 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 of critical minerals.

Meanwhile, USA Treasury Secretary Janet Yellen is in China to meet with top Chinese officials. The Treasury Department said in a press release announcing her visit that she will “pressure Chinese colleagues on unfair trade practices and highlight the global economic impact of China’s industrial overcapacity.”

At a Suniva solar cell factory in Georgia on March 27 Yellen said she was “concerned about the global spillover effects of the excess capacity we see in China” that have now hit new energy industries such as solar, electric vehicles and lithium-ion batteries.

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

In October, the European Commission launched an investigation into whether electric vehicle imports from China have benefited from illegal subsidies that in turn threaten to harm EV manufacturers in the EU. If this turns out to be true, the EU could impose tariffs on these imports. The EU investigation is still ongoing.

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The EU has also introduced the European Chips Act to boost domestic chip production.

After all, once bitten, twice shy.

“People like me grew up with the idea that if people send you cheap goods, you should send a thank you note. That’s what standard economics basically says,” Yellen told the Journal in an interview published Wednesday. “I would never again say, ‘Send a thank-you note.'”

What is China’s response to the West’s moves?

China sees the US response as an attempt to limit its growth.

“The US side has taken a series of measures to suppress Chinese trade and technological development,” Wang Wenbin, a spokesman for the Chinese Foreign Ministry, said at a regular news conference on Wednesday.

“This is not ‘reducing risk’, but 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 the “international division of labor and market demand” thanks to the global energy transition to more sustainable energy sources.

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

Last year, for the first time ever, China exported more goods to Southeast Asia than to the US, according to a Bloomberg analysis of Chinese customs data published in January – signaling a change in global trade flows amid the changing geopolitical landscape.

This year’s U.S. presidential election campaign season is likely to reignite a number of trade issues, Nomura economists wrote in a March 15 note.

“We believe deflation in Chinese export prices and overcapacity in some strategically important sectors could lead to an escalation of trade tensions later this year, and possibly beyond,” the Nomura economists said.

Read the original article on Business Insider

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