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Thirty years ago, ‘Made in China’ became synonymous around the world with everyday household items ranging from appliances to toys. As the FT’s three-part series on the “China shock 2.0” highlights, the brand is now increasingly associated with high-end industrial products such as electric vehicles, solar panels and batteries. With Beijing’s proven track record of improving its economic value chain – and that involves vertical integration – it would be bold to bet that Beijing’s industrial prowess will soon extend to next-generation technologies and even services. The rest of the world has yet to fully come to terms with the idea that China is no longer catching up on many fronts, but years ahead.
In the mid-1990s, China accounted for about 5 percent of global industrial production. It commands closer now 30 percent. This is supported by a long-term state-led industrial policy. The Chinese Communist Party’s approach relies on subsidies and hyper-competition in strategic sectors to create expertise across the supply chain. To illustrate, Chinese companies account for at least 70 percent of global production capacity for key green technologies.
The excess output that Beijing’s strategy has generated has been sold around the world, helped by an undervalued exchange rate. Insufficient domestic demand has only strengthened the country’s export-led growth model, with China’s trade surplus reaching a record $1.2 trillion last year.
Continued calls for China to rebalance its economy relative to domestic consumption and to address allegations of unfair trade practices are justified, not least because this will help Beijing strengthen its long-term growth trajectory. It would also give developing countries more room to grow. But especially in the West, policymakers have not helped themselves either. Industrial strategies lack China’s holistic, long-term approach. Red tape, high energy costs, a lack of key skills and slow infrastructure development have undermined business. Efforts to broaden trade ties have been moderate, limiting opportunities to build scale and economic resilience. US President Donald Trump’s embrace of tariffs has made matters worse.
For all countries, some diversification outside of China is necessary, especially to reduce the risk of Beijing using dependencies as leverage, or where its products raise national security concerns. This may require countries to acquire a strategic position in specific sectors such as energy, defense and critical resources. But with tight government budgets, ongoing concerns about the cost of living and the urgency to meet climate targets and boost growth, China’s cheap manufacturing and expertise cannot be sidelined now. Trying to replicate entire supply chains is time-consuming, costly and leads to waste – especially given China’s leading position in many sectors and raw materials.
One option that European countries are considering is to open the door to Chinese factories under sensible conditions, including knowledge transfer and local hiring. Where Chinese dumping or security risks are evident, rapid and coordinated countermeasures are needed. But policymakers must also develop industrial strategies to strengthen the private sector, investing in skills, lowering barriers to the internal market and strengthening free trade relations. The EU continues to miss an opportunity to achieve scale by failing to complete the internal market in key areas.
Improving competitiveness would help give more edge to national specialties where Beijing is lagging behind, and support companies to be agile and innovative more broadly. If countries focus too narrowly on responding to the latest Chinese shock, especially through protectionism, they can only sow the seeds for the next shock.
