China Shock 2.0 evokes fears of an EU ‘rust belt’

Major global economies face an existential crisis, sparked by China Shock 2.0. Earlier this week, the world’s second-largest economy reported its “export tsunami” surged more than 19% in May compared to the same period last year. The trade surplus topped US$105 billion.

Fueled by heavy state subsidies and massive industrial overcapacity amid dwindling domestic demand, the numbers are eye-popping. They also threaten to decimate the manufacturing landscape across the European Union, evoking images of the American rust belt.

Germany has been particularly pulverized. “Layoffs in the auto industry have been more pronounced than during the Covid-19 pandemic or the global financial crisis,” Noah Barkin, a senior advisor with the Rhodium Group think tank, pointed out.

“Germany is losing roughly 10,000 manufacturing jobs per month,” he said on his Substack site, as Beijing targets the automotive, mechanical engineering, and chemicals sectors.

It also exploits the full range of authoritarian state capitalism.

Global Public Policy Institute

Global dominance:

• Yet China’s moves are calculated, pre-planned, and “firmly geared toward global dominance,” according to the Global Public Policy Institute.
• “It also exploits the full range of authoritarian state capitalism, abusing [its] membership of the World Trade Organization,” the Berlin-based think tank stressed.

Delve deeper: Accession to the WTO opened the floodgates. But the original China Shock was largely a “Made-in-America phenomenon” and “one led by US multinationals.” In the process, they trained generations of Chinese engineers.

Between the lines: They also laid the groundwork for what Beijing is calling the “industrial policy of everything.” It will cement China’s role as the world’s manufacturing superpower.

Big picture: “[The Communist Party’s] industrial strategy is ushering in a new phase, characterized by accelerating trade dominance,” the Rhodium Group warned in an in-depth research report released last month.

Bottom line: [It will involve] deepening foreign dependencies on Chinese supply chains and the rapid global expansion of Chinese firms. [This will] entrench its dominant position in global value chains and counter foreign diversification strategies,” the study stated.

China Factor comment: Still, Germany and the rest of the EU are unlikely to fold under Beijing pressure after rolling out the “Made in Europe” blueprint. It will allow companies to access public funds in sectors such as advanced tech. But will it be too little, too late.