Twenty-five years ago, low-cost Chinese goods flooded the U.S. market, contributing to the loss of 3 million factory jobs and upending U.S. policy. a phenomenon known as the “Chinese shock.”
Now, a second chinese shock is reverberating across Europe, Southeast Asia, Africa and Latin America, raising fears of further deindustrialization and political unrest. Last week, German Chancellor Friedrich Merz and French President Emmanuel Macron made a call for joint action to protect European industry against the rising wave of subsidized Chinese products.
The current Chinese export boom originated in Beijing’s response to the outbreak, several years ago, from a housing bubble that wiped out $10 trillion in household wealth, according to KKR, a New York-based investment firm. Starting in 2020, Chinese authorities invested in additional production capacity to counteract the slump in the real estate market and develop advanced industries such as electric vehicles, lithium-ion batteries, and solar energy.
However, all those extra factories produce more cars, flat screens and machinery than Chinese consumers can afford. To keep millions of workers employed, Chinese manufacturers look for suppliers abroad. Exports in the first half of the year increased 18% compared to the same period last year, according to the General Administration of Customs in Beijing.
“There has been a huge increase in production capacity in the last five or six years. And there has not been significant growth in domestic demand to absorb it,” said Julian Evans-Pritchard, head of China economics at Capital Economics in Singapore.
China’s dominance of global markets for a growing number of manufactured goods has enormous social and political repercussions.
The first “China shock,” which emerged after the country’s entry into the World Trade Organization in 2001, led to the loss of 2.4 million U.S. manufacturing jobs over the next decade, according to economists led by MIT’s David Autor. Consumers benefited as cheap Chinese goods contained inflation. However, voter discontent in America’s industrial cities helped Donald Trump win the White House in 2016.
The new “Chinese shock” is also characterized by cheap products that quickly replace domestic alternatives. But this time, the exports are high-tech items such as electric vehicles and semiconductors, not clothing, footwear or passenger car tires. And its most severe impact is being felt outside the United States, in places like Europe, where economic discontent is already latent.
“The United States stands out as a clear exception to this global pattern,” says an analysis by five economists of the Federal Reserve system published this spring.
In fact, the United States, which suffered the impact of the first “China shock”, has so far managed to mitigate the effect of the latest wave of exports, mainly thanks to Trump’s controversial tariffs.
According to Chinese customs data, Chinese exports to the United States during the first half of this year are broadly stable compared with the same period in 2025. (U.S. figures, which often differ from official Chinese data, show a 30% drop in purchases from China during the first five months of the year.)
Even so, Many Chinese companies manage to avoid US tariffs by sending their products destined for the US through countries such as Vietnam or Mexico, where they undergo final processing that hides their country of origin. U.S. imports from Vietnam, Mexico, Thailand and Cambodia have increased significantly this year.
LC Sign, a custom sign maker in Guangzhou, China, ships to North America, Europe and Australia, according to Tony Zhu, the company’s marketing director. The company has expanded its workforce to about 350 employees, up from 300 the previous year.
LC Sign’s U.S. sales fell last year during the most intense phase of the U.S.-China trade war. But after the agreement reached between Trump and Chinese President Xi Jinping, which reduced trade barriers, activity improved.
“Once the tariff situation stabilized, our presence returned to its previous levels,” Zhu stated. “The agreement that our government reached with the American government on tariffs was a great help to us.”
Exporting is facilitated by a Chinese currency that, according to the International Monetary Fund, could be undervalued by up to 21%, effectively putting Chinese products on sale to foreign buyers.
Unlike the early 2000s, when increased Chinese exports were matched by increased imports, in recent years China has tried to reduce its dependence on foreigners, even when it relies on other nations to keep its manufacturers in business. Last year, for example, imports stagnated while exports increased, according to Chinese customs data.
The Chinese economy, much larger today, is increasing its share of global merchandise trade from an already dominant position. In 2000, China accounted for around 4% of global trade in goods. Today, it represents 16%, according to an analysis by the Federal Reserve.
Treasury Secretary Scott Bessent has highlighted chronic imbalances in the global economy, urging Chinese officials to reorient their investments from industrial policy to supporting household consumption. The administration is expected to announce additional tariffs this month, designed to combat the “structural overcapacity” of China and other manufacturing nations.
“China’s current economic model is based on exporting to get out of its economic problems. It is an unsustainable model that not only harms China, but the entire world. China needs to change,” Bessent said last year.
Her arguments echo those of her predecessor. In 2024, then-Treasury Secretary Janet L. Yellen traveled to Beijing to warn Chinese officials that “China is now simply too big for the rest of the world to absorb this enormous capacity.” A month later, President Joe Biden imposed 100% tariffs on Chinese electric vehicles to protect American automakers from low-cost competition.
China’s export dominance reflects both economic weakness and manufacturing strength. Economic growth in the second quarter slowed to an annual rate of 4.3%, compared to 5% in the first quarter, the National Statistics Office reported on Wednesday, the worst figure in more than three years.
Economists point out that Chinese government data is often distorted for political reasons, So the new figures probably overestimate the health of the economy.
“The Chinese economy is in a very delicate situation. I’m not saying it’s a total disaster or the end of the world is coming, but I am saying there is more weakness than we have seen in recent years,” said Shehzad Qazi, chief operating officer of China Beige Book International, which collects private sector data from Chinese companies.
The explosion of the Chinese real estate market continues to cast a shadow on economic growth. According to the Center for China Economy and Institutions at Stanford University, The real estate sector represents almost 70% of the wealth of Chinese households, double that of the United States. With housing prices still declining six years after the bubble burst, many Chinese consumers remain reluctant to spend.
Xi has called for policies that encourage greater consumer spending. However, to date, government policy continues to prioritize the development of globally competitive technology industries. ANDNew proposals may emerge from this month’s meeting of the Chinese Communist Party’s Politburo, the highest decision-making body.
“They know exactly what needs to be done and they want to do it, but they lack a sense of urgency and determination,” said Cornell University economist Eswar Prasad, former director of the China unit of the International Monetary Fund.
Coordinated pressure from China’s trading partners, including the United States, could help Chinese authorities modify their economic policies. Instead, Trump is preparing to host Xi Jinping in Washington on a state visit in September, while countries such as the United Kingdom and Canada have separately struck deals to maintain access to the Chinese market in exchange for allowing a limited increase in Chinese exports.
Europe, for its part, is struggling to cope with the Chinese rise. Macron has made rebalancing the global economy a priority this year for the French G7 presidency. Merz, the German leader, has been reluctant to back protectionist measures but has become more receptive to the idea amid Germany’s continued industrial stagnation.
The European Union plans this month to reduce its tariff-free quota for steel imports. Member States are also considering a wider range of industrial subsidies and local content requirements to promote European manufacturing. The emergency measures, backed by Macron and Merz, will be announced in September.
Germany, the continent’s traditional manufacturing power, is in the crosshairs of the Chinese export offensive.
Berlin has always been reluctant to support trade measures against China, for fear of losing access to the Chinese market. In 2024, when the EU imposed tariffs on Chinese electric vehicles, Merz’s predecessor opposed the measure.
EU leaders hoped the tariffs would reduce the number of cars coming from China. However, Chinese exports soared, as Chinese automakers opted for hybrid models.
According to the European Automobile Manufacturers Association, more than one million Chinese-made cars were imported into the EU last year. Major German companies have lost ground in Germany to their Chinese rivals, while losing market share in China. According to German press reports, Volkswagen plans to close four car plants in Germany and cut 100,000 jobs as part of its restructuring to face Chinese competition.
Chinese automakers can already produce about twice as many cars a year as they sell in China and are expanding production capacity for an additional 5 million vehicles, according to economist Brad Setser of the Council on Foreign Relations. Faced with saturation of the Chinese market, Chinese automakers are accelerating their expansion into overseas markets.
“There is no money to be made, real money to be made, selling in the extremely competitive, oversupplied Chinese market,” Setser said.