Opinion | What Is China Shock 2.0?

You’ve been arguing that the world economy is going through a China shock 2.0. So for people not familiar with this, what is China shock 2.0? China could supply out of capacity that it has already built the entire European auto market, all of it: 10 million cars. No problem. That’s just giant compared to the global market. China is supplying the entire world with batteries. China is now the leading exporter of tunnel boring machines. You name the category of machinery. China’s exports are growing. It’s no longer just consumer electronics. Imports stop growing. I think one of the key factors around the second China shock. Normally, you would say imports would grow with domestic demand. Chinese imports basically aren’t growing. And in key, China is selling ever more to the world. And then Chinese export buying more from the world. Exactly, and Chinese exports, particularly in the years right after the pandemic, after the currencies depreciated, start growing at two times or three times the pace of world trade. So China’s imports of autos used to be about a million cars a year. That’s now down. It’s now under half a million cars a year. And over this same period, China’s exports of cars have gone from a little under a million to now, 10 million in the space of five years. So one argument here is simply China is winning. They’re outcompeting the world and that there’s no problem here. It would be great to have cheap Chinese electric vehicles. It’s good for the world and the climate transition to have cheap Chinese solar panels. How do you take that argument? I think that misses a few things. One, it misses the shock that happens to our economies. If traditional but still kind of cutting edge sectors disappear. If an industry suddenly goes away, you have all the China shock 1.0-type effects. Communities that grew up around building cars will just kind of disappear. And then I think there’s a sense that people have discovered that supply chain dependence can be weaponized. China dominates magnets, rare earths. If you want those magnets, you want those rare earths, You better not try China. You better not. You better say nice things about China. You better not. You better not do what Japan did and say you’re going to come to Taiwan’s defense if something were to happen. You kind of need to respect China if you want access to their supply chain. That’s the argument that they are making. That kind of dependence scares people.