Fallacy of ‘China Shock 2.0’ – Opinion

The European Union”s threat of a trade war against China — harsher trade measures unless upcoming trade negotiations yield concrete results — builds on the fabricated foundation of a “China Shock 2.0”, supported by the EU’s roughly €1 billion-a-day ($1.16 billion a day) goods trade deficit with China.

“Shock 2.0” is so named because China’s integration into global trade after its accession to the WTO in 2001 was portrayed as one that triggered the first “China Shock”, when China became a major exporter riding on the back of low-value-added products and low labor costs.

“Shock 2.0”, however, manifests in exports of high-value-added and high-tech products such as electric vehicles, batteries and solar panels, which appear to upend the manufacturing base in Europe.

This theory blames China’s industrial policy, surmising that State aid makes Chinese products unfairly cheap for the European market, leading to what they refer to as “dumping” or excess capacity that is squeezing the global market.

This theory goes so far as to postulate that China is going to dominate global markets in practically all fields, and that China is a mercantilist state which is not interested in imports, only exports.

Let’s first get the facts straight. China is definitely interested in imports. In fact, the Chinese government is probably the only government in the entire world that actively promotes imports by going out of its way to help foreign countries and companies to export to China.

Every year, China holds the China International Import Expo, or CIIE, in Shanghai, the world’s first national-level expo dedicated to imports. As a matter of fact, contrary to the conventional wisdom in Europe, China’s imports have increased faster than exports in recent months. For example, in August, imports by China increased by 28.2 percent year-on-year, while its exports increased by 25 percent.

State aid by the Chinese government, if it really exists, resulting in dumping is another factual fallacy.

First, the subsidy’s legality under the WTO framework needs to be carefully examined.

The relevant framework outlaws direct government subsidies associated with production and exports; but doesn’t outright outlaw subsidies associated with initial R&D and industry infrastructural development in a nascent and emerging industry.

In 2011, the European Union itself was found by the WTO to have provided subsidies to Airbus, with the United States pegging the amount at more than $18 billion.

Second, alleged subsidy leading to dumping in the European markets borders on total absurdity as prices of Chinese-made cars sold in Europe are much higher than in China. Take Chery Automobile as an example, a highly internationalized company whose exports accounted for nearly 70 percent of its sales in the first half of 2026.

For some of Chery’s Jaecoo and Omoda cars and SUVs, prices in European markets are substantially higher than those of comparable models in China. If subsidies ever exist, it is actually the other way around, with European consumers subsidizing Chinese consumers.

Third, even if the Chinese government has played an instrumental role in initially cultivating the domestic EV market, the impact is still minimal in today’s production cost structure.

According to a study by Rhodium Group published in February, direct government grants to BYD contributed about $292 per vehicle to its cost advantage, roughly 1 percent of the sticker price of BYD’s Seal model in Europe. Geely’s corresponding cost advantage is even less, only $64 per vehicle.

My citing these numbers by no means implies endorsement of Rhodium, but goes to show that the European Union is barking up the wrong tree.

The real reasons behind China’s exports are better products, rapid innovation and strategic direction in the face of a profound technological revolution as far as the automobile industry is concerned.

The automobile industry is undergoing wholesale electrification. Not only is the market moving toward EVs, consumers are also embracing advanced infotainment features and autonomous driving capabilities, features in which European automakers are lagging far behind.

Excess capacity in China is often cited as a major driving force behind the trade imbalance between the EU and China. Nevertheless, the excess capacity issue should be understood in a global context. When the industry is undergoing an electrification revolution, of course some capacities will be in excess and some in great demand.

Actually, the real excess capacity is outdated and inefficient — capacity geared toward producing cars that consumers no longer want, such as internal combustion engine vehicles.

If politicians in Brussels are still disciples of the free market and free trade, what capacity is in excess and what is not should be determined by the market, should be voted on by consumers with their pocketbooks.

The author is a professor at the School of International Trade and Economics, University of International Business and Economics.

The views don’t necessarily reflect those of China Daily.

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