Biden ‘s very large tariffs on a number of Chinese-made products were the big financial news this year. Those taxes appear to have acted as a motivator for a bunch of different nations — India, Brazil, Vietnam, Thailand, Mexico, the Union, etc. — to contemplate their own tariffs on China.
In other words, the majority of the world is now aware that the Second China Shock represents a threat to their own production sectors and is acting appropriately.
This is a great, momentous change. Some people thought I had overstated my claim a month and a half ago when I declared  that the global economic system that had predominated for the past two to three decades was now crumbling. Also move critics are now forced to acknowledge that we are entering a new era.
What the age of decoupling, opposition, and separation means for the earth, and how to regulate it properly, will be the subject of a huge amount of discussion and analysis in the years to come. But for the moment, I think that this intriguing problem deserves more thought: Why is China exporting so far goods?  ,
Most of the innovative trade barriers and business plans that we see popping up all over the world are either directly or indirectly China- related. China’s enormous and expanding trade surplus in created goods is directly addressed by the new tariffs:
There are various theories floating around about why Chinese goods like cars, chips, metal, solar panels, equipment, and other goods are flooded with international markets. The principles are n’t typically mutually exclusive — it could be some mixture of any or all of these. However, I believed it would be helpful to compile all the arguments into a single listing.
Theory 1: Economic resonant
In the 2000s, Chinese imports soared even as the Chinese market was even powering forward with rapid progress. The two exchanged hands. China’s export are booming even as the market is slowing down, which is unique in the 2020s. Official statistics say that the country is still growing at a fairly healthy rate of around 5 %, independent estimates put the number , closer to 1.5 %, or , even 0 %:
The cause of this sluggishness is a massive real property collapse. Real estate and related fields, such as finance and construction, now occupy China’s economy by combining their jobs program, individual savings accounts, and local government funding. In 2021 the economy started to experience a sharp decline that is , by no means over.
A significant amount of paper household wealth has been destroyed as a result of the slowdown, which has also led to a significant accumulation of essentially hidden bad debts within the banking system. This could lead to a rise in unemployment. In the past, China’s government responded to economic shocks by pumping up real estate, but that is n’t working now.
Therefore, it makes sense to induce another sector of the economy. The only way to keep young Chinese people employed is to manufacture a lot of stuff, especially since Xi Jinping does n’t seem to believe that consumption and service industries make a country strong.
Since real property began to fall, there has been a large surge in commercial lending in China. A large part of this has been used as a covert rescue for troubled industries, but a large part has been devoted to manufacturing:
Even if this expansion is n’t entirely effective from a supply-side or productivity standpoint, it might be worthwhile from a demand-side perspective, i .e., keeping Chinese people working so they do n’t become angry with the government.
So this is the first concept: Commercial growth as a replacement for the real estate growth.
Theory 2: Overcapacity/underconsumption
There is a minute, closely related concept that is typically referred to as “overcapacity.” In a nutshell, the plan is that China’s use has slowed down as a result of the real estate bust, but due to government grants and other factors, production has n’t slowed.
Therefore, Chinese manufacturers who are paid to make goods but are unable to do so directly will simply dump their goods on the global market and hope someone buys them. In his most recent conversation, National Economic Council Director Lael Brainard cited overcapacity as the main cause of the new taxes.
In part, China’s overcapacity is achieved by firms selling at or , below cost—enabled by policy decisions that badly depress capital, labor, and energy costs…By , undercutting world prices , for these goods, Chinese policy- powered overcapacity disrupts the required demand signal that would enable market- based investment to be practical.
It’s pretty difficult to tell whether this is actually taking place. In a statement titled” Overcapacity at the Gate,” The Rhodium Group claims that power usage at Chinese factories in subsidized business has significantly decreased. That suggests that Chinese businesses have built a bunch of companies they’re never using — quite common for a nation in a downturn.
However, if they are n’t using the factories, they ca n’t use them either to fulfill export orders, at least not yet. Therefore, it’s still unclear why they should start using the free manufacturer capacity rather than simply shutting it down.
One possible answer is” subsidies”. A Chinese automaker that should have gone bankrupt but was saved by federal aid appeared in a fantastic content by Yoko Kubota and Clarence Leong in the WSJ:
In 2019, a little-known Chinese carmaker named Zhido went bankrupt after Beijing cut subsidies for the small electric vehicles it produced, causing its sales to decline. Despite mounting mounting pressure on China to increase its production, the government continues to support Zhido and various manufacturers, encouraging unprofitable carmakers to maintain producing as officials attempt to bolster its position and expand China’s role in the global electric vehicle industry.  ,
This is not a common circumstance in China. A CSIS statement from 2022-2022 attempted to assess China’s full support to manufacturing companies, and the results were eye-poppingly large:
But a lot of overcapacity perhaps been driven by these incentives.
However, there is actually a second, much more innocuous, policy-relevant cause for overcapacity. A nation with a sizable local market may experience rapid consumption swings, making it difficult for producers to adjust their manufacturing plans to meet the changes in demand.
This can result in swings in imports and exports that look great from an international standpoint but are actually small compared to the local marketplace.
For instance, sales of Chinese domestic vehicles have recently decreased, likely as a result of the country’s sluggish economy. Even though auto exports account for only one-sixth of domestic consumption, this slowdown, coupled with roughly flat production, has led to a sizable percentage increase in exports:
Similar patterns can be found in industries like steel and bp, among others.
In fact, China accounts for far more than countries like Japan or Germany in terms of exports, fewer than China does. But because China is just so huge, what look like small swings to China are huge, disruptive swings for other countries around the world.
It’s difficult to tell in the short term whether overcapacity is being caused by subsidies or simply by companies adjusting quickly to declines in domestic demand. These are referred to as” structural” versus “temporary” overcapacity by The Rhodium Group.
But both versions manifest as a seemingly huge flood of cheap Chinese goods glutting world markets and threatening other countries ‘ manufacturing industries.
Third theory: Comparative advantage
Of course, China’s leaders are fiercely opposed to the notion that their nation is experiencing overcapacity. In , a speech on April 30, Chinese Foreign Ministry spokesman Lin Jian argued that China’s exports simply represent the country taking its natural place as the world’s manufacturer:
The” China overcapacity” claim may seem like an economic one, but in reality, it is based on false logic and ignores the fundamental idea of comparative advantage for more than 200 years in Western economics. All nations produce and export goods using their own comparative advantages, and this is the nature of international trade.
Lin is slightly misapplying the theory of comparative advantage here. I give you soybeans because I grow them, you give me cars because you’re good at making cars, and so on. Compare the advantages. It ca n’t explain why you give me cars in exchange for IOUs. It’s unbalanced. Trade surpluses and deficits require ideas that go beyond comparative advantage.
Lin’s underlying theory is that China’s top manufacturing enterprise is what it does best, and that other nations should do the same amount as China does. In the end, China may balance out trade, leaving other nations turning to farming and financial services, and so on.
This is n’t  , such , a far- fetched notion. The majority of the world’s manufactured goods were produced in Europe, the US, and a few countries in East Asia during the 20th century, making it possible for manufacturing to be very geographically concentrated. China’s vast internal market is a major asset that no other nation possesses ( except perhaps a future India ).
China has a vast number of consumers, who will tend to prefer Chinese products ( out of cultural proximity, even without taking nationalism into account ). Chinese manufacturers can reach a vast  scale, lowering their costs in comparison to those of businesses in other nations, even before they export anything.
Without having to send numerous parts and materials abroad, China also has access to a vast network of suppliers and manufacturers for every kind of manufacturing. And it tends to create , clustering effects, where all the EV makers or chipmakers want to go to China because that’s where the greatest numbers of their competitors are located, companies like to poach employees and appropriate ideas from their competitors.
Therefore, it’s possible that China’s enormous export surge is merely a transitory stage in a long-term shift in global manufacturing to its original location. Chinese economic planners may believe that the best way to promote their nation’s growth is to accelerate this unavoidable shift:
” China wants to be the Amazon of countries — Amazon is the everything store, China wants to be the ‘ make everything’ country”, said Damien Ma of US think tank Macropolo, who met senior policymakers in Beijing last year. The objective is to introduce a complete supply chain to China.
Of course, this theory has some flaws. Why would an inevitable transition need such massive subsidies? Why would comparative advantage show up as a long history of unbalanced trade? However, in my opinion, this theory is basically what many Chinese policymakers either hold or declare to be true in order to shield China from “overcapacity” accusations.
Theory 4: Forced deindustrialization
The” comparative advantage” theory has a more nuanced, darker version. In order to gain a military advantage over its geopolitical rivals, China is allegedly trying to intentionally devastate the country’s manufacturing sectors.
In any major protracted war, industrial capacity becomes extremely important. Manufacturing from civilians is repurposed for military purposes. The most well-known instance is when the US manufactured its rivals during World War 2. The US still has a law called the Defense Production Act that’s supposed to allow a repeat of the civilian- to- military factory conversion.
The better chance it has of outshining its rivals in a war the higher the percentage of global manufacturing China has, and the lower the percentage of its competitors.
China’s leaders have repeatedly said they want to do the same, and it might even do so if it takes over the US and its allies as the world’s dominant power without a fight. Currently, the blocs are about evenly matched:
The Second China Shock might significantly shift that balance in China’s favor.
Comparative advantage, on its own, probably wo n’t suffice to achieve that. Usually, when new countries added themselves to the roster of high- output, high- tech manufacturers, they did n’t cause wholesale deindustrialization in other countries. Although US manufacturing employment decreased significantly during the First China Shock, manufacturing output remained roughly unchanged.
Subventions could come in at that point. If Chinese government subsidies make it essentially impossible for any non- Chinese company to compete, it could artificially tip the balance of comparative advantage, to the point where the US, Europe, Japan, and Korea could be inefficiently bereft of manufacturing industries — at least as long as China keeps up the subsidies.
China might be able to achieve its military goals ( such as capturing Taiwan ) while maintaining its position as the world hegemon.
A situation like this is something that the US and others would naturally want to avoid, and I’m willing to wager that those responsible for creating the new tariffs had a lot in mind about the threat of forced deindustrialization.
Theory 5: Xi Jinping’s techno- historical theories
One possibility that we can never rule out is that China does things because it has an absolute ruler who makes those decisions. The Center for Strategic Translation’s director, Tanner Greer, holds the view that Xi Jinping and his hand-picked subordinates are obsessed with monopolizing a few high-tech sectors of the future.
Endorsed by President Xi Jinping and popular among Chinese policy elites, this set of ideas argues that there are hinge points to human history. Emerging technologies, according to the Chinese leadership, can overthrow an existing economic order in these flimsy situations.
The past has now returned. Humanity again finds itself on the precipice of scientific upheaval. The foundations of global economic growth are about to undergo a transformation, and Xi is determined to lead it.
Xi explained the rationale behind [all this ] to a gathering of Chinese scientists held in 2016… Xi argued that “historical experience shows that]these ] technological revolutions profoundly change the global development pattern”.
Some states” seize” this “rare opportunity.” Others do not. Those who recognize the revolution before them and actively take advantage of it “rapidly increase their economic strength, scientific and technological strength, and defense capabilities, thereby quickly enhancing their composite national strength”.
Although this may seem like a bunch of Marxist mumbo-jumbo, the national interest, and technology are not very different from how other nations view things.
For instance, if you read the White House’s report on” critical and emerging technologies,” the language is a little less millenarian, but the underlying premise is that if you want your country to be powerful, it’s good to monopolize strategic cutting-edge high-tech industries as much as you can.
As to what those key technologies are, neither the Chinese government nor the US government appears to be quite sure — instead they’re placing diversified bets across a number of industries, in case any of those turn out to be the key to the future. Greer’s essay:
When the Chinese government discusses the upcoming techno-scientific revolution, they only mention AI in the context of a long list of promising technologies. These include materials science, genetics and plant breeding, neuroscience, quantum computing, green energy, and aerospace engineering. None of these are privileged over the others in Xi’s rhetoric.
That’s a incredibly broad list. But maybe Xi and the Politburo think China needs to massively subsidize , all , of these things in order to maximize its chances of being a superpower in the world of tomorrow. That choice may have a bearing on the export boom.
Sixth Theory: War preparation
There is one last theory that is the darkest of all, which I only hear muttered in hawkish national security circles. This is the theory that China’s boom in manufacturing and subsidies is the start of war production.
This theory basically has two parts. First, as I mentioned, countries at war convert civilian production lines to military production. Therefore, it might be possible to build up civilian industries like steel and computer chips for military use. In The National Interest, Nathaniel Sher hypothesizes , something along these lines:
China’s slowdown masks a worrisome trend under the surface: Beijing is pouring investment into high- tech manufacturing at an accelerating pace…China’s new industrial policy could help it narrow the capabilities gap with the United States…Weakness in the property sector is freeing up resources—land, labor, capital, and intermediate inputs—to invest in dual- use sectors.
Particularly strong was growth in industries , including aviation, electronics, and communication equipment. The government intends to increase the output of” strategic emerging industries” as a share of GDP from 13 % to 17 % by the end of the year.
Historically, the United States ‘ dominant industrial base allowed it to play a pivotal role in great power wars…Today, the United States ‘ consumer and services- led economy is ill- suited to sustain a major war.
China, in contrast, now accounts for 31 % of global manufacturing, despite its industrial and capacity utilization levels are below potential. Continued investments in advanced manufacturing will only serve to strengthen China’s strategic position.
Second, any country at war is vulnerable to having its supply lines cut, so building up domestic manufacturing of critical components like chips is a way to insulate a country against sanctions and blockades. Under Xi Jinping, the main thrust of Chinese industrial policy has been to offshore entire supply chains, and the current big manufacturing push is , continuing that trend:
Perhaps the most illustrative of all the indicators of war preparation is Xi’s absolute prioritization of security over the economy. In the last 18 months alone, Xi has undertaken massive efforts to insulate the Chinese economy from potential external vulnerabilities, stressing self- reliance at the expense of growth.
This strategic shift is not just related to de-risking dynamics, perceived supply chain vulnerabilities, or trade wars. Xi appears to have taken the sanctions plan the West used against Russia in relation to Ukraine into account before launching long-lead protective measures to stow away pressure on the Chinese economy.
This is the most ominous theory of all. It suggests that China’s development of the biggest military production facility the world has ever known may have contributed to the export boom.
Which theory is therefore correct?
It’s important to reiterate that none of these theories are mutually exclusive. The leaders of China may have a tendency to align their goals with those of war production, industrial policy, forced deindustrialization of rivals, and recession-fighting.
And it’s possible that natural forces, such as China’s recession and a protracted shift in manufacturing to China, are assisting the government’s efforts.  , All of these theories could be true at once. Or perhaps just a small portion of them.
However, I believe presenting the options in this way as a helpful prelude to carefully weighing the potential benefits of tariffs and other protectionist measures.
This , article , was first published on Noah Smith’s Noahpinion , Substack and is republished with kind permission. Read the original and subscribe to here.