WASHINGTON — The U.S. has been fighting an economic war with China for the last eight years, placing massive levies on goods coming from China before they enter the U.S.
But the campaign has not hurt China’s industrial power.
The world’s second largest economy is shipping more goods than ever before. It’s simply moving them from the U.S. tariff wall to more open markets in Europe and other parts of Asia.
The change in Chinese trade risks setting up a European version of the China Shock that killed out hundreds of thousands of factory jobs in the American heartland in the 2000s, and helped fuel the political upheaval that put Donald Trump in the White House twice.
Despite U.S. sanctions, China posted a record worldwide trade surplus last year – a staggering $1.2 trillion.
Early this year, French President Emmanuel Macron said Chinese exports are “literally killing a large part of the European industry” and conceded that Europe was “slow to see that.”
The Europeans can see well enough now. China's trade policies will be high on the agenda when leaders of the G7 rich democracies meet in Évian-les-Bains, France, this week. French officials hinted in briefings this week that they hope to come out of the summit with a plan for countering the China threat.
One option is that the European Union and others will erect a higher tariff wall of their own against Chinese imports. The EU applies very low rates to China under World Trade Organization standards today — although it levies higher taxes on specific Chinese goods (up to 35% on electric automobiles, for instance).
“China’s export surge, if left unchecked by its leaders, will spark a wave of protectionism against Chinese imports throughout the world,’’ said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist of the International Monetary Fund. “Further, if the current disruptions related to the Iran war continue and lead to a sharper global slowdown.”
Economist Taylor Wang at HSBC warned last month that a China-EU trade battle may endanger Chinese exports, as Europe accounted for a major share of China’s exports of electric vehicles, solar panels and lithium-ion batteries.
Europeans also aim to persuade Trump to stop singling out U.S. allies like the European Union and Canada with punishing tariffs and to join forces with them to combat China.
China Shock 2.0 Is Different -- and More Disruptive The first China Shock began in 2001 when the Chinese entered the World Trade Organization and acquired low-tariff access to the rich markets of the United States and Europe. Many factories in the United States could not compete with inexpensive Chinese textiles, furniture, electronics and other manufactured goods.
Economists David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich and Gordon Hanson, now at Harvard, found that the competition from China had cost America 2.4m jobs.
It’s unfolding in a different way and it’s been dubbed China Shock 2.0.
The first time around China was still rising as a key role in global business. Today it controls world trade and production.
In 2000, China accounted for only 4% of global goods exports. It now comprises 16% – the most in the world — making Beijing’s trade policy even more crucial.
And China has upped its game, exporting sophisticated products like EVs and batteries, advanced machinery, software, scientific instruments and putting it in direct competition with the richest countries in the world. For example, Chinese exports now compete with 57.9% of the exports of the 21 European nations that use the euro currency, up from 46% in 2000, according to a paper last month by experts at the Federal Reserve and the Federal Reserve Bank of St. Louis.
“The second China shock is that its companies are running the board on manufacturing exports, from low tech, low wage to high tech high value-added industries,” said Cornell University economist Eswar Prasad. “This is directly hitting advanced economies where it hurts the most now” – high tech businesses like EVs and high-end robotics that many countries “had been counting on for a manufacturing revival.
China exports hit Germany badly German companies used to make a fortune exporting to China, but now the tables have turned: China sells more things to Germany than it buys. And German industries are having a hard time competing with Chinese rivals in industrial gear, construction equipment, autos and chemicals – all pillars of Germany's export-driven economy.
Germany’s economy has been flat-lining, declining in 2023 and 2024 and gaining just 0.2% last year, partly due to competition from China.
The US is less susceptible than it was in the 2000s. Trump’s tariffs have kept many Chinese products out Exports of Chinese commodities to the United States fell 37% from January to April this year compared with the same period in 2025, the U.S. Commerce Department said.
The U.S. is also in a better economic spot, since it produces its own energy, unlike the EU and Japan, and is seeing a surge in artificial intelligence productivity and investment.
And China is booming with demand for its low-cost EVs and AI investment, leading to sales of Chinese electrical components and machinery for data centers despite Trump’s tariffs and reduced sales to the U.S.
China’s exports to the 27-nation EU were up 16.4% in January-May from a year earlier. That means France’s trade imbalance with China, according to Beijing’s customs figures, increased to $5.3 billion from $3.3 billion a year earlier.
Chinese policies exacerbate the problem The economists claim China’s policies lead to overproduction in industry and under-consumption by consumers. For example, Chinese state banks provide little interest to savers but lend cheaply to government-owned manufacturers. A weak social safety net means Chinese households save, rather than spend, to develop a financial cushion against old age and medical difficulties.
The rules are partially aimed at keeping industries active and workers employed, Obstfeld added. The conclusion is that there is surplus local supply of produced products and these ought to be sent abroad,’’ he added. Cheap Chinese goods are flooding world markets and threaten to drive European and other industries out of business.
Beijing has also urged enterprises to fight hard among themselves at home. “The rest of the world is ill prepared to compete with these apex predators,’’ Autor and Hanson wrote in a New York Times column last year.
China has frequently pledged to curb overproduction and boost consumer spending — as the United States and others have demanded for decades. That would reduce reliance on exports for its economy and boost the lot of its consumers. It would also provide an expanded market for U.S. and European to sell into. “This has long been said to be a goal of the leadership,” said Obstfeld. “But they have been slow to act like they mean it.”
“Beijing has been counting on the rest of the world to fix its overcapacity problem,” said Wendy Cutler, a former U.S. trade negotiator who is now senior vice president at the Asia Society Policy Institute. “But this unsustainable situation could change soon if the EU and others follow the U.S. lead and take steps to halt Chinese imports.
