Fresh from her trip to China, U.S. Treasury Secretary Yellen delivered a stern message: Washington won't tolerate a repeat of the early 2000s scenario where US industries were severely impacted by cheap Chinese imports.

Back then, the U.S. suffered a massive loss of around two million manufacturing jobs, a period dubbed the "China shock." At that time, China had just joined the WTO, accounting for 4.3% of global merchandise exports.

Fast forward more than 20 years, China's share of global merchandise exports has surged to over 14%. The impending "China shock 2.0" is bound to be broader and more challenging to handle.

During the pandemic, China, in a bid to preserve employment, offered tax cuts, fee reductions, and low-interest loans to the manufacturing sector. Now, it is gradually ramping up production capacity, sparking this seismic wave.

China Shock 2.0: The New Players in the Fray

Unlike before, this surge in excess capacity encompasses not just traditional industries but also what's known as the "new three": solar, electric vehicles, and lithium batteries, adding complexity to various countries' retaliatory measures.

Battlefield 1: Discounted Steel
Taiwanese factories: “Buy or perish”

According to data from Global Trade Alert, since January last year, China's major trading partners have initiated over 80 trade investigations into Chinese goods. Once dumping is confirmed, various countries will resort to trade protection measures.

Steel epitomizes China's weakening domestic demand.

In the past, China produced half of the world's steel, with 40% supplied to the local real estate industry. As China's property market took a nosedive last year, a wave of steel plant consolidations ensued, resulting in discounted steel exports overseas.

The China Iron and Steel Association reports that China's steel exports surged by 36% last year, marking the highest growth in eight years, but the average export price dropped by 30% compared to the previous year.

China determines the direction of the global steel market, and the World Steel Association predicts that China's steel demand will remain flat this year despite signs of recovery in the manufacturing sector. (Source: Getty Images)

According to OECD statistics, global excess steel capacity exceeds 550 million tons, with the majority coming from China, surpassing the combined output of India, the Americas, the EU, Japan, and Turkey.

Cheap steel has captured emerging markets. Exports to India, the UAE, Brazil, Vietnam, and Turkey increased by over 60% compared to the previous year.

Cheap steel has also flooded into Taiwan directly or indirectly through third-party channels.

"Other industry players buy a lot of materials from China, and I have no choice," said the owner of a steel mill. In the past year, the international steel market was disrupted by China, with price differentials reaching up to $60 per ton.

Especially for materials like screws and fasteners, whose raw material costs account for nearly 60%, they are heavily influenced by prices. Therefore, "the price difference from China can be more than 20% lower, and it's hard not to choose the cheaper option."

Kristy Chi, a senior industry analyst at Taiwan’s Metal Industries Research & Development Center, confirmed that wire traders have indeed been selling Chinese and Vietnamese steel over the past year. However, the more customized the product, the less likely it is to use Chinese materials, as their quality is questionable, and the after-sales service is inadequate.

"Reputable manufacturers wouldn't even consider it," she emphasized. Manufacturers that prioritize quality often would stick with China Steel Corporation (CSC)’s products , and customers wouldn't casually lower prices.

Liao Wei-hsun, chairman of Copa Flange Fasteners Corp., a supplier of fasteners to European automakers, said that automotive fasteners must undergo verification, and it's impossible to change materials arbitrarily. Everyone still prefers CSC. However, "for standard fasteners used in building materials, furniture, fitness equipment, and the like, it may be based on cost considerations to purchase materials from China or Vietnam."

Reframing the Competitive Landscape in Machinery and Car Industries

The stability of international steel prices in the future depends on whether China's "production control and output limitation" policy is implemented. Production control refers to keeping crude steel production no higher than the previous year's level.

However, this can only alleviate short-term pressure. The OECD Steel Committee estimates that global steel demand will only grow by 36 million tons annually, but by 2026, global new production capacity will reach 160 million tons, or 4.4 times the demand. The main reason is the investment of Chinese steel companies in Southeast Asia. Therefore, international steel prices may still be overshadowed by oversupply in the future.

This not only affects the raw material market, but also products made from cheap Chinese steel such as machinery and automobiles, significantly boosting price competitiveness. "This means that the surplus steel production capacity is 'moving upstream in the value chain'," analyzed the OECD Steel Committee.

Battlefield 2: Solar Panels So Cheap Europeans Use Them as Fences

Another heavily discounted product is solar modules.

The price of Chinese solar modules dropped by over 40% last year compared to the previous year, reaching as low as US$0.15 per watt, and the price is still dropping. They're so cheap that Europeans are not only installing them on rooftops but also using them as backyard fences.

China's cheap solar panels have become an unquenchable addiction to the energy transformation of the powers. (Source: Getty Images)

According to the IEA, this year's global solar panel production will be three times the current demand, mainly driven by China.

Solar energy, electric vehicles, and lithium batteries are China's proud "new three" in foreign trade, aiming to replace the "old three" of clothing, furniture, and household appliances. By exporting green transformation products, China hopes to mitigate the impact of a weak real estate market on the economy.

At the end of 2020, Chinese President Xi Jinping announced that the targets for wind and solar power generation by 2030 would double.

With support from local governments offering cheap land, low-interest loans from banks, and inexpensive coal-fired power, solar capacity boomed in 2023 and is not yet at its peak: China's module capacity this year will be three times that of 2021.

At this juncture, with the U.S. heavily subsidizing solar panel manufacturing and installation, Europe is striving to reduce carbon emissions and break away from energy crises and fossil fuel dependence by aggressively pursuing solar installation. Thus, the Western market is being overwhelmed by Chinese solar modules.

Over 90% of Europe's imported solar components come from China. Ironically, when the EU hinted at initiating a trade investigation into imported solar products and potentially imposing anti-dumping duties, the local industry disagreed.

The CEO of SolarPower Europe, Walburga Hemetsberger, publicly called for relief and resolution of inventory issues, arguing that previous trade barriers never brought solar manufacturing back but instead led to a decline in installations.

This is the struggle facing European countries: stuck between worrying about excessive reliance on China and wanting to continue enjoying cheap green energy, they find themselves in a dilemma.

Imports from Southeast Asia Still Tied to China

Not wanting to use Chinese products, while signing the legislation to reduce inflation, Biden also granted a two-year tariff exemption for solar modules imported from Southeast Asia, in exchange for time for U.S. manufacturers to establish a supply chain. As a result, local developers reaped the benefits of subsidies, with 80% of imported solar panels coming from Southeast Asia.

However, a U.S. Department of Commerce investigation found that five Chinese solar giants set up production bases in Southeast Asia, devouring billions of dollars in subsidies.

In the end, it's still back to relying on Chinese manufacturing.

"The cost advantage of China's upstream silicon material development is hard to beat," analyzed Norman Tsai, Chairman of INA Energy. The Wall Street Journal also noted that manufacturing solar panels in the U.S. is expensive and production volume is unstable.

Unlike Europe, the U.S. announced that starting from June this year, solar products exported from Southeast Asia would face punitive tariffs of up to 254% unless proven non-Chinese made.

The localization of U.S. solar panels remains uncertain. Tsai bluntly stated that the only possible contender against China is India. However, Chinese manufacturers have also set up factories in the U.S. and India, making it difficult for the U.S. to counter China.

Battlefield 3: Electric Cars for as Little as US$10,800

The most eye-catching of the new three is electric cars.

Five years ago, China's car exports were only a quarter of Japan's, but last year it became the largest car exporter; BYD, China's leader in new energy vehicles, has surpassed Tesla to become the world's largest new energy vehicle manufacturer. Electric vehicles are the fastest-growing export sector in China's multibillion-dollar-plus exports.

Emerging markets are most eager to embrace Chinese electric cars. 

At the beginning of this year, BYD introduced an electric car to Brazil for US$24,000, half the price of Tesla's Model 3 in the local market. BYD's latest two small hybrid cars cost only about US$10,800, shaking up the global automotive industry.

Worried about Chinese electric cars, various countries have implemented over 20 trade measures against importing Chinese electric cars.

In 2018, when the Trump administration launched the trade war with China, electric cars were among the first batch of tariff lists, with tariffs raised to 27.5%.

In February of this year, when BYD announced plans to build a plant in Mexico, a member of Congress immediately proposed raising tariffs to 125%.

In March, the White House instructed the U.S. Department of Commerce to investigate national security concerns related to connected vehicles made in China.

China's market share in electric cars in the EU was 8% last year and is expected to soar to 15% by 2025. The EU has also launched an investigation into whether the Chinese government's subsidies for low-priced cars violate regulations.

Compared to the solar industry where the tide has turned, electric cars are the battleground that Europe and the U.S. cannot afford to lose.

Suppliers Hedge Their Bets

President Biden is incentivizing localization of battery materials, components, and vehicle assembly through tax incentives, aiming to build a domestic electric vehicle supply chain.

On the other hand, the next step for electric vehicles is self-driving cars. Autonomous vehicles involve artificial intelligence, with one of the key elements being high-end chips. This is precisely what the U.S. is targeting in its chip war, aiming to control the chokepoint.

The rock-bottom prices of Chinese electric cars also worry suppliers. "Supply chains will undoubtedly be pushed to lower our prices," observed a supplier of automotive components with business in both China and the U.S. 

"Anyone doing business with them will suffer." Many Taiwanese suppliers in the automotive supply chain are hedging their bets by setting up facilities in China and the US.

The rules of the traditional trade war game are no longer sufficient to handle this wave of China Shock 2.0. Despite the long-term difficulty in determining winners and losers, in the short term, the world can't quit Chinese manufacturing just yet.

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Have you read?

• Are Chinese EV brands poised to conquer Europe?
• Thailand's electric shift: The rise of Chinese EVs threatening Japan's legacy 
• How Shein exports China’s “sinking market”

Uploaded by Ian Huang