A ‘Second China Shock:’ What it is and its Implications for the United States
Shipping containers in transit at a Chinese port.
Credit: FMT
After decades of seemingly unstoppable growth, the Chinese economy has stalled—it has been bogged down by a housing crisis, youth unemployment, and an aging population. Without a clear-cut remedy to the multitude of ills that beset the country, Chinese leaders are turning to a time-tested strategy to jolt its sluggish economy: doubling down on exports.
This could spell big trouble for the United States. As the U.S. struggles with political polarization—fueled by a rise in right-wing populism which sent Donald Trump to the White House in 2016 and 2024—a Second China Shock could further fan the flames of working-class strife and entrench a shift in political ideology. Furthermore, the global order could be reshaped in the coming decades, depending on how each country responds to this new but familiar trading paradigm.
How did we get here?
For decades, China was seen by many analysts as a poor and autocratic backwater. In 1960, Chinese GDP per capita was just $238.21. However, conditions drastically changed after 2000, when President Bill Clinton signed legislation granting Permanent Normal Trading Relations with China, paving the way for China to join the World Trade Organization (WTO). China’s accession to the WTO in 2001 meant that tariff barriers toward it were lowered, incentivizing Chinese leaders to increase their export volumes. As a result, China began selectively subsidizing its manufacturing industries, pumping out products at an astronomical rate in a concerted effort to create an export-led economic boom.
This marked the beginning of an onslaught of cheap Chinese goods—think of all the “Made in China” labels slapped on products in stores—that have since flooded foreign markets. The export surge, fueled by China’s abundance of cheap labor and capital that made the country ripe for mass production, worked. The strategic trading regime sparked a decades-long economic growth that propelled the country to emerging superpower status.
Chinese exports as a percentage of GDP. Note that exports began surging around 2001 and peaked around 2007.
Credit: World Bank
One benefit of this surge was that prices dropped precipitously for U.S. consumers. Domestic markets suddenly had access to a copious amount of cheap goods from China. Since the agreements opened up bilateral trade, U.S.-based corporations also benefited as they were able to penetrate the massive market of the more than 1.4 billion consumers who live in China. These new trading relations boosted overall economic performance for both China and the U.S., generating unprecedented prosperity in both countries.
However, these economic gains were not distributed equally, especially in the U.S.; domestic suppliers bore the brunt of the competition from imports. According to a prominent academic paper published by the trio of economists who first coined the term “China Shock,” the U.S. lost 2 million manufacturing jobs between 1999 and 2011 due to competition from Chinese firms. This job loss had severe knock-on effects on other sectors of the economy—such as the service industry—leading to the “hollowing out” of manufacturing-centric communities like Michigan, Pennsylvania, and Ohio. These states are now referred to as the “Rust Belt,” alluding to the shuttering of the many manufacturing firms that once operated there.
A major side effect of this inequity between the effects of the trade policy was a splintering of U.S. politics. Many of those hurt by the China Shock embraced a resentful attitude to what they perceived as the “establishment,” feeling that the wealthy elite and the ruling class were ignorant to—and even conspiring against—their wellbeing by adopting free trade policies that threatened their livelihood. Some then began embracing the protectionist rhetoric of populist politicians like Donald Trump, which fueled the massive popular unrest, surges of nativism and ethno-nationalism, and political polarization that has defined American politics for the past three electoral cycles.
The energy from this populist movement eventually seeped into the political mainstream and has become a tenet of modern American political discourse. Donald Trump, during his first term, instated a litany of tariffs on China as part of the raft of protectionist policies he pledged during his campaign. He insisted that stifling China’s exports would restore the prosperity of those in the Rust Belt and other bygone industrial centers while curbing China’s rapid growth, which seemed on track to upset the world order.
However, those tariffs, which were intended to champion industrial revitalization, instead sparked an intense trade war between the two nations. While Trump had intended for the cost of the tariffs to fall on Chinese suppliers, the incidence of those tariffs were actually paid for by American consumers. Some estimates show that the Trump tariffs have cost American families up to $1,000 a year.
Interestingly, the Biden Administration kept most of the tariffs in place, making the China Shock a surprising point of bipartisan collaboration. The rare convergence of ideology could be a sign of the urgency of the challenge, as well as a reflection of the fear that administrations who adopt a softer policy toward China stand to lose political support.
What is China Doing Now?
Once understood as a one-off occurrence, scholars and experts are warning of the threat of a Second China Shock. The strategy is Beijing’s attempt to claw its way out of the economic hole it has found itself in, which was bored by a myriad of market failures and structural imbalances. For instance, in January 2024, the Chinese real estate giant Evergrande was liquidated after it had failed to restructure the $300 billion in debt it owed investors. This sent China’s real estate sector tumbling, causing property prices to plummet and distorting the housing market drastically, sending shockwaves throughout the economy.
On top of the housing sector crisis, China faces a multitude of demographic problems, like youth unemployment. Recent data released by the Chinese National Bureau of Statistics showed that 18.8% of people aged 16-24 were jobless. College degree inflation caused by policies expanding college enrollment, coupled with restrictive hiring policies and an imbalanced labor market have contributed to this ballooning youth unemployment rate.
Another demographic problem ailing the country is its rapidly aging population. According to the World Health Organization, nearly 28% of the Chinese population will be over 60 years old by the year 2040. The older generation will soon be exiting the workforce, which will pose a major challenge on the durability of pension programs. With more and more people moving up along the age pyramid, Beijing is on a tight timeline to course-correct before a major demographic meltdown.
All of these challenges have caused deep anxiety within Beijing. Chinese leaders fear losing their grip on power as their political legitimacy is undermined by the effects of these pressing economic challenges. Thus, they have decided to revisit their playbook from the early 2000s, attempting to subsidize strategic industries like battery electric vehicles, solar panels, and wind energy, which they believe will bolster their presence on the international stage and revitalize the economy by artificially driving another export surge.
Part of China’s strategy has been to nurture homegrown industries into maturity, then unleashing them into the global market. For example, electric vehicle (EV) brands like BYD, Nio, and Xpeng have been specifically incubated by Beijing to become national champions. They have established a strong presence within the Chinese domestic market on the back of state subsidies, helping China leapfrog other nations in their EV transition. Now, these brands, with the continued support of government subsidies, are turning towards global markets and attempting to establish their presence abroad.
A similar story is unfolding with the solar and wind industries; China has taken the global lead as it is on track to reaching 1,200 gigawatts (GW) of wind and solar capacity, which is far ahead of the U.S.’s 40 GW. With a strong domestic presence established, Chinese firms like Jinko Solar, Trina Solar, and JA Solar are now pushing their products abroad. Some reports estimate that exports from these and other Chinese solar companies account for more than $30 billion of China’s total trade surplus.
With the global push toward a green energy transition, Beijing is betting that demand for the cheap, green energy goods will continue to feed the success of its green industries. It is hoping that these strategic subsidies will put the country back on track to hit the national GDP growth target of 5%. Time will tell if that will be the case.
What’s in Store for the U.S.?
Irrespective of whether China is able to restart its growth engine, its state-sponsored export surge is bound to have monumental consequences on the U.S. The consequences of the first China Shock will surely repeat: reduced prices for consumers at the cost of import-competing firms suffering. Only now, it will be the U.S.’s green energy industries that are hurt. This could mean another round of concentrated job loss and economic decline—this time in places where nascent green industries are popping up, such as in Sun Belt states like Arizona and Georgia. If the rightward lurch in those states during the 2024 U.S. Elections came as a surprise, a Second China Shock could embed those ideological shifts indefinitely and transform so-called ‘swing states’ into Republican strongholds.
A Second China Shock will also bring about new challenges. At a time of heightened tensions prompting policymakers in Washington to call for the “decoupling” of the U.S. and Chinese economies, a Second China Shock could force the two countries to become more economically intertwined than ever. Market pressures could force the establishment of new trade dependencies that could be politically detrimental.
Should Washington decide that it wishes to prioritize the wellbeing of its consumer base, it will inevitably need to tap into the abundance of Chinese goods. A Pew Research Center survey recently found that the most pressing issue for American voters is the economy. Despite data showing that the economy is strong, most Americans still believe that inflation and the cost of living are too high. Any policy that results in lower prices for consumers will certainly be welcomed, even if it might facilitate China’s growth.
Should Washington decide to aggressively pursue its climate goals, it will also need to purchase from China. The attractive prices of Chinese green goods means that it makes little economic sense not to purchase them. In fact, experts have noted that the cheapest and fastest way for countries like the U.S. to meet its climate goals is simply to purchase from China’s “green glut.”
These decisions will come with a geopolitical cost. The COVID pandemic has taught us that overreliance on a single country or single producer for a vital good, such as semiconductors, can be detrimental to the global supply chain in times of emergency. Additionally, an uncertain Sino-American relationship that has been made even more precarious with the election of Donald Trump means that any sort of reliance on Chinese goods in strategic sectors will carry a great risk; Beijing can leverage U.S. dependence on China as a political tool to strong-arm Washington.
Beyond domestic affairs and bilateral relations with China, the U.S.-led global order also hangs in the balance. During his campaign, Trump promised to again slap across-the-board tariffs on China. If these tariffs are instated, which is likely given Trump’s record during his first term in office, the cost will be paid for by American consumers, not Chinese exporters. Not only will Americans face higher prices, but potential economic gains will be left on the table.
China will likely not stand idle in the face of these tariffs, given their record of retaliation in the past. Beijing will most likely counter with their own tariffs on American exporters, creating even more economic loss for the U.S. A Second China Shock may not only perpetuate China’s growth, but also provoke Americans into adopting policies that erode the U.S.’s global leadership.
The Chinese are keenly aware of this; Xi Jinping has laid out what he calls “Great Changes Unseen in a Century,” which refers to the Chinese perception that the U.S. is in decline due to the rise of right-wing populism and the subsequent isolationism that has followed. Beijing is looking to capitalize on this perceived weakness and displace the U.S. as the leading world power. With many points of tension present between the two nations, any shift in global order could disrupt international norms and lead to great instability around the world.
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What Now?
The U.S. is between a rock and a hard place. The potential for a Second China Shock puts the pressing objectives of consumer welfare, climate action, and maintaining American leadership in tension with the need for political stability and economic independence. With a president-elect who has based a sizable portion of his platform around being hawkish toward China, the latter will take priority. Thus, hedging against China will be favored at all costs, much to the ire of Beijing.
There are ways around this suboptimal outcome. For example, instead of fencing off the U.S. market with across-the-board tariffs, Washington could consider brokering a deal that imposes strategic tariffs only on important sectors that could undermine U.S. leadership, much like ones the Biden Administration has implemented. In return, concessions could be negotiated that would give American producers more access to Chinese markets to offset the costs incurred from the tariffs.
A Second China Shock is an ugly symptom of a confluence of complex global political and economic currents. But smart policymaking and assertive negotiation can prevent the U.S. from once again sticking a band-aid on a broken bone. If Washington learned anything from the first China Shock, it should be that pragmatism and flexibility instead of absolutism and stubbornness will be crucial to confronting this challenge. With the election of Donald Trump, however, that may just be wishful thinking. His picks for Cabinet have signaled that he intends to take a hardline stance against China, potentially ushering in another four years of bitter rivalry between the U.S. and China.