Debunking ‘China squeeze’ and ‘China shock 2.0’

The evolving global industrial landscape reveals the fallacy of one-sided narratives about China's economic rise

The "China shock 2.0" narrative that has recently gained traction across Western media and think-tank circles reflects a growing anxiety over the declining industrial competitiveness of Western countries. It suggests that China's shift from a major producer of labor-intensive goods to a leading force in high-tech industries, such as electronics, industrial machinery, electric vehicles, batteries, photovoltaic products and semiconductors, has caused more concerns than the original "China shock" of the 1990s.

However, shifts in relative industrial competitiveness between nations have been a recurring feature of economic history. The United Kingdom's textile and light industries used to dominate the world market in the mid-19th century, but in the late 19th century, Germany absorbed the UK's industrial technologies and emerged as an industrial power on the European continent.

During the two world wars in the 20th century, industrial manufactured goods made in the United States swept the world market. In the postwar decades, Japan and West Germany witnessed an industrial revival, competing with the US in labor-intensive consumer goods, electronic products and mechanical equipment, and taking a leading position in the world market.

Market shares have always fluctuated with changes in competitive advantages; and trade imbalances have adjusted along with them. Therefore, such shifts provide little economic basis for blaming countries simply because their competitiveness is rising.

The "China squeeze" narrative extends the "China shock 2.0" rhetoric by painting a negative image of China.

This concept argues that China's increased competitiveness in high-tech industries, combined with a significant share of labor-intensive exports, constrains the industrial development and export capacity of Global South countries. This narrative is clearly designed to cast China's industrial impact as a challenge to developing countries as well as the West.

More than a decade ago, when China proposed the Belt and Road Initiative, some Western think tanks and media outlets speculated that it was an attempt to construct a new sphere of influence through strategic investments and trade, in opposition to the Western international system. Such claims were not only incorrect but also lacked persuasive power. Therefore, some scholars made up a new narrative suggesting that China's BRI investments and financing created "debt traps", which led several debt-stricken developing countries to demand debt relief from China. In response, the Chinese government gained the trust of debtor nations through practical measures such as debt reduction, while also using data to demonstrate that the majority of developing countries' debt was owed to Western private banks and international financial institutions. Leaders and enterprises in countries benefiting from Chinese aid and investment have consistently refuted the "debt trap" narrative, pointing to tangible investment and economic development results. Today, a similar situation is occurring with the "China squeeze" narrative, though it is equally unsubstantiated.

The "China squeeze" narrative is flawed both theoretically and practically.

First, China's industrial development and upgrading are dynamic processes, characterized by a balance of complementarity and competition with developed nations and other developing countries. In the early 1990s, China rapidly established a foundation for labor-intensive industries by attracting foreign investment and technology, creating a complementary trade and economic relationship with developed countries. During this period, other East Asian economies faced competition from Chinese products but they eventually upgraded to higher-tech industries, leading to a complementary relationship. This dynamic industrial process in East Asia is often described as the "Flying Geese" model of economic development, as first propounded by Japanese economist Kaname Akamatsu. It was an organic combination of the import substitution strategy and the export-oriented strategy. Its most prominent feature was the enhancing of the domestic technological level by attracting FDI to increase production capacity for export. However, this transfer requires certain basic conditions, such as a ladder-like pattern of labor and other production costs in the region and a technologically advanced country leading the transfer to nations with lower labor and production costs.

It is incorrect to claim that China has squeezed the development space of other developing countries just because a "flying geese" model has not been formed by Global South countries after China upgraded to high-tech industries. Countries such as India, which have the conditions for certain industry transfers have seen this process occur, as evidenced by Apple's shift of part of its iPhone production line from China to India. In other manufacturing sectors, such as home appliances and machinery, we have seen in recent decades that companies return to China due to India's insufficient electricity supply infrastructure and shortage of skilled labor.

Therefore, claims of China squeezing development space are baseless.

Second, Chinese manufacturing enterprises have already started to transfer their production to countries with relatively lower costs, and Chinese companies are actively investing abroad. However, this transfer can only occur in countries with the necessary infrastructure and a welcoming political and legal environment for Chinese investment. Ethiopia, before its civil war, was a successful example of a country accepting Chinese labor-intensive industries, becoming an "African star" in exports and economic growth.

Moreover, cross-regional transfer is taking place in China. As its coastal regions upgrade to technology- and capital-intensive industries and compete with developed countries, its western regions still retain and accept labor-intensive industries transferred from the east. This is a result of basic economic laws, not deliberate Chinese economic policy. As these less developed regions continue to upgrade, the drive for external transfer will increase.

Last but not least, the fundamental laws of economic globalization have been severely disrupted by increasing protectionist measures in developed countries. Cross-border industrial transfers and investments are now constrained by geopolitical considerations and overexpanded national security policies, affecting the free trade of many intermediate manufacturing products. This has made it more difficult for developing countries to integrate into global production and supply chains by participating in the international division of labor, hindering their ability to develop labor-intensive manufacturing industries through international market expansion. This is not the result of China's actions but rather the negative spillover effects of some Western countries' policies aimed at containing and restricting China.

The author is a senior researcher of international economics at the Shanghai Academy of Social Sciences and the former president of the Shanghai Institute for European Studies.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.