The second China shock is here, and it’s bigger, broader and more global

The global economy is facing a resurgence of the 'China shock,' a phenomenon first observed in the early 2000s following China's entry into the World Trade Organization. This new wave, beginning in the late 2010s and intensifying in 2026, is marked by China's rapidly expanding trade surplus, which reached US$1.2 trillion in 2025, a 20% increase from the previous year. This imbalance is sending significant ripples through global markets.

While the initial China shock primarily affected manufacturing employment and production in advanced economies, the current situation, dubbed 'China shock 2.0,' has broader ramifications. It is impacting both developed and developing nations, with China increasingly dominating not only traditional manufacturing but also cutting-edge, technology-intensive industries. This shift is provoking serious concerns worldwide.

Several factors distinguish this new shock from the first. Despite US tariff hikes, China's export boom continues, fueled by intense domestic competition that suppresses product prices. Furthermore, China's vigorous development of its domestic intermediate and capital goods industries means imports have not increased as they did in the past. Advanced countries are attempting to counter this trend through protectionist policies, which have already reduced the share of Chinese exports to the US.

China's manufacturing prowess, bolstered by its vast domestic market, skilled labor force, and substantial government support, positions it as a formidable competitor in sectors previously dominated by advanced economies. Products such as electric vehicles, solar panels, batteries, and wind turbines are being shipped in greater quantities to global markets, intensifying competition and reshaping international trade dynamics.