China Power | Economy | East Asia

The Double China Shock: How Beijing Is Disrupting Both Developing and Advanced Economies

China intends to keep making low-tech goods alongside its push into advanced technology. That’s bad news for advanced and developing economies alike.

Beyond embodied intelligence and fusion energy, China’s 15th Five-Year-Plan contains a segment which may get overlooked: the so-called traditional industries. This code-name represents the low-tech industries which helped China industrialize in the past, including the emblematic Made-in-China textile industry. The fact that traditional industries remain high in the new priorities suggests that China intends to keep making low-tech goods alongside its push into advanced technology. 

The question this raises is whether there is still room for other countries. If China competes simultaneously with both advanced and developing economies, is there room left for the rest of the world?

Why China Keeps Making Everything

As countries move up the value chain, they typically move on from relying on labor-intensive industries to more capital-intensive industries. For instance, Britain does not export large quantities of textiles as it once did in the 19th century, having shifted its economy toward knowledge-intensive and consumer-focused service industries, such as finance. 

Anyone expecting this transition in China is still waiting. As articulated by Xi Jinping himself, China’s strategy is not to downgrade these industries into the “low-end” bracket or abandon them, but transform and upgrade them so they remain relevant on the global stage. This reflects Beijing’s broader desire to avoid deindustrialization. 

Moreover, China aims to upgrade rather than merely retain these industries. Two ministries and three state institutions recently published an action plan to help enterprises accelerate the transformation to the higher end of the value chain, from “Made in China” to “Chinese Brands.”

Although China now has the capital and expertise necessary to grow capital-intensive industries, Beijing is simultaneously continuing labor-intensive manufacturing. A likely explanation is that the scale of China’s economy and uneven development among its provinces allow Beijing to move these industries inland rather than abroad – something no previous industrializing nation could do at comparable scale.

Staying with textiles, China continues to globally dominate in both overall production and exports, accounting for over 35 percent of the global market share, the largest share held among China’s manufacturing sectors. There are not many signs of Beijing’s loss of interest, as the National Bureau of Statistics (NBS) recorded a 4.3 percent year-on-year increase in investment in the textile industry, 5.2 percent in the apparel industry, and 12.3 percent in the chemical fibers. This growth outperformed all other manufacturing sectors. 

The End of the Virtuous Cycle

As countries move up the economic ladder, wages increase and labor-intensive manufacturing becomes uncompetitive. The industries eventually migrate to lower-wage countries, where the same process repeats. Over time, as those countries grow wealthier and their costs rise, they move on to more advanced production. In East Asia, this cycle has defined development since the 20th century and has been termed the “flying geese” paradigm. The region’s industrialization has long been led by Japan as the lead goose. As Japan grew rich, its labor-intensive industries migrated first to the Asian Tigers, and later to China and Southeast Asia. 

This virtuous cascade of industrialization and development now appears to be over, as China’s light industry overall has been expanding in recent years, and the migration is not happening at the predicted scale. The light industry in China still accounts for a quarter of all exports, remaining the largest export sector. Thus, China’s continued competitiveness in low-tech manufacturing exports is harming established manufacturers in Southeast Asia, not supporting industrialization. 

The Financial Times reported that Malaysian and Indonesian labor-intensive manufacturing companies are going out of business because of the strong competition from Chinese exports. In Indonesia’s textile industry, this has led to 250,000 lost jobs since 2021. In the case of the Malaysian plastic industry, even protective trade measures of the Malaysian government did not help the sector from getting into trouble. Southeast Asia is also increasingly dependent on China for both industrial inputs and finished goods like EVs and green tech.

It appears that the “first” China shock, which describes the low-cost, low-tech Chinese exports destroying manufacturing in advanced economies (mainly the United States) during the 2000s, continues to shock economies – and just not the........

© The Diplomat