The problem defined in this essay is really a version of the 'tragedy of the commons'. Instead of grazing land, it is a matter of demand for products. Europe, as a mature and relatively wealthy economy, will somehow adapt. There are huge parts of the world that will receive this onslaught of production from China and will never have the competitive opportunity to develop their own production. Those areas, most notably Africa, will be left in a mercantilist situation of supplying basic raw resources. In the past, it was possible for those recipient nations to develop competing industries, but in the China Shock 2.0 world, that may never be possible when the Chinese side has advanced production methods, robotic dark factories and economies of scale.
That's overly pessimistic and assumes that no local production is possible when there is a Chinese import alternative. Could African countries expand their productivity frontiers now that Chinese supply and excess savings made infrastructure and capital goods more accessible than previously?
The previous status quo didn't exactly work for African countries, after all. They were just resource appendages of the West, instead of China. And they didn't even get any roads or ports from that bargain.
It's not strictly true that African (and other) colonies didn't get any (rail)roads or ports — just that the ones they got served resource extraction, not general development.
You're just describing political conflict. The "tragedy of the commons", an ahistorical conservative fairy tale, is used to wave away real political conflicts arising from feudalism, conflicts that were fought out in centuries of class struggle. Likewise, China's rise is creating geoeconomic change to pre-existing Euro-American hegemony that will only be resolved politically. You're crying because China has not and will not abandon its political interests at the whim of a Eurocrat or American chauvinist who doesn't understand what century they're living in.
There seems something odd in discussions about the auto industry in China. Looking at the CSIS study, for example, it appears to be quite comprehensive in the funds it totals. There might be a similar study of the US auto industry, but I have not seen it yet. I have seen some rough estimates for the US auto industry overall and they seem to fall in the $30-35b/year range for all subsidies. Assuming that the Chinese invested the same amount in their IC as in their EV auto industry (did they?) between 2009-2023 those total numbers would be roughly equivalent. If this reasoning is sound, the real question would seem to be "How did the Chinese get so much more from their investments than we did?"
Same as with every other industrial sector — their shareholders aren’t allowed to loot their enterprises via stock buybacks and other forms of financial engineering.
Thanks for that. It was interesting and informative. But I’m not sure it answers the question. The thrust of the video is that US legacy manufacturers are so firmly wedded to internal combustion that it has impeded their effective move into EVs. A quick dive into the histories of the 7 major Chinese EV manufacturers indicates that 4 of those 7 were established internal combustion manufacturers who moved into EV production and now do both.
"Mercantilist-on-mercantilist violence" is the right frame — the China Shock 2.0 debate has mostly been litigated as China-vs-the-West, but the more consequential fight may be among exporters competing for the same shrinking absorption capacity. India's position here is instructive: it's simultaneously a target of Chinese overcapacity dumping (the steel and solar cases) and an increasingly mercantilist actor in its own right (EV and semiconductor localization). That dual posture — defending against one mercantilism while building another — might be the more common pattern for middle powers than a clean China-vs-West binary suggests.
This is the first time I thought of China's subsidies as share buybacks for he nation. We don't really have much oversight of how wealth is distributed when the state "invests" in their industries this way but the thinking is it contributes to the strength of the nation and thus the people.
I do appreciate the chartbook series and some of their insights. But there is always the sense of seeying Prof Tooze dancing around some problems. And not, not China, he discuss it freely and I really appreciated the fact that he seems to see the Chinese protection of yuan and not as a free floating currency as a sovereignist exercise. One would be stupid to leave their curency at the manipulation of the "markets" especially when there are entities, like the US, that would be happy to create havock, if one can avoid that.
But the treatment of Europe and European countries economies, like Germany. That is a bit a downer. To not speak the geostrategic blunder of getting caught in the war fostered by the US on the Ukrainian soil with Russia, and the losses incurred by EU economies by that fact, with no prospect of any future gains, strategic and economic, that is mind boggling.
But hey, real analysts, like the Swiss Ret. Col Jaques Baud get sanctioned by the EU if they provide a clear analytical perspective of the situation. One cannot book tickets to Dailin with such a stamp... Just saying...
The fundamental problem is the financialisation of Western economics and its ideological counterpart, the idea that the role of managers is to maximise shareholder value. (All predicted long ago, as I suspect Adam Tooze is aware, by Marx and his concept of fictitious capital.)
Apart from the case of strategically-necessary but unprofitable sectors such as steel, subsidies to physical investment and R&D are apparently not needed.
One possible answer would be heavy taxes on dividends, share buybacks, and so on. But the same political circumstances that have facilitated financialisation will obstruct this.
Micro, macro and 'meso' economics? Nice to see someone venturing to put the 'political' back into 'political economics'. Usually, in pronouncing the term, not only the 'p', but the entire first word is silent. Not since Popkin and Bowles were exiled from Cambridge in the 1970s . . .
The premise that macroeconomics could ever be anything but political economy (which was, and remains, the correct term for the discipline) was always a lie.
Both the EU and US starting their massive subsidy programs like the Green Deal and IRA almost as a response to Chinese subsidies is pretty much (as the author pointed out) reducing credibility of criticism for said Chinese subsidies.
At the same time, the manner in which overall government-directed economic policy in China works is exceeding the mechanism of common subsidy policies in most western developed economies.
The impact and importance of subsidies in those industries should also be highlighted. Without gov. subsidies, a bankruptcy and consolidation wave would hit the Chinese EV industry. This is also applicable to humanoid robots and AI labs. It is very hard to overcome the subsidy dependence. This is mostly due to the emphasis on industry output instead of a stable and sustainable business model of individual firms which is something healthy markets usually would prefer as an outcome.
My read is the second shock is harder to answer than the first because it isn't a low-wage story. The first one cost the West cheap-to-make jobs but gave consumers cheaper goods, so there was at least a bargain to sell voters. This time it hits the high-value sectors Germany actually leads, like cars, where there's no cheaper-goods upside to point at. You can't tariff your way out of losing on the products you used to dominate.
If EU didn’t have a habit of weaponising its trade, other countries would be less concerned about importing more from EU. But the EU cannot be trusted - look at how they restrict sales of high end technology by ASMI - so other countries have to “de-risk” from Europe and be self-sufficient. EU needs to show that it is a reliable trade partner!
If you put up protectionist barriers in Europe, then Europeans are forced to purchase from relatively inefficient producers, and those producers have relatively little incentive to become more efficient and better. But if you keep things as they are, then Europe will greatly deindustrialize, which is an enormous national security risk, as manufacturing is crucial to make drones, missiles, and other military hardware. China obviously is not a trusted ally who you can rely on to do the vast majority of your manufacturing. So what is the best solution?
I wonder if it is just to aggressively require China to manufacture in Europe in order to sell there without tariffs. This way, Europe gets the highly efficient and advanced manufacturing, and its consumers get the cheaper and better goods, but in the event of a war, Europe can nationalize those facilities. Of course, for that to work, local managers would have to learn the advanced Chinese skills, so the Europeans would aggressively have to try to staff and learn from these Chinese factories. it seems that the best solution is to not insulate the local manufacturers, and take away their incentive to get as good as the Chinese, but to instead create the paths and the incentives for local companies and professionals to learn to be as good as the Chinese.
The problem defined in this essay is really a version of the 'tragedy of the commons'. Instead of grazing land, it is a matter of demand for products. Europe, as a mature and relatively wealthy economy, will somehow adapt. There are huge parts of the world that will receive this onslaught of production from China and will never have the competitive opportunity to develop their own production. Those areas, most notably Africa, will be left in a mercantilist situation of supplying basic raw resources. In the past, it was possible for those recipient nations to develop competing industries, but in the China Shock 2.0 world, that may never be possible when the Chinese side has advanced production methods, robotic dark factories and economies of scale.
That's overly pessimistic and assumes that no local production is possible when there is a Chinese import alternative. Could African countries expand their productivity frontiers now that Chinese supply and excess savings made infrastructure and capital goods more accessible than previously?
The previous status quo didn't exactly work for African countries, after all. They were just resource appendages of the West, instead of China. And they didn't even get any roads or ports from that bargain.
It's not strictly true that African (and other) colonies didn't get any (rail)roads or ports — just that the ones they got served resource extraction, not general development.
You're just describing political conflict. The "tragedy of the commons", an ahistorical conservative fairy tale, is used to wave away real political conflicts arising from feudalism, conflicts that were fought out in centuries of class struggle. Likewise, China's rise is creating geoeconomic change to pre-existing Euro-American hegemony that will only be resolved politically. You're crying because China has not and will not abandon its political interests at the whim of a Eurocrat or American chauvinist who doesn't understand what century they're living in.
There seems something odd in discussions about the auto industry in China. Looking at the CSIS study, for example, it appears to be quite comprehensive in the funds it totals. There might be a similar study of the US auto industry, but I have not seen it yet. I have seen some rough estimates for the US auto industry overall and they seem to fall in the $30-35b/year range for all subsidies. Assuming that the Chinese invested the same amount in their IC as in their EV auto industry (did they?) between 2009-2023 those total numbers would be roughly equivalent. If this reasoning is sound, the real question would seem to be "How did the Chinese get so much more from their investments than we did?"
Same as with every other industrial sector — their shareholders aren’t allowed to loot their enterprises via stock buybacks and other forms of financial engineering.
There is a better answer here: https://www.youtube.com/watch?v=k77X47h6OVU
Thanks for that. It was interesting and informative. But I’m not sure it answers the question. The thrust of the video is that US legacy manufacturers are so firmly wedded to internal combustion that it has impeded their effective move into EVs. A quick dive into the histories of the 7 major Chinese EV manufacturers indicates that 4 of those 7 were established internal combustion manufacturers who moved into EV production and now do both.
Not a word about europe's supplier of cheap energy getting cut off.
Yes there is
"Mercantilist-on-mercantilist violence" is the right frame — the China Shock 2.0 debate has mostly been litigated as China-vs-the-West, but the more consequential fight may be among exporters competing for the same shrinking absorption capacity. India's position here is instructive: it's simultaneously a target of Chinese overcapacity dumping (the steel and solar cases) and an increasingly mercantilist actor in its own right (EV and semiconductor localization). That dual posture — defending against one mercantilism while building another — might be the more common pattern for middle powers than a clean China-vs-West binary suggests.
This is the first time I thought of China's subsidies as share buybacks for he nation. We don't really have much oversight of how wealth is distributed when the state "invests" in their industries this way but the thinking is it contributes to the strength of the nation and thus the people.
I do appreciate the chartbook series and some of their insights. But there is always the sense of seeying Prof Tooze dancing around some problems. And not, not China, he discuss it freely and I really appreciated the fact that he seems to see the Chinese protection of yuan and not as a free floating currency as a sovereignist exercise. One would be stupid to leave their curency at the manipulation of the "markets" especially when there are entities, like the US, that would be happy to create havock, if one can avoid that.
But the treatment of Europe and European countries economies, like Germany. That is a bit a downer. To not speak the geostrategic blunder of getting caught in the war fostered by the US on the Ukrainian soil with Russia, and the losses incurred by EU economies by that fact, with no prospect of any future gains, strategic and economic, that is mind boggling.
But hey, real analysts, like the Swiss Ret. Col Jaques Baud get sanctioned by the EU if they provide a clear analytical perspective of the situation. One cannot book tickets to Dailin with such a stamp... Just saying...
The fundamental problem is the financialisation of Western economics and its ideological counterpart, the idea that the role of managers is to maximise shareholder value. (All predicted long ago, as I suspect Adam Tooze is aware, by Marx and his concept of fictitious capital.)
Apart from the case of strategically-necessary but unprofitable sectors such as steel, subsidies to physical investment and R&D are apparently not needed.
One possible answer would be heavy taxes on dividends, share buybacks, and so on. But the same political circumstances that have facilitated financialisation will obstruct this.
really interesting &, i think (as a global macro economist), very credible
Micro, macro and 'meso' economics? Nice to see someone venturing to put the 'political' back into 'political economics'. Usually, in pronouncing the term, not only the 'p', but the entire first word is silent. Not since Popkin and Bowles were exiled from Cambridge in the 1970s . . .
The premise that macroeconomics could ever be anything but political economy (which was, and remains, the correct term for the discipline) was always a lie.
Cui bono?
Turns out that mindless acquiescence to the Washington consensus was an act of industrial suicide, eh?
Old verities die hard …
Both the EU and US starting their massive subsidy programs like the Green Deal and IRA almost as a response to Chinese subsidies is pretty much (as the author pointed out) reducing credibility of criticism for said Chinese subsidies.
At the same time, the manner in which overall government-directed economic policy in China works is exceeding the mechanism of common subsidy policies in most western developed economies.
The impact and importance of subsidies in those industries should also be highlighted. Without gov. subsidies, a bankruptcy and consolidation wave would hit the Chinese EV industry. This is also applicable to humanoid robots and AI labs. It is very hard to overcome the subsidy dependence. This is mostly due to the emphasis on industry output instead of a stable and sustainable business model of individual firms which is something healthy markets usually would prefer as an outcome.
My read is the second shock is harder to answer than the first because it isn't a low-wage story. The first one cost the West cheap-to-make jobs but gave consumers cheaper goods, so there was at least a bargain to sell voters. This time it hits the high-value sectors Germany actually leads, like cars, where there's no cheaper-goods upside to point at. You can't tariff your way out of losing on the products you used to dominate.
You’re also running out of workers to “safely” disemploy and/or underemploy — eventually the whole process becomes politically untenable.
If EU didn’t have a habit of weaponising its trade, other countries would be less concerned about importing more from EU. But the EU cannot be trusted - look at how they restrict sales of high end technology by ASMI - so other countries have to “de-risk” from Europe and be self-sufficient. EU needs to show that it is a reliable trade partner!
Thank you so much for your analysis. I always learn a lot from your texts.
Especially well-balanced article on the considerable tradeoffs on both sides
If you put up protectionist barriers in Europe, then Europeans are forced to purchase from relatively inefficient producers, and those producers have relatively little incentive to become more efficient and better. But if you keep things as they are, then Europe will greatly deindustrialize, which is an enormous national security risk, as manufacturing is crucial to make drones, missiles, and other military hardware. China obviously is not a trusted ally who you can rely on to do the vast majority of your manufacturing. So what is the best solution?
I wonder if it is just to aggressively require China to manufacture in Europe in order to sell there without tariffs. This way, Europe gets the highly efficient and advanced manufacturing, and its consumers get the cheaper and better goods, but in the event of a war, Europe can nationalize those facilities. Of course, for that to work, local managers would have to learn the advanced Chinese skills, so the Europeans would aggressively have to try to staff and learn from these Chinese factories. it seems that the best solution is to not insulate the local manufacturers, and take away their incentive to get as good as the Chinese, but to instead create the paths and the incentives for local companies and professionals to learn to be as good as the Chinese.