China Shock 2.0: China's Industrial Machine Cannot Stop
In recent years, the world has focused largely on the United States’ tariff war and President Donald Trump’s protectionist policies as the main threat to global trade. Yet an equally significant pressure is coming from the opposite direction: a flood of cheap Chinese goods into world markets.
China’s enormous production capacity, combined with weak domestic consumption, is pushing companies in the country to depend ever more on foreign markets. The problem is that the world’s capacity to absorb these products is approaching its limit.
Michael Froman, former United States Trade Representative and now President of the Council on Foreign Relations, has warned that China’s growth model, built on industry and exports, is beginning to hit a dead end.
“The world’s capacity to absorb China’s excess production is approaching a critical point,” Froman wrote recently in Foreign Affairs.
The warning comes amid an increasingly stark gap between global economic growth and China’s trade expansion. The International Monetary Fund estimates global gross domestic product growth at around 3.1 per cent this year. By contrast, China’s trade surplus has surged by more than 20 per cent at the start of 2026.
A year earlier, China had already recorded a trade surplus of around 1.2 trillion US dollars, the largest in recorded history. The surplus grew roughly three times faster than global goods trade.
This imbalance is beginning to provoke a backlash. The United States has raised tariffs on various Chinese goods. The Trump administration has even made tariffs one of its principal trade policy instruments, packaged under the “Liberation Day” agenda.
However, resistance to Chinese product penetration is not coming from Washington alone. The European Union, long known as one of the chief supporters of open markets, has also begun strengthening its trade protection instruments.
According to Froman, this shift shows that a growing number of countries are no longer willing to accept the industrial consequences of an influx of cheap Chinese goods.
“The political appetite for accepting the deindustrialisation and strategic dependency arising from surging Chinese imports is limited and continues to shrink,” he said.
If this trend continues, Froman argues, protectionism will spread further. As a consequence, Chinese producers will lose access to the markets that have until now served as an outlet for their excess production.
Cheap Prices, Excess Production
China’s ability to dominate international markets is inseparable from its cost structure. Chinese companies are said to be able to sell goods at around 30 per cent cheaper than their competitors in various other countries.
This is supported in part by an undervalued currency, state subsidies and a range of Beijing’s industrial policies.
But these policies carry consequences. The drive for mass production has created excess capacity in many sectors, whilst competition at home has escalated into an increasingly fierce price war.
When domestic demand cannot absorb production, Chinese companies have turned aggressively to export markets.
This competition has even squeezed corporate profits at home. Nearly a third of Chinese industrial companies are said to be operating at a loss.
From this, Froman sees a great contradiction within China’s industrial machine. “The result is an industrial machine that cannot stop and cannot slow down, but because of limited demand also cannot keep running,” he said.
In other words, China must keep producing to safeguard its industry, workforce, investment and economic stability. Yet at the same time, fewer and fewer international markets are willing to keep accepting additional Chinese goods.
If major markets begin closing their doors through tariffs, countervailing subsidies or other protectionist policies, the model could come under serious pressure.