Economist Predicts 'China Shock 3.0' Driven by AI, Biotech, and Robot Exports

Alicia Garcia-Herrero said the world was already at the starting point of a "China shock 3.0" that could exceed the current wave. Garcia-Herrero is a senior fellow at Brussels-based think tank Bruegel and chief economist for Asia-Pacific at investment bank Natixis. Garcia-Herrero spoke from Taipei after a virtual panel hosted by the Washington-based Peterson Institute for International Economics (PIIE) on Wednesday. Garcia-Herrero said the third wave would centre on artificial intelligence hardware and software, biotechnology and robotics.

Garcia-Herrero said China remained a major importer of advanced chips but was developing domestic AI hardware and software for export once domestic demand was met. Garcia-Herrero said those exports could come with bundled data centre and cloud services. Garcia-Herrero said humanoid and industrial robot exports could follow, creating a shock greater than the current one. Garcia-Herrero told the panel that China's cheap energy would give China the world's lowest computing costs and extend competitiveness from industrial goods into services. Garcia-Herrero argued that a huge economy competitive across the board but largely closed to imports must be "extremely reasonable".

US economists David Autor, David Dorn and Gordon Hanson popularised the term "China shock". The economists' research linked rising imports from China after China joined the World Trade Organization in 2001 to US manufacturing job losses and factory-town decline. The second wave began around 2018, although some date the beginning to the 2020s, and has involved more advanced manufacturing, including cars and machinery. European and US officials have accused China of producing far more than domestic and foreign demand can absorb and exporting the surplus at low prices. However, China has rejected those claims.

The Ministry of Commerce published "China's Position on the So-called Excess Capacity Issue" on July 28. The ministry's position paper said Beijing had never deliberately pursued a trade surplus. The paper attributed China's exports to innovation and reform, not subsidies or weak domestic demand. The paper said industrial subsidies and overcapacity had no necessary connection.

Customs data released on Wednesday showed China's trade surplus reached US$938.11 billion in the first nine months of the year. The surplus kept China on track to exceed last year's record of US$1,189 billion. September exports rose 36.3% from a year earlier. September trade surpluses with the US and the European Union each exceeded US$34 billion.

The US and 14 other economies, including the European Union, signed a statement in Paris on October 7 pledging action on structural excess capacity. The statement covered sectors including electric vehicles, batteries, chemicals, chips and solar power. China was not among the signatories. Analysts described the statement as an effort by Washington and Brussels to assemble a multilateral coalition to pressure Beijing.

PIIE panellists differed on how to respond. Nicolas Lamp, an associate professor of law at Queen's University in Canada, argued that the West should invite Chinese investment rather than treat all trade as a threat. However, Garcia-Herrero questioned the benefits of Chinese investment and business engagement. Garcia-Herrero said Chinese carmakers' European plants would likely be assembly operations reliant on imported parts. Garcia-Herrero said Beijing's security rules limited technology transfer. Garcia-Herrero described China's caution over technology transfer as justified and said finding a solution was harder today than previously.

Yeling Tan is a professor of public policy at the University of Oxford and a non-resident senior fellow at PIIE. Tan said China needed reassurance that the West was not seeking to contain, suppress or encircle China. Tan said all sides needed to find a way forward together. Tan said wise and courageous politicians were needed and described the possible path to agreement as narrow but not nonexistent.