China's Rise: Trade War, "Overcapacity," and Western Decline

Before 2010, China primarily exported labor-intensive, low value-added products to developed countries while importing high value-added, capital- and technology-intensive goods from the West. Over time, however, China’s industrial upgrading has accelerated, and its exports have shifted toward higher value-added, capital- and technology-intensive products that increasingly compete directly with developed economies. Western, particularly U.S., accusations of “overcapacity” should be viewed critically, as they often reflect politically motivated efforts to contain China’s rise rather than genuine economic concerns. The true drivers of global economic stagnation lie in Western financialization and chronic underinvestment, not China’s industrial policies.

Origins of the Trade War

The origins of the U.S.-China trade war can be traced to two primary driving forces: systemic global demand deficiencies and structural shifts in trade. At its core, a trade war is a response to real economic and strategic challenges, aiming to protect domestic industries, secure global market share, and address perceived imbalances in international trade. While the conflict is often portrayed superficially as a dispute over tariffs or trade deficits, its underlying causes are deeper and more structural.

The first driving force is global demand deficiency, which refers to insufficient aggregate demand in the global economy. Prior to the 2008 financial crisis, U.S. officials largely praised the “China produces, America consumes” model, in which China supplied low-cost goods to the U.S., effectively subsidizing American consumption. China then recycled its trade surplus by purchasing U.S. Treasury bonds and other dollar-denominated assets, providing low-cost financing for the U.S. government and private investors. Former Treasury Secretary Lawrence Summers famously described this interdependence as a “balance of financial terror,” likening it to the logic of mutual assured destruction in nuclear deterrence.

However, the 2008 crisis and subsequent global recession highlighted the risks of systemic demand shortfalls. The stagnation in global growth revealed the limits of the prior trade model, and U.S. policymakers increasingly criticized China for capturing an excessive share of global demand, contributing to economic difficulties in deficit countries. Even individuals who had previously praised Sino-U.S. trade relations, such as Janet Yellen, reversed their stance: as Federal Reserve Chair, she endorsed the existing trade relationship, but as Treasury Secretary, she emphasized China’s role in creating global imbalances. This shift reflected a broader transition from a neoclassical economic framework, which largely ignored systemic demand constraints, to a New Keynesian perspective recognizing the consequences of global demand deficiencies.

The second driving force behind the trade conflict is the structural transformation of China’s economy and trade. Before 2010, China primarily exported labor-intensive, low-value-added goods while importing high-value, technology- and capital-intensive products from developed countries. This arrangement reinforced the monopoly rents enjoyed by Western economies in high-tech industries. However, over the past decade, China has rapidly upgraded its industrial structure, moving into technology- and capital-intensive sectors, particularly green technologies such as electric vehicles, solar panels, and lithium batteries. This shift has increasingly placed China in direct competition with developed nations, eroding the monopoly advantages previously enjoyed by the West.

The rise of China in high-tech and green industries represents a major strategic concern for developed countries. The Paris Agreement of 2015 marked a turning point, as Western nations sought to secure leadership in the emerging green economy. Yet China’s rapid advancement in these fields, coupled with its massive savings and surplus capital, challenged Western dominance. U.S. officials, including Treasury Secretary Yellen during her 2024 visit to China, emphasized concerns over China’s “savings surplus” and overcapacity, particularly in technology- and capital-intensive sectors. These concerns were less about labor-intensive goods, where Chinese exports were widely valued, and more about China’s encroachment into sectors that had long generated monopoly rents for developed economies.

Understanding the trade war, therefore, requires moving beyond superficial rhetoric about jobs or tariffs to examine the deeper systemic and structural dynamics shaping global trade and economic power.

Ideological Shift in Protectionism

Historically, trade protectionism was primarily associated with the political left, which opposed unequal exchange and the exploitation of developing countries by developed ones. In the late 20th and early 21st centuries, left-wing critics of globalization and organizations like the World Trade Organization voiced strong opposition to free trade, arguing that it entrenched global inequality. Free trade, in their view, often involved an exchange of labor from the Global South for capital from the Global North, leaving the South in a persistent state of underdevelopment rather than fostering genuine growth.

In recent years, however, the ideological alignment of trade protectionism has shifted dramatically. Since around 2016, opposition to globalization and support for protective trade measures have increasingly become hallmarks of right-wing populism in Europe and the United States. Leaders such as Donald Trump have championed tariffs and trade barriers, but their motivation differs fundamentally from that of the left. Instead of opposing unequal exchange on ethical or equitable grounds, contemporary right-wing protectionism is primarily concerned with defending Western monopoly rents that are now threatened by the rapid rise of China.

China’s unprecedented economic ascent has been a key factor in this shift. As Jason Hickel and Dylan Sullivan note, the growth of Chinese wages and prices has improved China’s terms of trade, reducing its dependence on exports to developed countries and thereby limiting the ability of core states to appropriate value. During the 1990s, China’s low-wage economy required massive exports to acquire necessary imports, reinforcing the unequal exchange that left-wing critics opposed. Today, this dynamic has reversed: developed countries face growing competition as China captures a larger share of value in global trade, prompting defensive economic nationalism among right-wing actors.

Another critical change has emerged from the process of globalization itself. Free trade and capital mobility have led multinational corporations in developed countries to relocate labor-intensive industries abroad, especially to China, while pursuing financial strategies that prioritize returns on capital over productive investment. This has generated severe domestic inequality: workers in Western countries have lost jobs, seen wages stagnate, and struggled to acquire new skills, while capital owners have reaped substantial profits. Cheap imports from China and inexpensive labor from immigration have partially mitigated these effects, but the long-term impact has fueled widespread discontent and the rise of right-wing populism advocating isolationism and opposition to liberalization.

However, the anti-globalization stance of the contemporary right is selective. Far-right leaders generally support free trade when it benefits their own countries or reinforces existing monopolies, but oppose it when it threatens domestic economic interests. This contrasts sharply with the traditional left-wing critique of free trade, which targets the underlying inequalities and exploitation embedded in global exchange. In other words, left-wing protectionism seeks to prevent unequal exchange, while right-wing protectionism seeks to defend existing monopoly rents and national advantage from external competition.

Global Demand and Investment Crisis

The world today faces a chronic underinvestment problem rather than one of overcapacity. OECD investment rates have fallen from 26% of GDP in 1970–1980 to 22% in 2000–2022, while non-China developing countries have stagnated at around 25%. China stands as a notable exception, with investment rising to 43% of GDP over the same period, positioning it as the primary driver of global productive investment and value creation. Economic demand ultimately stems from income, which in turn depends on investment. Without sustained investment, income growth—and thus consumer demand—stagnates.

Despite this reality, Western narratives often focus on alleged “consumption suppression” in China, deflecting attention from domestic issues such as worsening income inequality and the financialization of capital. In countries like the United States, for example, large firms frequently channel profits into stock buybacks rather than research, development, or business expansion, effectively reducing the economy’s capacity to generate broad-based demand. Historically, neoclassical economics did not view insufficient demand as a structural problem, assuming that markets would naturally adjust over time. However, with the rise of New Keynesian economics, long-term global demand shortfalls are now acknowledged, and investment—or the lack thereof—is a central concern.

Within Western New Keynesian thought, there is no single explanation for low consumption, though a politically sensitive perspective is increasingly recognized. Popularized by books such as Trade Wars Are Class Wars, this view emphasizes the role of income inequality: workers have a higher marginal propensity to consume than capital owners, so economies in which income is heavily skewed toward profit earners will experience lower overall consumption. While this critique is often applied to China, where worker incomes constitute a relatively small share of total income, it also applies broadly to developed countries like the United States, where rising inequality has similarly suppressed demand. Political leaders have frequently acknowledged this problem rhetorically, but little substantive action has been taken to address it.

China’s Impact on Developing Countries

China’s rapid technological and economic development has significantly reshaped the global development landscape, particularly for developing countries. By breaking Western monopolies, China has provided alternative sources for essential goods at more affordable prices, offering these countries greater autonomy and flexibility in their development strategies. Unlike the exploitative “unequal exchange” historically observed with developed countries, China’s engagement has improved trade terms for the Global South: rising commodity prices driven by Chinese demand, combined with falling prices of Chinese capital goods such as machinery and electric vehicles, have boosted export earnings and expanded industrial capacity in countries like Vietnam, Bangladesh, and Ethiopia.

China’s rise has also facilitated large-scale industrial upgrading and transfer. As China transitions from labor-intensive exports to high-tech products, labor-intensive industries have systematically relocated to other developing countries. This process has not crowded out industrial development but has instead expanded these countries’ industrial space. By adhering to a non-interference policy, China allows recipient nations to pursue their own development paths, whether focusing on labor-intensive industries or attempting technology-intensive “leapfrog” strategies, without imposing any model of development.

From a global perspective, China’s sustained productive investment has played a critical role in offsetting stagnant investment growth elsewhere. While mainstream narratives often focus on market competition between China and other nations, the more fundamental contribution lies in creating new productive value, which drives productivity gains and income growth across the system. China’s economic expansion over the past two decades—its GDP growth, foreign trade, and outward investment—has not only accounted for a substantial portion of global economic growth but also enhanced the development space for other countries, rather than squeezing it.

Concerns that China’s comprehensive industrial chain might crowd out other developing countries are largely unfounded. While labor-intensive sectors in some developing countries initially faced competitive pressure from China, the country’s industrial upgrading and export of capital- and technology-intensive goods have coincided with the migration of labor-intensive industries abroad. This dynamic has expanded opportunities rather than restricted them. Furthermore, while China trades high-tech products with developing countries, these are sold at low prices without monopoly rents, providing access to technologies and machinery that were previously unaffordable. Simultaneously, China’s large-scale imports of resources have raised commodity prices, improving the trade terms for these countries and supporting their capacity for investment and industrialization.

Overall, China’s economic engagement with the Global South represents a fundamentally different model from historical patterns of unequal exchange. Profits from trade are not extracted by China in a manner that stifles development; rather, they provide developing countries with resources that can be reinvested in industrial and technological capacity. Whether these countries achieve successful industrialization depends on their domestic political economy and development strategies, not on China’s policies. By expanding development space through trade, investment, and industrial cooperation while maintaining a non-interventionist approach, China has made a uniquely positive contribution to global development.

China’s Impact on Developed Countries

The relationship between China and developed countries is complex, shaped by both external competition and internal dynamics. While Chinese companies have certainly exerted pressure on developed economies through demand and industrial innovation, the primary issue lies within these countries themselves. Many developed nations have experienced long-term stagnation in industrial upgrading and productive investment. Their companies have historically enjoyed monopoly rents and privileges, and it is less a matter of blame and more a structural consequence that Chinese firms are gradually eroding these entrenched positions. The stagnation of productive investment has prevented the improvement of industrial structures, leaving developed economies increasingly dependent on financialized activities rather than industrial development.

A clear example of this phenomenon can be observed in the practices of major U.S. technology firms such as Apple, Microsoft, Amazon, Google, and Meta. Rather than channeling profits into industrial innovation or productive capacity, these companies often prioritize financial speculation—particularly stock buybacks—which serve to inflate share prices, reward executives through stock options, and satisfy investor demands. This trend was popularized decades earlier by Jack Welch’s leadership at General Electric, where the “Welch playbook” emphasized cost-cutting, outsourcing, acquisitions, and shareholder value over industrial growth. The widespread adoption of this model transformed American industry, hollowing out the manufacturing base and fostering a corporate culture heavily oriented toward financial gains rather than productive reinvestment.

In contrast, Chinese companies such as Huawei and DJI exemplify a different approach. These firms reinvest the majority of their profits into research, development, and expansion, enabling them to challenge the dominance of established Western firms. Huawei, privately held and largely owned by its employees, reinvests strategically rather than seeking short-term stock market gains. DJI, holding a 70% share of the global consumer drone market, has become synonymous with high-quality consumer electronics, while U.S. competitors like GoPro have struggled to maintain relevance. China’s industrial approach demonstrates how reinvestment and technological focus can gradually erode the monopoly rents once enjoyed by Western companies.

From a Keynesian perspective, capital in developed countries has become “slack,” favoring financial speculation over productive engagement. The unwillingness of capital to act as industrial or entrepreneurial capital undermines domestic innovation and industrial competitiveness. In this context, China’s rise should be understood not as the cause of industrial decline in developed nations but as a mechanism that exposes and accelerates preexisting structural weaknesses in their economies.

“Belt and Road” vs. Western Aid

China’s Belt and Road Initiative (BRI) represents a distinctive model of international economic engagement, emphasizing productive infrastructure and industrial development in partner countries. Unlike much Western aid, which often carries political conditionalities or prioritizes creditor interests, China’s approach is largely “no strings attached.” Its state-owned enterprises (SOEs) implement projects in transport, energy, telecommunications, and manufacturing, while providing generous and unconditional debt relief when needed. This approach aligns with Ha-Joon Chang’s observations in Bad Samaritans, which highlight that today’s rich countries historically relied on protectionism, state intervention, and subsidies rather than strict free-market policies. Similarly, China’s foreign investments reflect pragmatic economic considerations rather than ideological prescriptions.

A key feature of China’s engagement is its emphasis on productive, long-term activities rather than short-term speculative ventures. Infrastructure construction, industrial park development, and even mining operations are conducted primarily by SOEs, which tend to adhere closely to local laws and regulations. Diplomatic and political considerations supplement economic motives, ensuring that China’s investments are not tools of hegemony but instruments of mutually beneficial development. While labor-intensive industry transfers may risk creating race-to-the-bottom wage competition, host countries retain sovereign control over policy responses, similar to how China’s Pearl River Delta developed decades ago through foreign investment in manufacturing.

The contrast with Western-led development finance is particularly stark. Western debt relief and restructuring often prioritize creditor interests, attach political or economic conditions, and can exacerbate financial vulnerability in developing countries. In contrast, China avoids participation in such processes, offers preferential financing, and sometimes provides debt forgiveness without imposing policy conditions. Claims that China creates “debt traps” are largely unfounded; empirical evidence suggests that many debt crises originate from Western lending practices, while China’s engagement seeks productive economic outcomes.

Comparisons to historical Western initiatives, such as the Marshall Plan, are instructive. The U.S.-led Marshall Plan rebuilt Western Europe after World War II, strengthening capitalism and establishing U.S. geopolitical dominance. Today, Western countries, particularly the U.S. and G7 members, have attempted to counter the BRI through initiatives like the DFC, B3W/PGII, Blue Dot Network, and the Free and Open Indo-Pacific strategy. However, these efforts face structural limitations, including the erosion of the West’s industrial base, which constrains its capacity to replicate a Marshall Plan–style transformation. By contrast, China’s strategy relies on productive, long-term economic engagement rather than political leverage or financialized instruments, making it a unique and influential model in contemporary global development.

Future World Order

The future world order is likely to remain dominated by capitalism, with no significant systemic anti-capitalist force emerging. The international system may evolve into a bipolar configuration, with a U.S.-led bloc characterized by hierarchical, rent-seeking capitalism, and a China-led bloc that is more egalitarian and production-oriented. Most countries, particularly in the Global South and parts of Europe, are expected to pursue a multi-alignment strategy, engaging both power centers pragmatically. Full decoupling between these blocs is expected to be slow and partial, given the West’s continued dependence on Chinese productive capacity.

China’s rapid development increasingly undermines the monopoly rents that developed countries have historically relied upon for economic and financial advantage. Although the erosion is more pronounced in production than in monetary or financial domains, the trend indicates a gradual weakening of the developed world’s traditional supremacy. As George Yeo Yong-Boon, former Minister for Foreign Affairs of Singapore, observed, “The rise of China is the single biggest cosmic event affecting us. It is like a second sun entering the solar system, changing the gravitational field and affecting everyone’s orbit.” This “cosmic shift” presents both opportunities and risks for the global system.

Politically, the Western-led capitalist order faces a structural challenge in accommodating China as an equal member. While it can integrate developed countries such as Japan, the system cannot easily accommodate a super-sized China without undermining its own foundational assumptions about resource allocation and global hierarchy. Consequently, the West is likely to pursue strategies aimed at limiting China’s technological and economic rise, as illustrated by measures such as the U.S. ban on advanced AI chip sales to China. In response, Chinese firms such as Huawei are developing domestic alternatives, including high-performance GPUs, which may erode Western dominance in key sectors such as artificial intelligence.

Beyond high-tech industries, Chinese consumer-driven enterprises are also challenging established global players. Companies like Shein, Temu, and TikTok Shop leverage algorithmic growth strategies to expand their market share without relying on traditional manufacturing networks. Temu and Shein, for instance, are increasingly competing in the U.S. fast-fashion market, challenging Amazon by offering lower prices and squeezing sellers’ profit margins. These developments highlight China’s growing influence across both technological and consumer domains, reinforcing the structural shifts reshaping global capitalism.

Conclusion

George Yeo has challenged the “overcapacity” argument, noting the irony of criticizing China while Western countries themselves enjoy long summers, short working hours, and claim to be overworked. Similarly, Scott Lincicome of the Cato Institute observes that while China delivers tangible infrastructure—airports and other projects—the U.S. tends to offer only lectures, exemplifying a “do as I say, not as I do” approach to foreign policy.[1] The real issue is not China’s rise but the West’s retreat from productive investment in favor of financial speculation, coupled with a tendency to externalize blame rather than revitalizing domestic infrastructure that supports emerging technologies. China, in this view, is not a threat but a potential solution to global stagnation.

References

[1] “If America Really Is Unpopular, We Have Only Ourselves to Blame”, Scott Lincicome, https://www.cato.org/commentary/america-really-unpopular-we-have-only-ourselves-blame, April 26, 2023

China’s Rise: Trade War, “Overcapacity,” and Western Decline