The China shock is coming to China
- Prof Emanuele Bracco
- Apr 10
- 4 min read
In the last three decades China has become the “factory of the world,” building a dominance in low-end manufacturing. The admission into the WTO, vast government investment programmes and (most of all) an abundant supply of cheap labor made China into the exporter of everything. These thirty years brought also a massive growth to the Chinese economy, their income, and with it also technological advances.
In the West, this translated in the so-called China shock: a retrenchment of manufacturing factories and jobs, an even greater importance of the service sector and with it a crisis for those strata of the population heavily relying on manufacturing as a source of income, especially middle- and lower-middle class men, substituted out by Chinese workers or by automation.
This era seems to be coming to an end irrespectively of American trade policy: in China rising wages, intensifying competition from Southeast Asian nations and technological advances in manufacturing practices are starting to chip into the Chinese model. Add to this the increased geopolitical tensions and the “Liberation” tariffs just announced, and you have a perfect storm.
The Decline of Low-End Manufacturing in China
Factories across China, especially those specializing in labour-intensive industries, face a stark choice: invest in automation to stay competitive or risk obsolescence. The result has been a slow shift away from traditional, labour-intensive production methods. Over the past decade, for example, the textile sector in China has shrunk its employment by 40%.
China once benefited from its comparative advantage—an abundance of cheap labour that allowed it to dominate global supply chains. However, as wages have risen, companies have started looking elsewhere, with countries like Vietnam and Indonesia emerging as major beneficiaries. China’s share of the global export market for labour-intensive goods has declined sharply, with Vietnam and Indonesia’s exports growing at significant rates in recent years.
In Figure 1 and 2 we can see the share of export on the overall world value of exports in the USA, Germany and the UK declining over time, and the share of China, Vietnam and India increasing over time. It is also visible a decline in China’s share of total exports in the last few years.
The ‘China Shock’ Comes Full Circle
China is now grappling with a version of the economic upheaval it once inflicted on Western economies. When China joined the World Trade Organization in the early 2000s, manufacturers from wealthier nations rapidly shifted production to its lower-cost factories. Entire industries in the U.S. and Europe were decimated, leading to widespread job losses and economic stagnation in the industrial hearts of the West. Today, as China loses its low-cost advantage, its own industrial workers are facing a similar fate.
Beijing is attempting to counteract this shift by investing in high-tech, automated industries; this is likely to become a threat to existing machinery exports of countries such as Germany and Italy, but is going to offer limited relief to Chinese labour market. Also the government in China is pushing for a transition to high-end production, such as electric vehicles and robotics, but these industries require fewer (better-qualified) workers, leaving low-skilled workers in dire straits.
Vietnam and Indonesia Growing Role—and Vulnerabilities
Vietnam and Indonesia has emerged as a major alternative manufacturing hub, with foreign companies increasingly diverting production there. One third of Vietnam’s GDP is related to exports to the USA; companies such as Nike base their production entirely there. The shift has been largely driven by companies eager to reduce their dependence on China, either to hedge against geopolitical risks or to take advantage of lower wages.
However, Vietnam’s rise in manufacturing has not been without its challenges. The country remains highly dependent on Chinese supply chains for raw materials and components.
Moreover, Vietnam is not immune to the forces of automation that are reshaping global manufacturing. While it currently benefits from lower wages, rapid technological advances could soon erode this advantage. If companies decide to invest in automation rather than relocate production to low-cost regions, Vietnam could face a manufacturing slowdown of its own.
The Impact of New U.S. Tariffs
Adding another layer of complexity to this shifting economic landscape are the trade tensions between the U.S. and the rest of the world.
At first observers were predicting that U.S. tariffs on China were expanded, Chinese companies may have attempted to circumvent them by routing production through other countries such as Indonesia and Vietnam. It turns out that President Trump’s tariff announcement on April 2nd is much wider on all countries, with Vietnam and Indonesia facing higher tariff rates than China itself. Additionally, if the U.S.-China trade war intensifies, global economic uncertainty could dampen demand for exports across the board, hurting all manufacturing-dependent economies, including Vietnam.
The Future of Manufacturing in Asia
The decline of low-cost manufacturing in China marks the end of an era, but it does not mean that the country’s industrial base will disappear. Instead, China is transitioning toward automation and high-tech production. However, this shift is unlikely to absorb all the displaced workers, many of whom lack the skills needed for these new industries.
For other countries in South-East Asia, the current moment is likely to push them even further in the Chinese sphere of influence, while trying to negotiate with the USA more lenient tariff schedules in the hope of limiting the damages to their economy.
