Changing trade patterns: China gains more of an edge
The step-change in China’s export strength has been evident since the pandemic ended. In the auto sector. China’s car makers are on a roll, with industry experts projecting sales of more than 40 million electric vehicles (EVs) per year over the next five years, of which 10 million are destined for overseas markets. Years of steady investment in new capacity have seen Chinese auto companies gain economies of scale that few other countries enjoy. Hustling for market share in China’s highly competitive domestic market requires satisfying very demanding consumers. That has produced EVs that set new standards for performance, styling and customer experience. Not surprisingly, when these cars enter overseas markets, they offer a very enticing product which smashes the competition.
A similar combination of scale economies and fierce domestic competition has given Chinese firms a commanding presence in many other industries besides autos. The International Energy Agency estimates that China produced more than 70% of the world’s electric vehicles, 92% of global solar cells, 98% of solar wafers, and 85% of solar panels in 2024. The country also produced more than 75% of all batteries sold globally.
China is also making huge strides outside the new energy sector, with large increases in production capacity and displacement of imports in several sectors, suggesting growing competitiveness and further surges in exports in the near future. Consider these examples:
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- In chemicals, Chinese firms are aggressively expanding production of ethylene, which is a key ingredient for the manufacture of plastics used in so many parts of the economy.
- In a segment as mundane as the wheel assemblies under railcars, China used to import US$70 million worth a year 10 years ago but now it barely imports any at all.
- In shipbuilding, China’s 307 shipyards currently command a 50.7% share of global tonnage but with their success in securing new contracts, that is set to rise to 62% of the global order book by 2033.
- European medical technology firms have noted that their sales of ventilators and other medical products in China fell by half in 2024 compared with 2023 as local firms seized market share.
Chinese academics say that if current trends hold, China’s improved competitiveness will see it increase its share of global manufacturing value-added, from around 27% today to 40% in five years’ time. China’s gain will be other major exporting nations’ losses — and that is going to cause pain.
China’s foundations for long-lasting competitiveness: These trends will intensify
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If there is no response from other countries, the likelihood is that these trends will be sustained.
It is easy to say that China’s strengthened competitiveness is all due to unfair trade practices. There was some basis for that allegation in the early days of China’s investment in new energy sectors, for example, but less so now. Similarly, there have been complaints about the Chinese government pressing local hospitals to buy only locally made medical equipment, thus hurting exports from other countries to China.
However, a primary reason for China’s recent export success is in the effort it has put into gaining a technological edge. Take the following indicators of technological success which we have collated from various media reports:
- China’ research and development spending grew six-fold between 2007 and 2023 to reach 2.55% of GDP, with basic research accounting for 6.8% of that total. In other words, not only is China ramping up its overall research effort, more of it is going into frontier areas where ground-breaking changes could result.
- In fact, a widening gap has emerged between China and the US in research output. Although the US spends more on R&D in relation to GDP (3.6%), by 2024, Chinese researchers had published 1.1 million articles, compared to 880,000 from their US counterparts. While China accounted for 40% of papers in 2023 in the medical field, that share rose to just over 50% in 2024.
- China has invested heavily in 5G technology, giving it 42% of global 5G standard-essential patents. As of September 2025, it had more than 4.6 million 5G base stations in operation or about 60% of the world’s total. This gives it scale and seeds new industries such as the industrial internet and the Internet of Vehicles.
- In artificial intelligence, China is reported to account for 61.5% of global generative AI patents. Its academic researchers produce more scientific papers with citations impact in autonomous driving and quantum computing than their American peers.
- Scientists at China’s two leading tech companies, Huawei and Semiconductor Manufacturing International Corporation, have developed the Kirin 9000S chip, which can be manufactured without the extreme ultraviolet lithography tools made by Dutch firm ASML.
- In energy research, China is already the clear global leader, producing around 35% of all papers in the field. China is showing that it is adept at converting academic research into practical results. For example, China is reported to have made a breakthrough in carbon capture and storage technology which could transform the energy industry. Some scientists say that the successful recent coal-fired carbon capture demonstration project at Huaneng Zhengning Power Plant in Gansu Province could potentially alter the dynamics of coal-fired power generation, maybe even making coal a source of clean energy — something that would dramatically change the whole discourse on climate change policies. China is also said to be making advances in nuclear technology that could redefine atomic energy’s role in a low-carbon future. Its next-generation fission reactors offer improved safety, higher fuel efficiency, and can help reduce radioactive waste.
This extraordinary progress puts China in a different league altogether now compared to a decade ago. The set of industries where China has outstanding competitiveness is set to grow significantly in coming years.
But, the rest of the world will not sit still, a backlash is likely against China
While these advances mark a significant achievement in China’s development, the implications for the rest of the world may not be so benign. At one level, Chinese officials argue that their growing export clout is a net positive for other countries who are not only getting high quality products at a good price but will also find a cheaper way through their energy transition because of China’s exports of new energy products such as solar panels and EVs.
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Free market economists might also argue that consumers everywhere will benefit from China’s relatively cheaper but superior products, which in effect improves their real incomes. While there might be some dislocation in terms of local producers being forced out of business by super-competitive Chinese exports and job losses, the increase in real incomes for consumers will stimulate spending in other areas which will create new opportunities for those who are laid off or run out of business.
Unfortunately, it is not as simple as that. In the real world, job losses and local champions being forced to shut down have political and social consequences. These losers from free trade have a political voice and few governments can ignore the political demands that will ensue.
Moreover, as China’s exports grow much faster than its imports in coming years, its trade surpluses will expand. That will put some pressure on local currencies and would weaken the external resilience of these economies. If China does not allow a sharp appreciation of its currency, there will be more complaints that China is not playing fairly. As Chinese exporters have been cutting the prices they charge, there is also a risk of strong deflationary pressures affecting importing countries.
There will also be concerns within countries that they are becoming too reliant on one source of imports. This is all the more the case in a world that is now much more concerned about national security and resilience. China’s aggressive moves on rare earths and the way it has recently hinted at using economic sanctions against Japan make China’s trading partners more wary.
But the main concern will be to protect local producers and avoid de-industrialisation. Most countries believe that manufacturing should remain an important part of their economies and will resist a trend of imports from China that displace local production and weaken their manufacturing prowess.
The pushback against China will be justified on the grounds that China’s domestic policies have contributed to an excessive tendency to export rather than import. For the longest time, economists in both China and elsewhere have argued that China should raise the unusually low share of household consumer spending in its GDP. Despite agreeing with this, Chinese policymakers have baulked at substantive measures to address this issue. A second area where policy exaggerates the export trend is how local governments find ways to assist their industrial favourites with access to cheap land and capital — which produces over-capacity and deflation.
That is why it is not surprising that there is an expanding number of countries imposing trade restrictions on China. It is not only the US, Europe and Japan that are doing so. It is China’s friends in the Global South — Brazil, Chile, Turkey, South Africa, Indonesia, Thailand and even Russia which are doing so. If our projection of a further surge in China’s exports materialises, this backlash will intensify.
Therefore, it is inevitable that protectionism will worsen. In addition, more countries will turn to inward-looking policies to favour domestic producers over foreign ones. If China can trigger accelerated industrialisation through subsidies, government procurement rules, and indirect restrictions on trade, so too can others.
China will therefore have to respond. There are several possibilities:
- We could see some voluntary export restrictions being undertaken by China to placate its trading partners.
- China could offer a substantial increase in its foreign direct investment in friendly countries. Producing locally would help alleviate some of the political backlash. This offer would be better received if it came along with promises of technology transfer as well as a commitment to help nurture local sub-contractors and component manufacturers.
- Another option for China would be to offer more aid. For instance, it could expand Belt & Road Initiative investments in infrastructure in developing countries.
Conclusion: Trade tensions will not go away in 2026
In the coming year and beyond, China’s growing competitiveness will become more tangibly felt across the world. Even before the world economy has dealt with Trump’s tariff shock, it will have to gear up to absorb the China trade shock as well — another reason why next year is shaping up to be a rough one.
Manu Bhaskaran is CEO of Centennial Asia Advisors
