Countering China’s Mercantilist Ambitions: A Collective Approach to Prevent the Next Economic Shock
For the past two decades, China’s rise as an industrial powerhouse has reshaped global trade and manufacturing, forcing economies worldwide to reckon with waves of low-cost Chinese exports. This phenomenon, known as the “China shock,” first hit Western markets hard, displacing domestic manufacturing jobs and creating lasting economic shifts. Now, a second wave threatens, as Beijing increasingly prioritizes power over prosperity by flooding global markets with subsidized goods across cutting-edge and traditional industries alike. To counter this threat, the United States and its allies must adopt a coordinated economic response that balances openness with strategic protectionism.
The Nature of China’s Mercantilist Strategy
Under President Xi Jinping, China’s economic strategy is driven less by economic efficiency and more by a quest for geopolitical power. With industries ranging from electric vehicles and batteries to semiconductors and steel, China is determined to establish itself as the world’s leading industrial hub. The country’s subsidized goods—heavily bolstered by government support—often enter global markets at prices well below production costs, undermining foreign competitors and fostering dependence on Chinese suppliers.
Western economic models often assume that rising consumer demand within China would naturally correct its economic imbalances, forcing it to pivot toward a consumer-led economy. However, China’s leadership views its economy through a different lens. Rather than distributing more income to households, which could empower individuals and potentially weaken the Chinese Communist Party’s (CCP) control, Beijing chooses to funnel resources into industrial dominance. This industrial expansion, coupled with a focus on key sectors such as AI, biotech, and renewable energy, reflects an ambition to assert control over the supply chains that other countries depend on for strategic and technological assets.
A Global Problem Requires a Unified Solution
China’s growing export surge poses risks beyond advanced economies. For developing nations seeking industrial growth, an influx of cheap Chinese goods stifles local industries and limits these countries’ economic prospects. Western nations, especially the U.S. and European Union, have attempted individual measures to limit Chinese overcapacity. Yet, the scale of China’s economic influence and the potential for retaliatory measures highlight the need for a global coalition. No single country can counter China’s economic force alone.
The European Union, under leaders like competition commissioner Margrethe Vestager, acknowledges this reality, advocating for a comprehensive “trade defense coalition” among market-based democracies. This coalition could encompass countries across economic and political spectra—from the United States, Japan, and Australia to high-deficit nations like Turkey and India—all of whom share a vested interest in countering China’s market-distorting practices. Such a coalition would be unprecedented in scale and intent, uniting countries under formal trade agreements designed to mitigate Chinese influence by restricting access to members’ markets for Chinese products.
The Role of Industrial Policy in the Coalition
A trade defense coalition would have to coordinate closely on both defensive and proactive policies. Tariffs alone are insufficient to protect against a coordinated, state-backed export wave from China. The coalition would need shared rules, such as import quotas or regulatory standards, that specifically address sectors vulnerable to Chinese dominance—semiconductors, renewable energy, and essential raw materials, for example. Strategic tariffs on products containing a high percentage of Chinese-origin components could also incentivize companies to shift production to more neutral or coalition-aligned territories.
Further, coalition members could encourage the diversification of critical supply chains by supporting domestic industries and expanding production networks in friendly nations. For example, providing subsidies or tax breaks to companies that source raw materials or manufacture components outside China could foster alternative supply chains and reduce dependence on Chinese imports. Such policies would also help developing countries strengthen their industries, enabling them to participate more fully in global trade without relying excessively on China.
Barriers to Coalition Success
Forming and sustaining this coalition would be politically and economically challenging. First, there is the issue of the World Trade Organization (WTO), which traditionally emphasizes free trade and non-discriminatory practices. A coalition explicitly restricting Chinese products might violate WTO principles, but advocates argue that China itself has already distorted these principles through extensive subsidies and protectionist policies. To function effectively, the coalition would have to confront the reality that China is unlikely to liberalize or open its market substantially, even under international pressure.
Moreover, a trade coalition would likely drive up consumer prices in member countries, especially in sectors where Chinese imports currently dominate. This could result in short-term inflation, as the coalition members adjust to the reconfigured supply chains. Nevertheless, advocates argue that such a coalition would offer long-term gains in economic security, innovation, and independence from China. Furthermore, by pooling resources and coordinating industrial policies, coalition members could create a robust alternative market that is resilient to price shocks.
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Implementing the Coalition Strategy
If successful, this coalition could transform global trade by creating a counterbalance to China’s influence. Key to its success would be an incremental approach. By beginning with a few strategically significant industries—such as electric vehicles and critical raw materials—coalition members could establish norms and refine their coordination without overwhelming their economies or escalating tensions excessively with Beijing. The European Union’s formation began similarly, with a single agreement on coal and steel, which eventually expanded into a more comprehensive economic union.
A focus on sectors like electric vehicles and energy storage would be a logical starting point. Electric vehicles have strategic value for several reasons: they link to jobs in automotive manufacturing, they rely on secure sources of lithium and other critical minerals, and they embody a significant market for both advanced and developing economies. Protective measures, such as coordinated tariffs and technology-sharing agreements, would foster an industrial base capable of competing with Chinese electric vehicle exports.
Additionally, establishing a standardized method for calculating the “true origin” of imported products could prevent circumvention tactics by China-based companies. Many products, especially complex ones like electronics, are manufactured across borders. Ensuring that tariffs are correctly applied to products with significant Chinese content would reinforce coalition policies, incentivizing manufacturers to shift supply chains away from China.
Anticipating China’s Response and Building Resilience
China would almost certainly retaliate against coalition efforts by leveraging its control over global supply chains for rare earth elements, batteries, and other essential goods. Aware of this risk, coalition members must prepare contingency plans. By investing in domestic production capabilities for critical goods and establishing strategic reserves, coalition members can reduce vulnerabilities that China might exploit. In addition, the coalition could work to strengthen relationships with other resource-rich countries, encouraging them to diversify their trading partners and rely less on Chinese markets.
It is likely that China would attempt to divide coalition members, using diplomatic and economic incentives to weaken their collective stance. To counter this, the coalition would need strong, transparent agreements with mechanisms to handle disputes and prevent individual members from being swayed by Chinese incentives. Formalized agreements and political support would ensure that coalition policies are consistent even through political shifts within member countries.
Global Implications: A Balanced Approach for Economic Security
Critics argue that a coalition-based approach could fragment the global economy and hamper globalization, yet proponents suggest that this strategy merely aims to create a fairer playing field. By working with developing countries to establish diversified supply chains and limit dependency on any single market, coalition members can support global trade that is not overwhelmingly reliant on Chinese exports. Encouraging alternative manufacturing bases in countries like Malaysia, Vietnam, and Morocco would support economic growth across diverse economies and reduce the need for developing nations to choose between economic engagement with either China or the coalition.
While there is no doubt that China’s rapid industrial rise has helped lift millions out of poverty and contributed to global economic growth, its current approach also poses substantial risks to the global economy. If left unchecked, China’s aggressive trade policies could erode industrial capacity worldwide, weaken competitive markets, and create dependencies that reduce the autonomy of both developing and advanced nations.
Securing Economic Sovereignty in a Multipolar World
By forming a coalition dedicated to fair trade and industrial resilience, the United States and its allies can build an economic system that balances openness with strategic protections against unfair practices. Such a coalition would safeguard democratic nations’ autonomy and support a more equitable global distribution of economic power. Although implementing these changes may be politically and economically challenging, the benefits of securing economic independence and protecting the interests of diverse nations justify the effort.
Ultimately, a trade defense coalition is not about isolating China but about fostering a more balanced global economy where nations can participate without fear of dominance by a single actor. By encouraging diversified industrial growth, coalition members could offer the global South an alternative to China’s extractive model, helping these nations achieve sustainable development. For the coalition members, this would mean forging a trade network that ensures economic security while preserving democratic values and national sovereignty.
