China Shock 2.0: How New Legislation Is Driving China’s Climb Up the Value Chain

In the 13th episode of his China In and Out podcast series, Frank Hong of Longan Law Firm discusses the implications of the so-called “China Shock 2.0.” This term refers to the recent surge in Chinese exports, particularly electric vehicles (EVs), electronics, and machinery, following the COVID-19 pandemic.

Published on 14 June 2024

A Question of Perspective: Is the China Shock More Than a Western Policy Talking Point?

The concept of China Shock is largely US-centric, highlighting the disruption felt by American blue-collar workers. Hong suggests that from a Chinese perspective, the narrative is different. China has steadily climbed the manufacturing value chain, evolving from producing low-value items to dominating advanced sectors like renewable energy and electronics.

“Flooding the global market with dollars is an artificial undertaking par excellence. Flooding the global market with inexpensive EVs is also a man-made enterprise. One produces inflation, the other contributes to the transition to the green economy.”

Hong criticises Western media and political narratives that attribute China’s success to state subsidies and unfair trade practices. He points out the irony in these claims, noting that the USA itself engages in significant economic interventions, such as the Federal Reserve’s quantitative easing. These policies have far-reaching effects on global financial markets, often overlooked in discussions about trade fairness.

Chinese Legislative and Regulatory Development as Drivers of Industrial Growth

Hong delves into the legal and regulatory framework that has facilitated China’s industrial growth. He shares a personal anecdote about advising an American manufacturer in Shanghai, illustrating how local government policies and urban planning have consistently pushed for higher-value manufacturing. Changes in zoning laws, for instance, forced the company to relocate twice within a decade, each time to areas designated for more advanced manufacturing sectors.

“Clusters of factories and even whole sectors relocate to stay viable. New industry clusters emerge in different parts of China. Supply chain gets optimised.”

The evolution of China’s legal landscape has also been pivotal. The introduction of property laws in 2007 and labour contract laws in 2008, along with tax reforms that incentivise high-tech investments, have collectively strengthened China’s manufacturing base. These regulatory measures have promoted technological development and attracted substantial foreign investment, despite instances of fraud and corruption.

Looking Ahead

Hong concludes by reflecting on the resilience and ambition of Chinese entrepreneurs, engineers, and workers, backed by world-leading infrastructure. He argues that tariffs will not curb China’s industrial overcapacity or its competitive edge. Instead, they might delay the inevitable adjustments needed in the US economy. Hong emphasises that understanding the broader context and being fact-based, as suggested by JP Morgan Chase’s Jamie Dimon, is crucial in navigating the complexities of global trade and manufacturing dynamics.

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