The Next Global Economic Crisis Could Be Made in China: How Overcapacity Ends

Foreign Affairs  |  Michael Froman

China's trade surplus reached nearly $1.2 trillion in 2025, pushing global market absorption of its industrial overcapacity toward a catastrophic breaking point. Accountable for 30 percent of global industrial output—and projected by the UN to hit 45 percent by 2030—Beijing relies on state-directed credit and subsidies to sustain unprofitable state-backed manufacturers.

This structural subsidisation drives relentless price wars, termed "involution," leaving nearly 30 percent of Chinese industrial firms operating at a loss while undermining foreign industrial bases. Consequently, the strategy threatens Beijing’s "dual circulation" model as trading partners erect aggressive defensive barriers. The European Commission levied countervailing duties of up to 35.3 percent on Chinese electric vehicles in October 2024 and introduced the Industrial Accelerator Act, while Germany faces deep autoworker layoffs and contemplates U.S.-style Section 301 tariffs. Escalating protectionism risks abruptly severing market access for Chinese exports, creating systemic economic shocks across interconnected global supply networks.

Comment

The European Commission's Industrial Accelerator Act marks a structural shift toward defensive industrial policy aimed at preserving domestic manufacturing sovereignty. By mandating "Made in EU" local content standards and mandatory technology transfers in critical sectors, the framework seeks to insulate European production capacity against subsidised foreign manufacturing gluts. This intervention alters the regulatory baseline for industrial integration within the single market, prioritising domestic supply chain security over pure cost-efficiency. The measure reflects a broader retreat from laissez-faire market access in favour of state-backed industrial preservation across advanced economies.

Strategic Question for Discussion

Which constraint will exert greater pressure on European industrial competitiveness under the Industrial Accelerator Act — the potential supply chain friction caused by 'Made in EU' mandates, or the threat of targeted trade countermeasures against European exports?

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