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

Foreign Affairs  |  Michael Froman

China's industrial trade surplus reached $1.2 trillion in 2025, driving severe global economic imbalances and triggering aggressive protectionist responses across international markets. Beijing currently controls 30 percent of global manufacturing output through state-directed credit and extensive industrial subsidies, forcing unprofitable domestic enterprises into destructive, margin-slashing export price wars referred to internally as involution.

This persistent reliance on aggressive export growth under China's dual circulation strategy has overwhelmed the global market's structural capacity to absorb excess production. The resulting surge of cheap manufactured goods severely threatens key industrial sectors in advanced trading partners like Germany and the broader EU, where local autoworker job cuts have reached historical highs. To stem this influx, European nations are enacting 35.3 percent electric vehicle duties, considering new local content requirements, and joining the U.S.-led Forum on Resource Geostrategic Engagement. Without an immediate domestic shift toward consumption-led economic rebalancing, Beijing risks prompting widespread market closures and a systemic global crisis.

Comment

State-subsidised industrial expansions under the Made in China 2025 framework demonstrate how non-market credit allocation creates systemic dual-use production surpluses that undermine foreign industrial ecosystems. By absorbing financial losses through local government financing vehicles, Beijing sustains unviable output levels that compress international profit margins below capital maintenance thresholds. This structural glut degrades sovereign manufacturing supply chains required for defense mobilization, as seen in the contraction of Germany's metal and electrical engineering sector.

The resulting erosion of dual-use manufacturing capacity directly compromises Western industrial readiness for protracted conflict sustainment. Legislative instruments such as the European Commission's Industrial Accelerator Act attempt to counter this attrition through local content mandates, yet these measures arrive after baseline tooling and skilled workforce foundations have already eroded. Consequently, the attrition of automotive machine-tool manufacturing directly restricts the surge output capacity of defense supply chains anchored by prime contractors like Rheinmetall.

Strategic Question for Discussion

If protective mechanisms under the Industrial Accelerator Act fail to preserve Europe's machine-tool base against state-subsidised competition, which factor will dictate Allied industrial mobilization timelines in a protracted conflict — critical component stockpiling or redirected commercial re-tooling?

The available evidence points toward severe friction in commercial re-tooling, as modern precision manufacturing relies on highly specialized supply chains that cannot be rapidly pivoted. My assessment is that component stockpiling will prove insufficient without active preservation of baseline precision-machining capacity, leaving Allied defense output vulnerable to early supply depletion.

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