For years, Western policymakers warned about a new "China Shock" as Chinese exports flooded global markets. Now Beijing is pushing back with a new message: stop seeing China as a threat and start seeing it as an opportunity. As Chinese officials prepare for crucial talks with Washington and Brussels, they're defending a state-backed industrial strategy that has helped create global leaders in electric vehicles, batteries and clean technology. Critics argue those same policies distort competition, suppress rivals and risk hollowing out manufacturing elsewhere. This week on The Dip, we'll be looking at the specific products that China is propping up and what this means for consumers, workers and governments around the world. We'll ask the bigger question: should governments actively create industrial champions, or is China proving that free-market rules were never enough to win the global race?
This transcript was created using transcription software.
00:00:02 - 00:30:03
Kassandra
China is doubling down on its version of capitalism. That magic mix of market competition and loads of exports, alongside strong state direction and Communist Party control. And despite years of complaints from Western countries like the United States and those in the EU bloc, there's little chance that Beijing is going to take its foot off the gas pedal. And what can we what can the West do to stop these waves of exports that are headed to their shores?
00:30:05 - 00:49:04
Kassandra
It turns out it's not much. I'm Kassandra, you are watching The Dip, the podcast where we examine money, power and consequences. And today we are looking at what cards the EU and the US have to play in the run up to trade talks with Beijing in the coming weeks. And to do that, I'm joined by two fabulous guests.
00:49:08 - 01:03:17
Kassandra
Up first I have Alicia Garcia Herrero. She's the chief economist for Asia Pacific for the French investment bank Natixis, joining us today from Taiwan. And we also have on the line, Shirley Yu senior visiting fellow at the London School of Economics joining us from
01:03:19 - 01:04:03
Kassandra
D.C..
01:04:07 - 01:21:09
Kassandra
One of the the buzzwords that we're looking to break down today and get past is, of course, China opportunity 2.0 versus China shock 2.0. Shirely, what's the argument of China opportunity 2.0.
01:21:11 - 01:22:15
Kassandra
Opportunity
01:22:17 - 01:50:03
Shirley
is a phrase that was raised by a Chinese premier the channel recently at the double summit in Tianjin. But it's really made in China 2.0. So maybe in China was a decade long industrial policy that ended in at the end of 2025. And as a result of that, China has developed global dominance for manufacturing industries that primarily in the high end sectors such as EVs, lithium batteries, solar, etc..
01:50:05 - 02:20:03
Shirley
But as a matter of fact, as of the beginning, as of the beginning of 2026, these industries are no longer receiving state subsidies, and the state documents named them as mature industries and therefore leaving their survival to competition itself. And China is our overwhelming focus right now is shifted to the what's called the new quality productive forces, a new decade of China's, innovation centric industrial policy era.
02:20:08 - 02:53:18
Shirley
And it's really what the premier implied when he talked about opportunity 2.0. So these new industries that China is heavily investing in are in the semiconductors industry. I knew telecom infrastructure, space technology, quantum computing and biotech. So there are some key shifts between 1.0 and 2.0. So one prominent one is that under opportunity 1.0, China primarily exported to products, but under the new opportunity 2.0, China will begin to export more ecosystems.
02:53:20 - 03:18:11
Shirley
And so currently over 50 or nearly 50% of the global token usage our AI are spent on Chinese AI platforms. So the world is heavily adopting Chinese cheap but efficient AI models to build its AI applications. So China's export of the future tech ecosystems will undoubtedly have huge, consequences for the global economy, which certainly will not be built on
03:18:13 - 03:21:00
Kassandra
some shoes that I.
03:21:02 - 03:45:11
Kassandra
Yeah. So China long been seen as the factory of the world moving away from socks and shoes and maybe plastic toys that people might be thinking about to this higher tech, kind of exporting. But, Alicia, how has this rebranding attempt that we are hearing in Davos? Summer Davos that is gone over in capitals around the world.
03:45:13 - 03:48:15
Kassandra
Well, I would say that, we are listening
03:48:15 - 04:12:15
Alicia
to this new production, forces. But that doesn't mean that the old production forces are really old, aren't they? They are still there. And, I mean, China is still wants to export EVs and solar panels to the world. That's not going to stop anytime soon. And if you really go down the drain, even textiles for that matter.
04:12:15 - 04:42:19
Alicia
In fact, let me give you one thing that probably we be very surprised in for our audience. What is the product that is growing the fastest in terms of Chinese exports? Is it solar panels? Is it EV is no, it's tobacco to Europe. Yeah. And textiles is not doing any you know, it's not doing badly either. So China and this is someone's you know, they might be professors at a recent article.
04:42:21 - 05:09:21
Alicia
China really aims at total comparative advantage. So yes, we hear about AI and I'm sure China will will try that and UN services more generally digital services, AI cloud, you name it. Yeah. But The AI cloud sorry but but that's not all. China also needs to feed the West. It needs to feed lower wages.
05:09:21 - 05:29:15
Alicia
And for that China will continue to export its way out beyond the new sectors. And that means that if we think we've seen it all in terms of Chinese exports hitting our shores, well, we've not seen we've not seen it all. It will be even more than that. So, you know, that is a big question for the rest of the world.
05:29:15 - 05:30:04
Alicia
What can we
05:30:04 - 05:49:20
Kassandra
can we do about it? We can talk about exports quite a bit because the Chinese market right now or the Chinese economy, I should say, is really relying on exports. Alicia, help us understand why. Why are exports such a big part of the plan right now? It's because nothing else is growing.
05:49:22 - 06:14:23
Alicia
that's that's why if China had to rely on its own domestic demand, China's growth rate would not have been 5% larger. It would have been probably two thirds of that, which is little. Yeah. That would have been around three and a half or so. But China's income per capita, still the catch up with the West and the catch up, you know, with the US in particular, cannot happen at three and a half.
06:15:02 - 06:49:01
Alicia
And and because, furthermore, China was at that time 20, 25, still under severe deflationary pressures, nominal GDP growth was even lower. So, you know, there's there's no possible catch up with such a low growth without exports. So in a way, for China to continue to catch up, exports are needed. And and I think for China to also offer a reasonable, increase in disposable income for its citizens, exports are needed, because nothing else is growing.
06:49:01 - 07:16:19
Alicia
Again. Fixed asset investment, second quarter, was, negative, not only the real estate. Let's not think that everything relates to the real estate. Even manufacturing CapEx was negative. Even infrastructure, fixed asset investment was negative and consumption was hovering around 1%. I Shirely, rightly pointed out. So without exports, there is not enough growth in China that can really, you know, keep
07:16:19 - 07:30:22
Kassandra
keep the model going. Shirley, how has this gone down in Washington, D.C., turning to China from the DC, the United States perspective, I wouldn't imagine that there would be politically at least.
07:30:22 - 07:40:07
Kassandra
And maybe that's only part of the story. This being seen as an opportunity so much as as a threat to be honest. In the US
07:40:07 - 07:59:23
Shirley
certainly primarily seen as a threat to particularly, coming from the Chinese tech frontier. So the US has just recently banned the export of Chinese humanoid robotics, into the US market. But we'll, we'll take a look at specifically, the nuances, from the US's perspective. These are the Chinese exports, you know, a little bit.
08:00:02 - 08:26:23
Shirley
So I agree with, Alicia in the, in the, in the perspective that. So just because China is driving the, further acceleration of exports of the frontier industries of the future doesn't mean that China is eliminating the export of, the, products. So that comes from it. So, you know, domestic capabilities from low end to high end to products.
08:27:00 - 09:02:20
Shirley
And the other, caveat I would like to add is that just because, the, consumption and the investments are not growing in China does not necessarily mean that, China's, export to will, indigenously grow. It's growing because there is economic complementarities growing because China has the product capacity and the manufacturing supply chains. And so for the U.S, obviously, you know, if you look at, Chinese AI models such as Kimmy, you cannot, it doesn't go through customs.
09:02:20 - 09:24:03
Shirley
And so you cannot tariffs tariff does not work out. It's biting the clouds. And so for the U.S, the banding seems to be something that the white House has been contemplating, to completely eliminate the China Chinese open source models from, the domestic marketplace. But for Europe, I think the stance should be very different.
09:24:07 - 09:53:18
Shirley
I've heard European AI companies today are using Chinese open source models to develop AI applications for third markets in the Middle East, in Africa. And if you look at the recent fable ban, Europe has no say in the US. Europe has to take does take sovereignty from the United States. And so I think in looking at the global take bifurcation in the future, Europe does have, both a threat and an opportunity to hedge with, Chinese,
09:53:20 - 09:55:06
Kassandra
we need to focus on that now.
09:55:10 - 10:15:03
Kassandra
Yeah. I want to just remind listeners Shirley maybe you can help me do this. This is being called China Opportunity 2.0, but then that there must have been a 1.0. What was the that iteration like, and what were the consequences for the West? 21 point? I was
10:15:03 - 10:47:17
Shirley
mentioned a little bit earlier, is primarily China as the world's factory. And exporting products from the went to high end. And then opportunity 2.0 is going to be the area in which China will become the R&D. One of the major R&D centers of the world. And it's beginning to export, more, take services, take ecosystems, and particularly, ecosystems that that are, becoming the infrastructure for the global AI economy.
10:47:19 - 11:14:05
Kassandra
China has by some numbers that I was looking at a 1 trillion with a T trillion dollar trade surplus with the world. Given those figures, even if the West did want to call this, you know, China Shock 2.0 and do something about it, isn't there not really much that they can do to negotiate over this? What what can we see from this election do because China has a
11:14:07 - 11:30:01
Alicia
than we dare do. Because China has a, an obvious weakness, which is that if it's basically growing out of exports, so you know it, that in itself is is leverage for, for the West.
11:30:03 - 11:39:14
Alicia
I agree with Shirley that the fastest growing markets are in the global South, but that is only true, in gross numbers.
11:39:14 - 12:08:13
Alicia
Meaning when you look at value added, say, EVs, you know, but with a lot of obviously much higher value added than tobacco for that matter. There actually, you have 60% of EVs exported to Europe only. And in the case of batteries, that's even higher. So, you know, as you move up the ladder into the real value added, Europe is very important for China, and the US is increasingly less important for obvious reasons, which makes Europe more important.
12:08:13 - 12:35:18
Alicia
Now, what's what's when you come to the point of then why don't we do anything is because Europe, Europe is has not been, designed. If you want to take actions that would really show that leverage, meaning be able to close that market. I'm not saying we should, but the point is, nobody would ever believe Europe would be able to do that.
12:35:20 - 12:47:08
Alicia
So because of that, even if we are large, we look small and we don't have bargaining power with China in the current trade
12:47:10 - 12:48:00
Kassandra
discussions.
12:48:06 - 13:09:07
Kassandra
Yeah. From the US side Shirley is the vibe there that you know enough has been done. There's tariffs, there's deals. We're good. We're protected. Or what is the US thinking about doing. Considering that this is either a shock or an opportunity, depending on where you're standing. Pretty well. The strategy is
13:09:07 - 13:27:12
Shirley
primarily restrictions, export controls and banning of Chinese products from the domestic market. The U.S can afford to do so because it it has a robust domestic take ecosystems sitting at the very frontier of the global economy. If we look at the silicon Valley AI models, they are the best in the world.
13:27:16 - 13:52:12
Shirley
If we look at the humanoid robotics industry, yes, China has shipped over 84% of the global humanoid robots as of 2025. But speaker, I, Tesla are both coming up with cutting edge humanoid robots domestically so the U.S can afford it because it has the domestic supply chain. And if needed, the U.S can bring more supply chains back onshore.
13:52:16 - 14:23:08
Shirley
But I think Europe is in concert with two problems in its, regulatory policies. These vis-a-vis Chinese trade. The first one is the EU regulators are targeting the industries of yesterday or yesterday's success. The EU is looking at the EVs, lithium batteries and solar industries which are no longer being subsidized by China. And if the end goal is to address industrial subsidies, then they are absolutely targeting the wrong industries.
14:23:12 - 14:50:08
Shirley
They should be targeting the industries of the future rather than the ones of yesterday, just very much like what the U.S is currently doing. But the other problem for Europe, as Alicia has, really incisively pointed out, is that if you look at the world's top ten, sorry, top ten, I stops by usage and efficiency.
14:50:10 - 15:17:20
Shirley
Five are from China and five are from the US. And so where does Europe sit in the future of the global economy? So it either falls into the US, take sovereignty or it can choose to make the marketplace, appealing, to all competitors, essentially, so that Europe will be in a position to hedge one against, the other.
15:18:00 - 15:38:01
Shirley
So I think for Europe, the responses today are a bit outdated, and it really needs to come up with a industrial policy to resuscitate Europe's, future economies, particularly in building these tech ecosystems in, that are suitable for AI economy.
15:38:03 - 16:01:03
Kassandra
I want to zoom in on one thing you mentioned, Shirley, which is subsidies. And Alicia, I'm hoping you can help me with this, because this is a complaint we hear quite often from the West that a lot of these industries in China are subsidized heavily, by the government. Can you help put us into perspective how these subsidies from the Chinese side compare to subsidies, either in the EU or the US?
16:01:05 - 16:26:08
Alicia
I can, clarify something. When Shirley was talking about, subsidies being lifted, I, I, I believe these are demand subsidies. Meaning if you are to buy a new TV or even to install a solar panel in China from 2026, you don't have any subsystem that has actually created a massive reduction in, in auto sales.
16:26:08 - 16:51:03
Alicia
EV sales. I think it's -16 overall. Auto sales in, in, day says in the month of June. So just to give you a sense of, you know, how bad it is. Why? Because the demand is not subsidized. However, the supply continues to be subsidized to a point, meaning and and why? Because without those subsidies, many of these companies.
16:51:03 - 17:14:22
Alicia
But we're talking even, about BYD not not just, you know, the companies we would imagine are not, winners. Even those subsidies receive, those companies receive subsidies. We have basically public numbers for that. For we what the in financial statements. So, you know, it's very easy to track. I think the second largest recipient of subsidies in, in China.
17:14:24 - 17:42:08
Alicia
So that's what it is. Now, the interesting thing though, is that those subsidies do not make these companies profitable, which is like, so how big these subsidies need to be? According to the OECD, China's subsidies are like eight times bigger than Western subsidies. And yet companies are not profitable. And why are they not profitable? Because they compete among themselves.
17:42:08 - 17:59:24
Alicia
It's not about this is about Chinese competition. This is involution. Everybody knows about this. So they compete so much for market share to survive that they lower the prices beyond what they could even with such big subsidies. So the question is how
18:00:00 - 18:09:10
Kassandra
is how sustainable the model is when we're thinking, I'm kind of using my mind's eye, my imagination a little bit and seeing this like race to the bottom.
18:09:10 - 18:29:15
Kassandra
Alicia, that you've been describing, let's, let's maybe say with the electric vehicle, part of this for just a moment. Shirley that makes me a bit worried that that mess, so to speak, could then come to Europe or the United States. Is that a risk, or am I just imagining a spillover, like when my my friend, once
18:29:15 - 18:44:14
Shirley
thing that we, discussed a little bit earlier, which is really crucial, it's not just the demand, the subsidies that are being removed. They have been removed over the past couple of years. I'm talking specifically about the supply subsidies that are being removed as of
18:44:19 - 18:47:14
Kassandra
2026.
18:47:16 - 19:09:17
Kassandra
Oh, okay. Thank you for that clarification. I appreciate that. But in terms of this, this very competitive market that we're seeing with electric vehicles in China, is that something that could, if the doors are, are forced open by this wave of car exports? Is that something we could see in Europe or the United States as well? It's actually really interesting.
19:09:17 - 19:11:02
Kassandra
If you look
19:11:04 - 19:47:14
Shirley
the ECB, the European automakers and what they have been investing in China, over the past a few years. VW as an example, we formed the partnership with Chinese EV player exponent, American companies. The Linters had a partnership with Leap motor. Nearly all European and Japanese auto brands have established some sort of R&D partnerships with China, Chinese automakers not to export products per se, but to jointly develop the tech, infrastructure for the EV industry.
19:47:19 - 20:20:03
Shirley
So essentially, what we are seeing in China is less that we are seeing the European companies are, you know, hosts, wholesale, trying to bring Chinese products and products into the European markets. But more so in collaborations of R&D. As mentioned earlier, the if we look at the the fundamental, shift of China's R&D investments, in recent years, AstraZeneca has also just made a huge announcement of, building an R&D center in China.
20:20:09 - 20:51:08
Shirley
So it's like European companies coming to China to set up a factory to produce doors, elevators or shoes or fashion. It's more European companies coming to China to develop R&D centers and the capabilities in order to fit it into their, international competitiveness. And so this type of global collaboration is accelerating as we speak. They are not being retrenched.
20:51:10 - 21:07:19
Shirley
You may say that. Oh, yes, in certain, export categories, but primarily in China's exports to the United States, we are seeing substantial retrenchments. But, in terms of R&D collaborations, we are seeing accelerated growth, as we speak
21:07:20 - 21:18:05
Kassandra
at the moment at least, that part of the reason that we're talking about this right now is, is, of course, this rebrand that we've been seeing roll out this idea of China Opportunity 2.0, since summer.
21:18:05 - 21:36:06
Kassandra
Davos. But this is just weeks ahead of two important rounds of trade talks between China and the US and China and the EU. How is China preparing for these talks, in your view? I think China
21:36:08 - 22:04:00
Alicia
that, the we're into managed trade. Yeah. So this is the board of a board of investment in the US. I think Europe is heading there. China knows that there will be some form of quota. We already got, Volkswagen out of, import tariffs into minimum price undertaking. So, you know, you could imagine that this could be a follow up on that.
22:04:00 - 22:30:03
Alicia
But I want to go back to the innovation issue because I think it's essential. Yes. European, not so much American, but European companies have gotten into this. Jim, you have heard about the Jim, maybe too many times that. So basically, if you want to be fit, you need to be in, in in China's. Jim. Well, this is not a Jim said prison is not Jim.
22:30:05 - 22:57:08
Alicia
And I hope European companies, do realize this, for AstraZeneca to invest 15 billion in China, AstraZeneca had to put 2.5 billion in R&D. That's how it works. Because if it doesn't, there's no there's no way that you can have the real market access you need to be in China. So R&D is being deployed as a way to, of course, innovate.
22:57:13 - 23:31:10
Alicia
I'm not saying that, you know, it won't make our companies feature, but there is a trade off there because AstraZeneca will take away 2.5 billion in R&D in Oxford or Belgium to put it in China. And that basically destroys the ability for Europe to innovate in its own continent in an indigenous innovation Europe. So what will happen is that the the, the best and most advanced products will be produced in China by European companies which will export from China.
23:31:10 - 23:41:05
Alicia
This has a name is called China for the world. So you know it. I'm not saying we shouldn't be in China, we shouldn't learn from China, but we have to be aware
23:41:05 - 23:42:09
Kassandra
aware of the trade off.
23:42:09 - 24:09:03
Kassandra
There. And I think that's a critical part of this, this the shift towards, you know, innovation being an innovation hub. I I've heard that loud and clear as I've gotten into this story, Shirley. What is this branding of, China opportunity 2.0? You kind of touched on this earlier, but I'm hoping go a little bit deeper. What does this tell you about how China is navigating tariffs, that the US has imposed on products?
24:09:05 - 24:34:18
Shirley
towards this opportunity 2.0, or more specifically under the new quality product forces, is really to drive its economy to upgrade towards the global technology frontier. And as you see today, China's inching very closer in some of the frontier industries, in many, many sectors, all including AI, in certain segments of quantum computing, China is catching up.
24:34:20 - 25:07:00
Shirley
With great efforts in space technology. So it's really a part of the domestic industrial policy to move its economy towards the tech frontier. If we look at the world economic history, you know, countries economic a century, it begins with exports of products, then the elevates itself towards the export of technology. And then subsequently countries, will further elevate themselves to the export of some global rules and norms and institutions.
25:07:06 - 25:32:23
Shirley
So that takes a long time. But it really follows a natural pattern, I think, of the global ascent of major economies. So China is not doing something exceptional in that regard. And when it comes to the, the tariffs and the trading goods automation, Alicia, it's absolutely correct. Export of services in China is still a marginal proportion of China's total exports.
25:33:04 - 26:04:07
Shirley
But we have to look into the future. In looking at the growth trajectory, I think there is a high, probability that a further growth of trading and exports, sorry, trading services, exports, it's going to be, the scenario there. And so in trading in its services exports, as mentioned in the Kimmy case, if a European company wants to use Kimmy to build an AI application, it does not need to pay tariffs.
26:04:13 - 26:18:10
Shirley
There is no tariffs to be added. And so we have to look at, the future challenges, with China's services exports from a different land from, you know, the way that we
26:18:12 - 26:29:10
Kassandra
have had to push exports from China. Sure. That you teed up my last question beautifully. Thank you for that. Which is, you know, this idea that China isn't necessarily doing anything special here, right?
26:29:10 - 26:46:04
Kassandra
Because I can hear some of the commentators already saying, I can hear the typing already that Germany was propped up by car exports for years. So, you know, any kind of criticism might be a bit hypocritical. Alicia, I'll give this one to you. Is China just giving the West a taste of its own medicine? Here?
26:46:06 - 27:13:12
Alicia
medicine is is Chinese medicine is not Western medicine. It means it's it's protecting China before you get sick. It's it's thinking, okay, I'm getting too much, too much overcapacity in, in this, you know, like traditional or or even new manufacturing sectors saunas, solar panels, you name it. I'm moving ahead. I'm going where the money will be word where the value added would be.
27:13:14 - 27:37:05
Alicia
Sure. You said that loud and clear. And I fully agree that's going to be digital services. Yeah. So AI services, cloud, you name it. So you know in that regard Germany's Germany has always been doing what Germany could do. Well what Germany was excelling is comparative advantage. China doesn't believe in comparative advantage. China believes in ways. The next one I'm going to be.
27:37:05 - 27:56:07
Alicia
They're very different. So I don't think we can compare these types of medicine Germany just was doing and yes, with great success. But it so happens these are all sectors now. But you know in a way Germany. So this is what I can do. I keep on doing it. China doesn't follow that that recipe.
27:56:07 - 28:04:08
Kassandra
recipe. Alicia Garcia Herrero, Shirley Yu, thank you both so much for joining us on the.
10:28:04:10 - 10:28:31:22
Kassandra
And that is it. This week on the dip. If you got any questions or comments, you can of course leave them wherever you're watching or listening to my beautiful voice right now. And if you have a lot to say, you can of course leave us an email or shoot us an email at the dip@dw.com. And to find more episodes or our full playlist, you can either scan the QR code that's appearing on your screen right now, or check the link in the show description, but that is it for me and the crew here in Berlin.
10:28:31:22 - 10:28:38:13
Kassandra
Until next time. You have been listening to the day.