BEIJING — Former U.S. Trade Representative Michael Froman warned in a Foreign Affairs article that Chinese industrial overcapacity and rising global protectionism risk triggering a global economic crisis. The United States has threatened a 7.5% tariff on Chinese goods citing industrial overcapacity, while the European Union has threatened stricter measures regarding China's trade surplus with an October 2026 deadline for a deal.

Froman, who is the president of the Council on Foreign Relations, wrote that the world's ability to absorb Chinese overcapacity is approaching a breaking point. He argued that as these trends continue, protectionism is likely to rise, cutting off Chinese manufacturers' market access. Such moves could suddenly close off China's access to a broad swath of foreign markets, accelerating the failure of its export-led growth model and raising the prospect of a global economic crisis, he wrote.

Chinese companies charge up to 30% less than competitors in other regions, yet nearly one-third of Chinese industrial firms are operating at a loss. Froman described this dynamic as the result of an industrial machine that cannot stop and cannot slow down, but that, owing to the limits of demand, cannot keep going. He added that the political appetite for accepting the deindustrialization and critical dependencies that come with the flood of Chinese imports is finite and shrinking.

Brad Setser, a former Treasury official, estimated that China has the capacity to produce two-thirds of the world's demand for cars. China produces more than half of the world's supply of steel, aluminum, and ships. Setser noted that this points to a world economy in which China has no need for the industrial inputs of other countries while leaving those countries dependent on Chinese-made goods and vulnerable to Beijing's political and economic pressure.

Global electric car production in 2025 was more than 25% higher than in 2024. China accounted for approximately 75% of global electric-car production in 2025 and approximately 40% of global electric-car trade in 2025. Chinese electric-car exports exceeded 2.5 million units in 2025. Exports from China have increased by more than $150 billion overall.

In response to these shifts, governments have implemented various trade barriers. The Biden administration increased the U.S. tariff on Chinese electric vehicles from 25% to 100% in 2024. President Donald Trump increased tariffs on China in the previous year.

The European Union is implementing trade barriers against Chinese imports. The European Commission's anti-subsidy investigation into Chinese battery-electric vehicles identified imports associated with Renault, BMW, Mercedes-Benz, and Tesla.

Federal Reserve economists published a note in May regarding changes in China's export composition. Taken together, these elements suggest that China Shock 2.0 is not simply a continuation of earlier trends, but a new phase of global trade integration. Froman warned that even if the next crisis is made in China, the cleanup is likely to fall, as it often does, on the United States and the institutions it anchors.

As Beijing debates whether to embrace the reforms necessary to avert disaster, other countries are likely to try to stem the flow of Chinese exports, Froman wrote. The Chinese government has implemented measures to support consumer spending. Foreign-invested enterprises accounted for $1.97 trillion of China's total merchandise trade in 2025. In 2024, foreign-invested enterprises accounted for 27.4% of Chinese exports and exported approximately $979 billion of China's total exports of $3.58 trillion.

Why It Matters

The convergence of massive Chinese industrial output and rising Western protectionism creates a volatile environment for global trade stability. With China producing more than half of the world's steel, aluminum, and ships, and accounting for 75% of global electric car production, the sheer volume of goods exceeds current global demand. This imbalance forces trading partners to choose between absorbing cheap imports that harm domestic industries or imposing tariffs that risk severing supply chains.

The potential for a sudden closure of foreign markets to Chinese goods raises the stakes for international economic coordination. If China's export-led growth model fails due to restricted access, the resulting economic shock could require intervention from the United States and the institutions it anchors. The situation represents a distinct phase from previous trade tensions, characterized by China's reduced need for foreign industrial inputs while maintaining high export volumes.

Timeline

By December 31, 2024, foreign-invested enterprises accounted for 27.4% of Chinese exports in 2024. Also on December 31, 2024, foreign-invested enterprises exported approximately $979 billion of China's total exports of $3.58 trillion in 2024.

Also on December 31, 2025, China recorded a $1.2 trillion trade surplus in 2025. On that same date, China's General Administration of Customs reported total goods trade reached $6.8 trillion in 2025.

What's New

Additional reporting indicates that the European Commission put forward the Industrial Accelerator Act in March 2026, which would set 'Made in EU' local content requirements and mandate technology transfer for deals involving key sectors, as reported in a Foreign Affairs article by Michael B. G. Froman published on August 13, 2026. The United States has threatened a 7.5% tariff on Chinese goods citing industrial overcapacity.

In 2024, foreign-invested enterprises accounted for 27.4% of Chinese exports. Those enterprises exported approximately $979 billion of China's total exports of $3.58 trillion in 2024. The European Union has threatened stricter measures regarding China's trade surplus with an October 2026 deadline for a deal. China's General Administration of Customs reported total goods trade reached $6.8 trillion in 2025.