China shock 2.0 – how are cheap imports impacting economies?

The original “China shock” was a reference to the economic disruptions in the West caused by the surge in imports from China. It began after China's 2001 entry into the World Trade Organisation and the subsequent surge in FDI inflows, which transformed China’s abundance of cheap labor into the manufacturing workshop of the world.

China-made consumer goods became ubiquitous in the West, with imports from China peaking in 2017 at 22% of US total goods imports. While the China shock helped keep US inflation in check, it also hollowed out its manufacturing industry, causing significant job losses. Since imports peaked in 2017, the trade conflict against China has resulted in a 13-percentage point decrease in China’s share of US total goods imports to 9% in 2025.

Since President Trump’s first term, China’s supply-oriented fiscal approach of upgrading its industrial capacity and its deepening struggle to revive local consumer demand have given rise to the second China shock. China shock 2.0 refers to the overcapacity in China that has led to price wars and an erosion of profit margins. Rather than retreating, China’s highly competitive manufacturers have redirected sales from the deflationary environment at home to foreign markets.

How does this impact other economies?

In response to China shock 2.0, local manufacturers may be forced to cut prices to maintain market share, but at the cost of reduced profits. This can be good news for other countries’ consumers in the short run, but as local firms accumulate financial losses, these firms may need to cut back on jobs and capex. This could lead to many of them being forced to shut down. The macro impact could be larger trade deficits (or smaller surpluses), strong disinflation (possibly deflation), weaker growth in the most affected industries and larger fiscal deficits (or smaller surpluses), as governments try to support local industry and displaced workers.

At first glance, evidence of the large increases in the share of China imports in countries’ total goods imports in recent years supports the hypothesis of a deepening China 2.0 shock. However, the analysis has become more complex by the growing trend of transshipment activity: the surge in US tariffs on China in 2025 led to a significant re-routing of exports by Chinese companies (and MNCs in China) to the US via third countries to evade the higher tariffs.

Our updated analysis of mapping China’s import share to local manufacturing production and PPI inflation at a detailed product level for 45 countries with 2025 data showed stronger evidence of these China imports impacting economies, compared to a year ago. Countries that experienced large increases in their shares of imports from China are usually also the ones that faced the sharpest slowdowns in manufacturing growth. Moreover, industries in those countries that have experienced disinflation have usually also experienced greater China import penetration.

To read our full report, including our methodology, click here.