The Chinese “cannot be allowed to export their way back to prosperity,” argues US Secretary of the Treasury Scott Bessent, who claims that China’s economy is the “most unbalanced in history.”
Such remarks reflect the growing fear in Washington that China’s overcapacity, subsidies and dumping are distorting global trade.
However, the more pressing concern is not what China exports, but how. Global cost structures are indeed being reshaped, but by a quieter and more complex force: relentless productivity improvements.
China is not merely moving more goods; it is exporting a new production model powered by automation, artificial intelligence (AI) and state-guided industrial optimization. This shift is disruptive, deflationary and still largely misunderstood.
China’s rise as the world’s factory in the late 20th century was driven by labor and scale, but China today is aiming to achieve a new form of dominance through intelligent infrastructure. No longer confined to apps or chatbots, AI has been embedded across the physical economy — guiding everything from robotic arms and warehouse fleets to autonomous production lines.
For example, Xiaomi’s “lights-out” factory in Beijing can assemble 10 million smartphones annually with minimal human intervention. AI conducts a symphony of sensors, machines and analytics that form a tightly woven industrial loop, driving efficiencies that traditional manufacturers can approach only incrementally.
Nor is this technology-driven ecosystem confined to a single factory. DeepSeek’s 671 billion parameter open-source large language model is already being deployed not just for coding, but also to optimize logistics and manufacturing. JD.com is revamping its supply networks through automation. Unitree is exporting bipedal warehouse robots. And Foxconn (Apple’s primary manufacturing partner) is developing modular, AI-led microfactories to reduce its dependence on static production lines.
These examples might not represent “prestige innovation,” but they do attest to a broad culture of industrial optimization. Under the banner of “new quality productive forces,” the Chinese government is rolling out AI pilot zones and subsidizing factory retrofits; and cities such as Hefei and Chengdu are offering local grants that rival the scale of national initiatives elsewhere.
The strategy echoes the one pursued by Japanese industry in the 1980s, when automation, lean production and industrial consolidation helped firms outcompete global rivals, but the Chinese approach goes further, blending AI with economies of scale, feedback loops and a unique cultural dynamic known as involution (neijuan, 內卷): a self-perpetuating race to optimize and outcompete, often at the expense of profit margins.
BYD, among the most vertically integrated automakers globally, recently cut prices across dozens of models, triggering a US$20 billion stock selloff.
In sectors from e-commerce to electric vehicles (EV), this practice has driven such relentless cost compression that the state has occasionally seen fit to intervene.
In April, the People’s Daily newspaper warned that extreme involution was distorting market stability, citing a destructive price war in food delivery between JD.com, Meituan and Ele.me. And the problem is even more acute in the EV industry. While more than 100 Chinese EV brands currently compete, more than 400 have gone out of business since 2018.
The arena of global competitiveness is unforgiving. Those who survive emerge leaner, more adaptive and better positioned than their legacy counterparts. That is how successful Chinese EV makers have edged into Europe, offering models at price points that local firms struggle to match. Viewed from afar, the process looks chaotic. In practice, though, it resembles natural selection. China is deliberately promoting industrial evolution: the state fosters a wide field of contenders and then lets the market winnow the field.
The approach is rippling across industries. In solar panels, Chinese manufacturers now account for more than 80 percent of global production capacity, driving prices down more than 70 percent over the past decade. And a similar trend is emerging in EV batteries, with Chinese firms dominating the cost-per-kilowatt curve.
However, make no mistake: this deflation does not stem from oversupply or dumping. It reflects redesigned cost structures, which are the result of AI, intense competition and relentless iteration.
Thus, Chinese industry has made efficiency a tradable asset — one that is reshaping global pricing dynamics. Once the shift really takes hold, businesses around the world will find themselves adjusting their own pricing strategies, labor deployment and supply-chain configurations.
The development presents new challenges for many economies. Consider the role of central banks, whose mission is to ensure price stability. What can they do if inflation is subdued not by weak demand, but by superior supply-side efficiency coming from abroad? Most likely, monetary policy will lose traction in such a scenario. The march of software advances will not slow just because interest rates rise or fall. Instead, industrial policy will have to come to the fore — not as protectionism, but as an adaptive necessity. The core divide will no longer be between capitalism and state planning, but between static and dynamic systems.
The US Inflation Reduction Act and CHIPS and Science Act, as well as the EU Green Deal Industrial Plan, did represent early Western efforts to challenge China’s lead; but the packages were largely reactive, siloed or focused on upstream nodes like chips. While the US and its allies deploy tariffs, subsidies and export controls, the real competition is over integration of AI into the real economy: not who builds the smartest chatbot, but who builds the smartest factory and whose model can be sustainably replicated at scale.
Of course, the Chinese model has trade-offs. Labor conditions might worsen under relentless cost-cutting; oversupply remains a systemic risk; regulatory overreach can derail progress; and not all efficiency gains translate into shared prosperity. Consumers might benefit, but workers and smaller firms will bear the brunt of the adjustment.
However, even if the Chinese model is not universally replicable, it raises important questions for policymakers everywhere. How will others compete with systems that produce more, faster, and cheaper — not through wage suppression, but ingenuity?
To dismiss China’s approach as merely distortive misses the point. The Chinese government is not just playing the old trade game harder; it is changing the rules and it is doing so not through tariffs, but through an industrial transformation. If the last wave of globalization chased cheaper labor, the next one will chase smarter systems. Intelligence will no longer live only in the cloud — but in machines, warehouses and non-stop assembly lines.
China’s most important export today is not a product, but a process. And it will redefine the nature of global competition.
Jeffrey Wu is director at MindWorks Capital.
Copyright: Project Syndicate
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