Brazil, India and Mexico are taking on China’s exports

But China has started to fight back. To reverse an economic slowdown and cement its control over global supply chains, its leaders have launched an investment spree in high-tech goods, such as batteries, electric vehicles and other green devices. Weak domestic demand for traditional products, such as cars, chemicals and steel, mean they are also flooding global markets. The average price of Chinese manufactured exports fell by nearly 10% from 2022 to 2023. China’s export volumes have surged to near-record levels.

On a recent visit to Beijing, Janet Yellen, America’s treasury secretary, said that the West would not accept a flood of cheap goods. A few weeks later, on May 14th, the Biden administration unleashed a wave of tariffs covering everything from solar cells to syringes. Electric vehicles were hit with a 100% levy. China has other options for its exports, however—namely emerging markets that value friendly relations with it.

As a result, emerging-market policymakers are worried. “The biggest threat of Chinese overcapacity is to developing countries," says Jorge Guajardo, Mexico’s former ambassador to China. In his country, which is proud of its car industry, the market share of Chinese-made vehicles has grown from next to nothing in 2016 to a fifth. Emerging economies are thus introducing import restrictions on Chinese goods, while accelerating a push for free trade elsewhere. Their success depends on the sustainability of China’s approach, as well as the deftness of their own.

Start with the free-trade side of things. Countries with manufacturing ambitions are desperate for access to big markets, where leaders are themselves keen to reduce reliance on China. In February Chile signed a trade deal with the EU. Mercosur, a customs union including Argentina, Brazil, Paraguay and Uruguay, has penned an agreement with Singapore and is eyeing pacts with Japan and South Korea. Having failed to complete a deal in the seven years to 2021, India has since signed four.

This emerging-market attempt to lower trade barriers with the West is happening at the same time as they are being raised with China. Officials see this as necessary to protect domestic manufacturers until China’s subsidy wave subsides. “In the [late 2000s], Mexican companies would ask for protections and the government would tell them…‘well, you have to learn to compete’," says Mr Guajardo. “That is no longer the case." Mexico raised tariffs on 544 products in April. It has slapped an 80% levy on certain steel imports.

Yet some Chinese goods are so cheap they have the lowest prices even with sky-high tariffs. Moreover, some products sneak past levies because they are packaged in third countries. That is why non-tariff barriers and import bans are also proliferating. India has launched anti-dumping probes into a variety of products, including unframed glass mirrors and fasteners, which it says will protect its small and medium-sized businesses. It has also filed the most anti-dumping cases of any country in the world. China is retaliating. Sumant Sinha, boss of ReNew, an Indian green-tech firm, says it is even quietly blocking India’s access to solar equipment.

Unfortunately for emerging markets, China is now at the technological frontier of manufacturing, providing another reason to avoid antagonising its leaders. In March Cap SA, Chile’s largest steel producer, decided to wind down its mills, blaming Chinese import competition. On April 24th the Chilean government imposed temporary anti-dumping tariffs of 25-34%, prompting Cap to suspend its decision. But Cap says the tariffs would need to stay in place for longer to keep its factories open, something to which the government is reluctant to commit. Even in India, where relations with China are frosty, plenty of officials recognise that Chinese investment is crucial for manufacturing.

A better alternative to flat-out protectionism may be to copy China’s strategy of coaxing firms to invest locally. Thailand has been aggressively courting Chinese battery firms through an incentive scheme, and two big cell manufacturers are expected to begin production this year. BYD, a Chinese electric-vehicle maker, is building factories in Brazil and Hungary. Foreign direct investment into China may have plummeted, but Chinese investment into other countries is at an eight-year high.

Can this cocktail of strategies work? One factor is how long China’s export surge lasts. “It cannot be sustained," reckons the boss of a big manufacturer with plants in China and India. He adds that the production costs for his Indian plants have recently become competitive with his Chinese ones, meaning a slow shift in production is inevitable. Others are more concerned. “I don’t know if China can do this for ever. But they’ve been doing this for the last 25 years," says Maximo Vedoya, boss of Ternium, Mexico’s largest steel producer.

Even if China were to reorient its economy, emerging markets would be wise not to place too much hope in manufacturing growth. Western countries may welcome more of their exports, but only up to a point. The West is in the midst of its own subsidy spree to revive domestic manufacturing. And American tariffs on Chinese goods are limited to just a few categories that count for $18bn in current imports; in other areas, Chinese competition will remain robust. The manufacturing take-off may have to wait a while longer.

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