Brace for a Second China Shock. Advanced Manufacturing Is at Risk.

Employees inspect semiconductors at a factory in Binzhou, in eastern China’s Shandong province, in January. (AFP / Getty Images)

The U.S. could face a second version of the “China shock” that hollowed out parts of the U.S. manufacturing sector, according to Dan Wang, a veteran China technology analyst. Whether that happens depends on whether policymakers rethink their approach, he says.

The first China shock kept prices low for Americans and boosted corporate profitability. But it came with costs, namely the vanishing of thousands of particularly lower-skilled U.S. manufacturing jobs. It also helped China transform into a more formidable rival, feeding the current frictions in the U.S.-China relationship.

While the Trump administration’s trade policy is, in part, an effort to address that damage, the U.S. needs to take a different tack to avoid ending up in worse shape, he says.

Wang, who emigrated from China to Canada when he was seven, has spent about a decade analyzing China’s technological capabilities as an analyst at Gavekal Research and as a fellow at Yale Law’s Paul Tsai China Center. Along the way, Wang, now a research fellow at the Hoover Institution, built a following for his insights about China’s transformation.

In Breakneck: China’s Quest to Engineer the Future, out later this month, Wang offers a framework for understanding China’s emergence as an economic powerhouse, its growing rivalry with the U.S., and where its weaknesses lie. Barron’s spoke with Wang about the next phases of U.S.-China competition, the export restrictions affecting Nvidia and others, and why the U.S. may want to take a page from China’s playbook. An edited version of the conversation follows.

Barron’s: What’s a good way to look at the U.S.-China rivalry?
Wang: The U.S. has tried to confront China’s rise through a series of legalisms, most notably the tariffs created through Section 301 investigation in Trump’s first administration, and technology export controls administered by Department of Commerce that designated Chinese companies to blacklists no one had heard of before. The Biden administration continued those.

Xi Jinping’s response wasn’t to get good lawyers around him but rather surround himself with even more engineers, elevating a lot of people from the military industrial complex, including those who manned the rocket and aerospace programs. China’s response to the trade and tech war was to build more electrical power, manufacturing capacity and infrastructure.

Excess capacity and a flood of Chinese goods already underpins trade friction. What’s next?

The U.S. is good at laying scientific ladders in important industries, and China is much better at climbing them.

For example, the U.S. will always have bragging ranks that Bell Labs invented the solar industry in 1954. But the U.S. treated solar as mostly a scientific project and the Chinese completely overran them. It is much more important to look at scale and manufacturing, not just what we design in the labs.

China is weak on aviation and somewhat weak in semiconductors, but in almost any other manufacturing area it is already or almost a world leader. All the high-end manufacturing that remains in the U.S., Japan and Germany, which is relatively efficient producing things like medical devices, will be threatened in the way light manufacturing and steel production was threatened in the first “China shock.”

What should policymakers do to avoid this?

There could be a more robust debate about whether tariffs are the right move. I suspect not: U.S. manufacturing employment four months since Liberation Day is down 40,000 jobs.

The U.S. should have a more vigorous debate to encourage and invite Chinese companies to set up shop in the U.S. China did this, inviting Apple and Tesla, as well as 1,001 other big American companies to produce goods domestically and train their workforce to produce better iPhones or electric vehicles.

It may make sense for the U.S. to invite the world leaders, say in electric batteries, to train its domestic workforce in Michigan.

The U.S. has relied heavily on export restrictions limiting China’s access to technology as a tool in this rivalry. How effective has this been?
Export controls were haphazard when Donald Trump first started using them. Chinese companies, like Huawei, had been buying enormous quantities of American technologies, especially semiconductors because Huawei knew Chinese alternatives were inferior.

When the U.S. government denied them that option, Huawei was forced to develop a local, domestic Chinese ecosystem. That has been China’s real Sputnik moment. Over the longer run, not at this moment, we will be able to point to the export controls as one of the great accelerants of China’s technological capabilities.

The Trump administration recently eased some of these restrictions, specifically on Nvidia and AMD’s ability to sell H20 chips to China. Was this a good move?
The US. government should either try to have the Chinese buy Americans technologies again to become dependent on the American technology stack or be much more severe and try to block off Huawei’s ability to keep accessing equipment.

To date, control measures have been too loose due to a variety of reasons, including generous licensing policy and Chinese companies’ ability to smuggle what they wanted on the gray market.

How far behind are the Chinese in semiconductors?
Right now, seriously behind in all sorts of ways. Huawei’s AI chips are definitely not as good as Nvidia’s; its semiconductor production equipment is nowhere near as good as tools from ASML; and China’s software t ools to design semiconductors are nowhere ne ar the American alternative.

China has an aggressively invested in certain sectors. What is your view of the U.S. taking a 10% stake in Intel?
State capitalism has arguably worked well in China, but its version has involved a very patient stake that invests huge amounts of money in favored sectors like robotics and electric vehicles and a broad risk tolerance. These aren’t the political conditions present in the U.S.

The U.S. just doesn’t have the right political culture to manage companies very well. Even if it did, it needs much more tolerance for failure and patience to execute it.

All of this is taking place against Chinese stocks hitting a decade-high and a weak economic outlook. What’s the disconnect?
China’s economic prospects seemed weak in 2019, even before the pandemic and after the economy has been lukewarm to poor since 2023 as it deals with a property crisis, debt issues, and longer-term demographic problems.

At the same time, China is producing bigger and bigger technology champions. AI, semiconductors, Huawei, internet companies—for the most part are gaining capabilities despite the state of the economy.

The engineering state is still very intent on technological supremacy. As they gain success, that’s going to further de-industrialize the United States. The West has to have a much better program than expecting artificial intelligence to solve all of its problems.

What is a misperception about China you encounter?
The most important thing is to view China as it is—with the good and bad. The economic growth over the past nearly five decades has been incredible, but at the same time political repression has gotten worse over the last 10 years. There are questions about whether Xi is going to tighten society into tremendous discontent and create some great mistakes. Yes, [there has been] economic growth but also new and novel forms of repression.

Thanks, Dan.

Write to Reshma Kapadia at reshma.kapadia@barrons.com