Long the ‘factory of the world,’ China is now experiencing its own ‘China shock’
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Ann Scott Tyson Staff writer
| Gaoyang County, China
Moving nimbly between clacking looms, Chinese textile worker Li Xiaojuan switches spools and ties loose threads, keeping machines humming as they weave white and lavender towels.
“I like working here,” says the mother of two teenagers, pulling off her safety mask and wiping back a strand of hair. Ms. Li says her job pays $1,300 a month and allows her and her husband, a shopkeeper, to make ends meet – for now.
Ms. Li is one of about 120,000 textile workers in her native Gaoyang County on the north China plain. An ancient textile center, Gaoyang is now famed as the nation’s towel and blanket capital, accounting for a third of the domestic market. Yet Jiang Dongfang, party secretary of Gaoyang County, says the number of textile workers here has already fallen by more than 25% over the last two decades – a trend that will likely be accelerated by the U.S. trade war, new industry data suggests.
Why We Wrote This
China is a manufacturing juggernaut, but new data shows the sector’s growth is slowing. As Beijing and Washington talk trade, and the U.S. seeks to revitalize its own manufacturing industry, what can America learn from China’s experience?
Many in the United States blame the 2000s “China shock” – a yearslong influx of low-cost Chinese goods – for hollowing out American factories. That impact was real and hit some communities especially hard. But the bigger picture, experts say, is that manufacturing has been declining in advanced economies for decades. Even China is now seeing its mighty manufacturing sector shrink as a share of gross domestic product as wages rise, production moves overseas, and rapid automation eliminates jobs and demands higher qualifications.
“China is also experiencing a ‘China shock,’” says Tianlei Huang, China program coordinator at the Peterson Institute for International Economics in Washington. “You just don’t need that many people to work in the factories.”
As China and U.S. officials meet in Switzerland this weekend, there is hope that a new trade deal may ease some burdens on Chinese manufacturers – and on American retailers – but experts say China’s economic landscape will continue to evolve.
Data points to decline
Globally, China still dominates manufacturing, accounting for about 30% of the world’s added value. Filled with whirring robots, Chinese factories are also more automated today than those in Japan, Germany, or the United States. At the same time, China is losing ground in traditional industries such as textiles, with some production moving to Vietnam, Bangladesh, and other Asian and Latin American countries where labor is cheaper.
As a result, “manufacturing employment in China, just like other industrialized countries, has come down,” says Mr. Huang. The sector’s portion of total economic output (GDP), measured as a share of value added, has dropped from a third to a quarter since 2004, according to World Bank data.
The U.S. trade war is intensifying pressure on manufacturing. Official data shows the sector contracting more than expected in April, as U.S. tariffs of 145% on most Chinese goods took effect. New orders, production, employment, and other key factory activity dropped to a 16-month low, while export orders fell to the lowest level since December 2022.
Last Friday, the U.S. also closed a loophole allowing American shoppers to import from China tax-free as long as the goods were directly shipped to U.S. consumers or small firms in packages worth less than $800.
Such measures are hitting Chinese factories making everything from clothing and bedding to toys, furniture, lamps, and umbrellas, leading to production stoppages and layoffs.
In Gaoyang, towels destined for the U.S. are now piling up in factory warehouses, according to recent reports.
“Clearly there is already some pain ... as people stop ordering Chinese goods,” says Bert Hofman, professor at the East Asian Institute of the National University of Singapore and former China country director for the World Bank.
President Donald Trump said Thursday that the 145% tariff would likely come down during trade negotiations, but this doesn’t mean the war is over. Despite the plunge in U.S. shipments, China’s overall exports actually rose by 8.1% in April, as companies redirected orders to other countries such as Thailand and Vietnam. That could give Beijing an advantage as it heads into talks. On the other hand, U.S. negotiators are heading to Switzerland after getting the United Kingdom to accept strict U.S. regulations that could block China out of critical supply chains in the name of national security.
Can China – or the U.S. – bounce back on manufacturing?
Domestic demand is unlikely to bridge the gap from canceled exports to the U.S., given China’s already slowing economy and weak household consumption, Mr. Hofman says.
Overall, China’s policymakers have overemphasized manufacturing as an economic driver, analysts say, and if the current tariffs stay in place, some predict China’s GDP growth this year could fall to 3%, missing the official target of around 5%.
Beijing leaned heavily into industrial policy to try to stimulate growth and jobs following the collapse of China’s real estate market in 2021, “but that didn’t work. ... You still don’t have enough job creation,” says Andrew Batson, China research director for Gavekal Research, a Hong Kong-based financial firm. “Even with this huge infusion of new resources in the manufacturing sector, it is still shrinking as a share of the economy.”
Long known as the “factory of the world,” China could offer some lessons for the U.S. as Washington seeks to revive U.S. manufacturing.
Instead of using tariffs and protectionism, the U.S. should take advantage of China’s gains in industrial automation to move up the value chain, experts say.
“Chinese companies are at the technological leading edge in certain areas, so having them come to the U.S. would be beneficial ... not just to transfer technology ... but to promote competition,” says Arthur Kroeber, head of research at Gavekal and author of “China’s Economy: What Everyone Needs To Know.” This would be similar to how Tesla’s presence in China served as a catalyst for local electric vehicle makers, he explains.
“What is not achievable,” he says, “is significantly increasing the number of jobs.”
In China, as manufacturing jobs disappear, workers are increasingly joining the service sector, including the gig economy, just as they have in the United States.
In Gaoyang County, laid-off textile workers are turning to tourism and logistics, or becoming delivery drivers.
“In the United States, all the textile production and labor force is already gone,” says Xu Qing, former deputy head of Gaoyang. “Gaoyang’s textile factories will face the same thing one day.”
