Sure. Some of these are natural processes. It's a growing Chinese economy, with Chinese producers moving up a value chain and gradually competing with industries in other countries. Some of that is a natural process that we also see in other developing countries. What's distinctive about the current China shock is that it's driven to a great extent by massive state subsidies and industrial policies that have deliberately, under banners including made in China 2025, dual circulation and others.... It's part of an explicit policy by China to dominate key sectors, such as biotechnology, robotics, advanced manufacturing and green technology, and to make China the dominant producer of those technologies, while at the same time making other countries dependent on China for those technologies and reducing China's dependence on others. It's leveraging productive capacity for geopolitical purposes.
This is ultimately driven by both ideological and domestic political economy dynamics. China heavily incentivizes production in manufacturing because the Chinese Communist Party views this as a source of comprehensive state power. It's a massive wealth transfer from Chinese citizens through low interest rates in their bank accounts, for example, in taxation, funnelled into Chinese industry, which then makes those Chinese companies much more competitive on an international market than any western company, because those companies, in many cases, don't have to worry about turning a profit. They're getting cheap land, low taxation, and a lot of credit and other resources, and they're plugging into vast, industrial-scale clusters. There are economies of scale, and there are advantages of learning by doing; a whole host of things pile up to make this an industrial juggernaut.
For countries like Germany, for example, this has become existential. The first China shock was a deindustrialization of somewhat lower value-added manufacturing in the U.S., southern Europe and other countries about 10 to 20 years ago. The current China shock is now decimating the most advanced manufacturing in the world. It's affecting, for example, American automakers, drones and battery makers. It's affecting every German car maker. There are massive layoffs in Germany.
The risk is both economic and strategic. If you deindustrialize a country, you lose a lot of quality jobs. You lose the ecosystem. You lose the process knowledge and expertise that make you capable of producing the advanced technologies of the 21st century. What happens if there's a war? Are you going to have the capacity to build the necessary materials for tanks, for armoured cars, for weapons? Are you still going to have the skilled labour that can produce those things? You're also ultimately going to suffer in terms of lost productivity, because it's much harder to drive productivity in service and agricultural sectors than it is in manufacturing.
There are a whole host of negative externalities that come along with a loss of a manufacturing base and industry, and those in turn accrue to China a further benefit of that much industrial gravity. We are talking about China alone, potentially, in the next few years, producing 40% of all global manufacturing. That provides massive economies of scale; it provides geopolitical leverage, and it ultimately puts China in a position to disseminate its own standards, norms and ideologies through that technology. It's an immensely powerful tool of influence.