The China Shock 2.0

China’s transition from low-end manufacturing to dominance in advanced sectors like electric vehicles, batteries, and artificial intelligence constitutes a "China Shock 2.0" that fundamentally alters global geopolitics. Unlike the initial shock, which centered on labor-intensive goods, this phase leverages China’s state-directed financial system and high savings rate to capture the technological frontier. Brad Setser, a senior fellow at the Council on Foreign Relations, argues that China’s persistent overcapacity—producing far more than its domestic market can absorb—forces a global reckoning with industrial policy and supply chain vulnerability. While the U.S. and Europe grapple with the decline of traditional manufacturing, the challenge lies in balancing the benefits of trade against the risks of strategic dependence. Future competition in AI and digital services threatens to further disrupt Western economic models, necessitating a shift from procedural trade rules toward a strategy of reciprocal interdependence and national economic resilience.