China's Industrial Catalog and the Global Trade Ripple Effect — Takeaways
On Monday, March 2, the Association of Foreign Press Correspondents (AFPC-USA), hosted a podcast, in partnership with the Hinrich Foundation, titled, “China's Industrial Catalog and the Global Trade Ripple Effect.”
China now produces more than 30% of the world’s manufactured goods—more than the United States, Germany, and South Korea combined. Some Chinese scholars argue the country should push that share to 45%, framing sheer industrial scale as both a shield against pressure from the United States and a source of “narrative power” in the global economy, writes Mariko Watanabe, Professor with the Faculty of Economics at Gakushuin University, where her research specializes in applied microeconomics, the Chinese economy, firms, and institutions.
These arguments, she writes in research for the Hinrich Foundation, highlight how scale itself is treated as a strategic asset. But size can also carry risks: overwhelming productive capacity can distort markets and strain trade relations, creating systemic challenges not only for China but for the global economy as a whole.
The podcast episode was hosted by Roseanne Gerin, an assistant editor at the newsletter International Trade Today, who has worked in journalism for more than 25 years.
This podcast episode was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode. The transcript of this discussion can be found HERE.
Watanabe said that China’s dominance in manufacturing—now producing “more than 30% of the world’s manufactured goods”—is the result of “efforts for the last 40 years,” but warned that the same system that fueled that growth is now creating major problems.
According to Watanabe, China’s strong state capacity to organize industrial planning, similar to models once used in Japan and South Korea, has produced “a very huge problem both domestically and internationally.” She said Beijing increasingly views its manufacturing scale as “some kind of geopolitical asset” amid intensifying tensions with the United States.
The economist said the consequences of that strategy are now visible across the economy. By 2024, she noted, “the depression situation appeared overall in sectors,” signaling that overcapacity had become systemic rather than limited to specific industries.
At the center of the problem, she argued, is China’s “Catalogue of Industrial Guidance,” a government planning list that directs investment into favored industries. Introduced after China declared a “socialist market economy” in 1992 and expanded through several revisions, the catalogue encourages local governments to pour resources into sectors designated by Beijing.
Local officials, she explained, often rely on the catalogue as “a very good reference as to how to invest,” even when they lack technical expertise in the industries involved. The result, Watanabe said, is nationwide investment driven by central planning signals—a system that helped build China’s manufacturing dominance but is now fueling widespread overcapacity and global trade tensions.
Mariko Watanabe
Watanabe said China’s industrial policy encourages waves of investment into the same sectors (such as electric vehicles, solar panels, and steel) even when demand cannot absorb the resulting output.
She explained that in most countries, industries like EVs are developed by established automakers with technical expertise. In China, however, government planning signals encourage many firms to enter the same sector. The state’s industrial catalogue effectively “helps them to organize investing in some specific industry that was directed by the government,” she said. As a result, even entrepreneurs or officials “with no professional knowledge can enter into the industries,” fueling what she described as “unuseful, unnecessary investment.”
The consequences are visible in sectors where production keeps rising while prices fall. Watanabe pointed to China’s EV battery industry, where leaders like BYD and CATL dominate globally, yet dozens of other firms remain in the market. China still has “57 other companies that produce EV batteries,” she said, many of which lack sufficient research and development capacity but continue operating, a sign that “over-entry in the industry is not a good symptom.”
Watanabe argued the problem reflects a broader market failure created by the planning system. China’s industrial strategy has built unusually strong supply-chain linkages—what she called a “very broad and perfect industrial-wise input-output relationship.” While that integration strengthens China’s manufacturing ecosystem, it also creates external effects that crowd out competitors abroad. In international economics, she said, this dynamic is known as a “production geolocation externality,” where China’s scale undermines the industrial bases of other economies.
The pattern has already reshaped global markets. Watanabe said the phenomenon first appeared in shipbuilding in 2006 and has more recently spread to the EV sector. After China designated EVs as a priority industry in its 13th Five-Year Plan, companies rapidly expanded production. By 2021, intense domestic competition pushed many firms to export vehicles abroad to survive. Chinese analysts refer to this self-reinforcing cycle of competition and oversupply as “involution,” she said.
Watanabe argued that China’s industrial success has created a paradox in which rising production can actually reduce national welfare. She described the phenomenon as a form of “immiserizing growth,” where expanding output lowers prices so dramatically that the country earns relatively little from what it sells abroad.
China’s competitiveness relies heavily on scale, she said: “The more they produce their products, the cheaper their prices become.” While this allows Chinese firms to export “very good products at cheap prices,” the returns remain limited. Because the country sells goods cheaply but imports higher-priced products, “their purchasing power does not rise,” leaving Chinese households with weaker economic gains despite the nation’s manufacturing strength.
Watanabe said this dynamic harms not only China but also its trading partners. Massive exports—particularly in sectors like electric vehicles and solar panels—are sometimes sold abroad even when companies are losing money at home due to fierce domestic competition. Such practices clash with basic trade principles, she said, arguing that global institutions need stronger safeguards, anti-dumping rules, and counter-subsidy measures to address the problem.
She also said geopolitical tensions are reinforcing the cycle. China increasingly sees its industrial capacity as a strategic asset in its rivalry with the United States, creating what she described as a “chicken game” of continued capacity expansion. Even if the strategy harms domestic welfare, Beijing feels pressure to maintain it as a form of economic defense.
The spillover effects are especially severe in developing economies. Countries such as Vietnam, which have built their own manufacturing sectors, can see domestic industries quickly undermined by waves of cheaper imports. As Watanabe put it, “the smaller the country is, the bigger the damage.” For those nations, she argued, stronger international rules and cooperation among middle powers like Japan, the European Union, and Canada could help protect emerging industries.
Watanabe said China’s industrial strategy is contributing to the fragmentation of global supply chains as economic rivalry between China and the United States intensifies. She warned the competition risks becoming a geopolitical “chicken game” in which both powers continue expanding production capacity, even when global markets are already oversupplied.
“If one country or a bigger country monopolizes the profit from the scale, it would become very disastrous,” she said, arguing that the international trading system was originally designed to prevent exactly that outcome. Watanabe said countries should focus on strengthening the World Trade Organization and restoring a rules-based system that allows the benefits of large-scale production to be shared more broadly.
Addressing the problem will require reforms both inside China and internationally. Watanabe said global trade rules must better protect industries from surges of subsidized exports by strengthening safeguards, anti-dumping tools, and countervailing duties. At the same time, she argued that China needs to shift its economic model away from investment-driven manufacturing and toward stronger domestic consumption.
But she acknowledged major political obstacles to that shift. The governing philosophy of the Chinese Communist Party, she said, traditionally prioritizes protecting state power over maximizing household welfare, making it difficult to rebalance the economy toward consumers.
Looking to history, Watanabe pointed to tensions between the United States and Japan in the 1980s, when economists sought ways to prevent any single country from monopolizing the gains of large-scale production. One solution was the Information Technology Agreement, which eliminated tariffs on many technological products and helped distribute manufacturing benefits across multiple countries.
She suggested similar cooperation could help prevent scale advantages from concentrating in a single economy today. Another pragmatic path, she said, is deeper regional integration through trade blocs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and expanded agreements between the European Union and Southeast Asian economies. By creating large markets outside the U.S.–China rivalry, such partnerships could give middle and emerging powers enough economic scale to negotiate more effectively with the world’s two largest economies.
Watanabe said middle-income countries caught between the economic rivalry of the United States and China still have tools to defend their industries, though the options are limited. She argued that smaller and emerging economies should first rely on the World Trade Organization, which she said, “is still functioning to some extent.” Filing cases through the WTO and forcing negotiations can help compel larger powers—particularly China, which presents itself as a defender of free-trade rules—to engage with disputes through the multilateral system. She also pointed to mechanisms such as the Multi-Party Interim Appeal Arbitration Arrangement as another venue where countries can pursue rulings when traditional dispute channels stall.
Watanabe added that larger middle powers—including the European Union, Japan, and Canada—should help smaller economies defend their trade rights by backing cases and building political coalitions around rules-based trade. In closing, she acknowledged that the global trading system is currently unsettled but argued the turbulence is unlikely to last indefinitely. Rather than choosing sides between major powers, she said third-party economies should work together to rebuild a cooperative framework.
Although advocating for a rules-based system may seem naïve during a period of geopolitical confrontation, Watanabe said it remains the most realistic path forward. As she put it, smaller countries should unite and build enough collective economic scale “to keep our voices heard,” instead of being forced to “fight against a tiger and an elephant.”
