Trading Partners Form United Front Against Chinese Export Onslaught as Export-Dependent China Prepares to Hold Firm Using Supply Chain Leverage

Influx of Chinese goods threatens industries and jobs across trading partners
Coordinated response to overproduction expands to discussion of a “second Plaza Accord”
Simultaneous barriers in major markets could disrupt export-dependent strategy

Trade tensions between China and its major trading partners are intensifying as Beijing uses exports to offset weak domestic demand. With an influx of Chinese goods threatening domestic industries and jobs, countries have begun coordinating their response to overproduction, even floating the idea of a “second Plaza Accord” to pressure China to let the yuan appreciate. China is also preparing to push back by leveraging supply chains for critical materials, but simultaneous increases in import barriers across major markets would inevitably leave it less room to sustain growth through exports. Concerns are growing that if exports contract while domestic demand remains weak, China could again turn to debt-financed investment stimulus, increasing the risk of a Japan-style prolonged stagnation.

China Lowers Growth Expectations, Relies on Exports to Stay Afloat

According to Bloomberg on the 21st, local time, the Chinese government recently formally acknowledged slowing growth by lowering this year’s economic growth target to 4.5–5%, the lowest since 1991. The reduction from the “around 5%” target maintained over the past 3 years is seen as a response to a prolonged property downturn and weak consumption. Exports are now the main engine supporting China’s growth. Third-quarter gross domestic product (GDP) rose 4.5% year on year, according to China’s National Bureau of Statistics, with overseas sales of advanced manufactured goods, including semiconductors and electric vehicles, supporting the expansion. The trade surplus for January–September this year reached USD 938 billion (approximately USD 967 billion), putting it on course to surpass last year’s record annual surplus of USD 1.2 trillion (approximately USD 1.24e+3 billion).

Meanwhile, the property slump weighing on a recovery in domestic demand is eroding households’ and businesses’ capacity to spend. According to an analysis by market research firm Macquarie, new housing starts in China have fallen 78% from their peak, while declining home prices and job insecurity have also dampened consumer sentiment. Retail sales growth, which tracks goods sales and dining expenditures, was just 1.1% last month, following 0.6% in July and 0.4% in August. Household restraint was also evident in leisure spending during the National Day holiday earlier this month, when average spending per trip fell to its lowest level in 4 years. As consumers tighten their purse strings, companies are cutting selling prices to attract customers while also reducing costs, including labor expenses. The result is a vicious cycle in which weak consumption squeezes corporate spending on jobs and wages, further weakening household purchasing power.

All-Out Export Push to Offset Weak Domestic Demand

Chinese companies, finding it increasingly difficult to protect profitability through domestic price competition and cost cuts alone, are accelerating their expansion into overseas markets. Weaker consumption has intensified price competition, undermining the profitability of domestic operations. According to the China Association of Automobile Manufacturers, passenger car sales in China fell 27% year on year last month, extending the contraction in the domestic market. As automakers expanded sales channels in Europe, Latin America and Southeast Asia, passenger car exports rose 64% in the same month to about 919,000 vehicles. International credit rating agency S&P Global Ratings said China’s auto industry is becoming more dependent on overseas revenue and profits to offset weak domestic demand.

China needs exports to sustain production and corporate earnings until domestic demand recovers. According to an International Monetary Fund (IMF) analysis, exports have filled the gap in domestic demand as a protracted property adjustment and a weak social safety net have prompted households to rein in spending. If overseas orders also decline, the shock could spread to factory operations and employment. Companies facing falling revenue may first cut capital expenditure and labor costs, further weakening household purchasing power. The World Bank has also noted that declining corporate profits could place additional pressure on consumption through delayed investment and a deteriorating labor market. China’s reliance on exports appears driven not only by the immediate need to defend its growth rate but also by concerns that shrinking production and employment could entrench the domestic downturn.

Chinese Authorities Recognize Limits of Export Dependence

Chinese authorities also recognize that there are limits to relying on exports to sustain growth and employment, and that reviving domestic demand is urgent. At last month’s meeting of Group of 20 (G20) finance ministers and central bank governors, People’s Bank of China Governor Pan Gongsheng outlined plans to expand domestic demand, citing the need for countries with trade surpluses to increase consumption and investment. Since late last month, the government has also introduced additional stimulus measures, including mortgage subsidies, funding support for local governments and low-interest loans for infrastructure and technology. Critics, however, argue that support tilted toward production and investment will struggle to raise household purchasing power. Michelle Lam, an economist at French bank Société Générale, warned that delays in shifting policy toward supporting household incomes and consumption could prolong low inflation and slow growth. The assessment suggests it will take considerable time for domestic demand to replace exports as the engine of growth.

This also helps explain why China finds it difficult to accept a reduction in exports. There are concerns that if overseas markets narrow before domestic demand recovers, the country could slip into a prolonged stagnation like Japan’s. Richard Koo, chief economist at Japan’s private-sector Nomura Research Institute, said China is experiencing a “balance sheet recession,” in which households and companies focus on repaying debt after a sharp fall in asset prices. Because debts remain unchanged even as asset values fall, lower interest rates struggle to encourage the private sector to borrow more for consumption and investment. In Japan, too, continued private-sector deleveraging after the asset bubble burst weakened the stimulative effect of monetary easing.

Major Trading Partners Join Forces Against Chinese Overproduction

The problem is that the more China relies on exports, the more forcefully its trading partners move to protect their own industries. At the G20 finance ministers’ and central bank governors’ meeting held in the United States on the 1st of last month, participants other than China agreed on the need to address non-market policies that deepen export dependence and trade imbalances. The chair’s statement called on countries with persistently large external surpluses to eliminate distortions that suppress domestic consumption and make growth dependent on exports. The influx into other markets of Chinese goods blocked by US tariff barriers appears to have broadened support for trade pressure on China. US Treasury Secretary Scott Bessent also said his warning that higher US tariffs would divert Chinese goods into trading partners’ markets was coming true.

The joint response is taking concrete shape through the formation of sector-specific consultative groups. According to a joint ministerial statement released by the Office of the US Trade Representative (USTR) on the 7th of this month, 15 economies, including South Korea, the United States, Japan and the European Union (EU), agreed to address structural overproduction. Initial discussions will focus on sectors where China’s capacity expansion has been particularly pronounced, including automobiles and electric vehicles, batteries, chemicals, mature-node semiconductors and solar panels. Participants noted that government-supported overproduction threatens local production and jobs while increasing dependence on particular supplier countries and vulnerability to export controls. They agreed to hold a working-level meeting before December to share information on production capacity and harm, and to explore ways for their respective measures to reinforce one another. Although the statement did not name a specific country, the coordination is seen as targeting China’s industrial support and export expansion.

Table 1. International Responses to China’s Export Expansion

From Restraining Chinese Exports to Calls for Yuan Appreciation

Alongside these efforts, the idea of a “second Plaza Accord” to induce yuan appreciation through trade pressure is also being discussed. The 1985 Plaza Accord was an agreement among the United States, Japan, West Germany, France and the United Kingdom to jointly intervene in foreign exchange markets to lower the dollar’s value. In June, German Chancellor Friedrich Merz proposed Plaza Accord-style international consultations, arguing that an undervalued yuan was boosting the price competitiveness of Chinese goods. Last month, The Wall Street Journal’s chief economics commentator Greg Ip also argued that countries should use tariffs as a coordinated pressure tool to secure yuan appreciation. In China, however, the prevailing view is that this is an attempt to weaken the competitiveness of its manufacturing sector. In an editorial following Merz’s proposal, China’s state-run Global Times argued that pressure under the pretext of exchange rates was unacceptable, stressing the size of China’s economy, its industrial base and its policy autonomy.

China is also pushing back against coordinated action targeting overproduction, leaving open the possibility of using its supply chain influence as a bargaining tool. On the 15th of this month, China’s Ministry of Commerce said it would respond firmly if measures harming its interests were implemented under the pretext of overproduction. China’s capacity to respond was already demonstrated during last year’s rare earth export controls. When China introduced licensing requirements for exports of rare earths and permanent magnets, supplies were delayed, forcing some European auto parts factories to halt production. Diplomats and auto industry representatives from India, Japan and Europe asked China to expedite export approvals out of concern that component shortages could disrupt vehicle production. Since major manufacturing countries cannot readily replace critical Chinese materials in the short term, China may try to ease pressure by highlighting the costs that supply restrictions would impose on its counterparts.

Analysts caution, however, that China’s strategy of holding firm through supply chain leverage would inevitably become more costly if its major trading partners raised import barriers together. Michael Pettis, a senior fellow at the US think tank Carnegie Endowment for International Peace, said that if trade tensions reduce China’s trade surplus, domestic consumption or investment must increase by an equivalent amount; otherwise, production and employment could contract. Because raising household incomes to boost consumption takes time, Chinese authorities may again turn to government-led investment expansion to prevent an immediate economic slowdown. Increasing investment first when demand is insufficient could also tie up funds in low-return projects and increase the debt burden. Pettis noted that after the Plaza Accord, Japan also loosened monetary conditions excessively to prevent a growth slowdown, expanding credit and investment and exacerbating economic imbalances in the process. The concern is that if China similarly relies on debt-financed investment without replacing lost exports with domestic demand, debt accumulated through stimulus efforts could increase the risk of a Japan-style prolonged stagnation.