Growing global imbalances are only one source of trade frictions with China. Another is the soaring similarity in the export baskets of China and the advanced-economy countries.
By experts and staff
China’s trade surplus is set to hit well over a trillion dollars again this year. Largely in consequence, global current-account imbalances are projected to reach 4.1 percent of world GDP1—the highest level since the financial crisis of 2008. But those aggregate numbers do not capture another source of trade-policy friction: the growing overlap between China’s exports and those of its major trading partners. The advanced economies adjusted to the first China shock by moving up the value chain. The second shock has now arrived at their new address.
Our Export Similarity graphic above tells the story. The index we use measures how closely China’s export basket resembles that of the advanced economies. Broadly, the more similar the baskets become relative to 2007, the greater the potential for immediate trade conflict.
As shown in the graphic, the index fell from 2007 to 2013, as the advanced economies reduced wood, textiles, and other basic manufactures as a share of their exports. The orange bars show the advanced economies’ retreat from basic manufactures, which lowered the index by about two points by 2009—and, combined with their retreat from electronics, slightly more by 2013. That downward tug, however, is no longer enough to offset upward pressures elsewhere.
Those pressures have been in two categories—in chemicals since 2016, and machinery since 2023. As shown by the black line, they have driven the steep rise in the index value.
From the advanced economies’ perspective, some of this is benign: since 2022, memory-chip exports have risen by $33 billion in South Korea, and computer processing unit exports by $23 billion in the United States. The largest single driver, though, is China’s massive government-subsidized push into electric vehicles (EVs).2 Japan and Germany, whose economies are heavily dependent on cars and machinery, have seen their similarity with China rise by roughly ten points since 2007. The US figure, tariffs notwithstanding, is up 6.5 points.
Unilateral tariffs are a flawed response. Duties get circumvented: Chinese carmakers answered the EU’s 2024 EV duties by shifting to plug-in hybrids—which were not covered. Furthermore, Chinese overcapacity doesn’t fall, but gets redirected—fueling trade frictions elsewhere. The advanced economies now absorb 47 percent of China’s exports, down from about 70 percent in 2007; closing their markets pushes the surplus into third countries, where emerging economies then feel the same pressure. Any global solution has to span both groups.
The October 7 statement on excess capacity signed by the United States and fourteen other economies, including the EU, Japan, India, and Mexico, represents a possible way forward. But it needs agreed triggers and coordinated responses, so that diversion into one member’s market meets a common reply. It also needs a way out for China: the measures would be lifted as the subsidies behind the surplus are demonstrably cut—as judged by the members’ own monitoring of prices, capacity, and trade flows, rather than Beijing’s reporting. It also needs Washington to stop threatening overcapacity show trials of the equally affected partners it is courting. Until then, unilateral action against subsidized Chinese exports will remain a costly and ineffective game of whack-a-mole.