A recent Wall Street Journal article entitled "The World Is in for Another China Shock" caught my eye. The first China shock, or course, was the one that followed China's economic emergence on the world stage, which culminated with its entry into the World Trade Organization in 2001. There is much evidence that this contributed to the loss of manufacturing jobs in many industrialized countries, chiefly the US. As we discussed in Global Trends, this in turn contributed to the rise of populist forces in the US and elsewhere, and to a backlash against globalization. Now, China's slowing economy and huge manufacturing capability are fueling a second China shock, powered by low prices on many goods such as EVs - which in turn benefit from generous public subsidies aimed at turning China's economy around. This has deflationary effects on importing countries like the US or the countries in the EU, because the imported goods are typically cheaper than those available through domestic production (so, a BYD car is much cheaper than a Tesla, for instance, in turn putting downward pressure on Tesla prices).
This time, though, the backlash is likely to be much swifter, and we are already seeing many calls for raising tariffs on Chinese imports - not just in the US, where 25% tariffs on many Chinese-made goods have been in place since the Trump administration, but increasingly in Europe as well. Whether such tariffs will have inflationary effects remains to be seen.
This case illustrates the importance of considering the world economy as an interconnected whole - a growth slowdown in China, and the concurrent increase in government support - helps bring down inflation in Western economies. A backlash against cheap imports from China, instead, could contribute to inflation, by giving more leeway to domestic producers to increase prices. And all this comes from the slowdown in Chinese growth. Definitely an issue that you will want to track closely.