China’s Trade Dominance and the Role of Industrial Policies

March 23, 2026

China's Trade Dominance and the Role of Industrial Policies

François de Soyres, Ece Fisgin, Mike Liu, and Eva Van Leemput¹

China's trade surplus surged to a record $1.2 trillion in 2025, exceeding 6% of its GDP, marking a new milestone in its integration into, and dominance of, the global trading system.² This development has attracted heightened attention from policymakers and analysts, not only because of the sheer size of the surplus, but also because of growing concerns about the distribution of global manufacturing, the persistence of global external imbalances, and the role of industrial policy interventions in shaping trade outcomes.

This note contributes to that discussion in two important ways. First, we document how China achieved this unprecedented trade surplus by establishing three salient aspects of China's trade dominance: the breadth of its export expansion across sectors, the corresponding loss of export market share by advanced economies, and the limited growth of China's imports outside of commodities. Second, we examine the relationship between China's industrial policies and sectoral trade outcomes, highlighting systematic links between policy interventions, export growth, and trade balance dynamics. Taken together, the evidence suggests that industrial policy is a contributing factor to China's trade surplus and should be considered alongside more traditional macroeconomic drivers.

1. Three aspects of China's trade dominance

A defining feature of China's recent trade performance is the broad-based nature of its export expansion. As shown in the left panel of Figure 1, China has gained global export market share in nearly all manufacturing sectors over the past decade. These gains span low-value-added consumer goods, such as apparel and textiles, as well as advanced products including automobiles. The expansion in advanced sectors is consistent with broader evidence of rising research and development intensity and innovation capacity in China, as documented in Ates and Jeon (2025). Therefore, contrary to the common view that China would move up the value chain as it gradually exhausted its pool of low-cost labor, it has expanded into higher-value sectors without ceding market share in lower-value industries.

This pattern has important implications for China's trading partners, which leads us to the second aspect. As China's export share has increased, exporters in advanced economies have experienced widespread losses in global market share. The right panel of Figure 1 illustrates changes in export shares for selected advanced economies alongside China. Losses are evident across most sectors and are particularly pronounced in economies with strong manufacturing bases, such as Japan and euro area members. Within the euro area, Germany is especially affected due of its exposure to sectors where China's export growth has been strongest.³ These shifts underscore how China's rise is reshaping the global manufacturing landscape and altering industrial competitiveness and trade dynamics across advanced economies.⁴

A third aspect of China's trade dominance is the asymmetry between exports and imports. As seen in the left panel of Figure 2, exports have expanded rapidly whereas import growth has lagged.⁵ The middle panel shows that imports have become even more concentrated in commodities and commodity-intensive inputs, now accounting for 44 percent of all Chinese imports. As shown in the right panel of Figure 2, this shift has supported economic activity in several commodity-exporting economies. In contrast, imports of manufactured goods from advanced economies have grown much more slowly, and exports to China as a share of gross domestic product have declined for many advanced economies. This divergence points to a change in the geography of China's growth spillovers, away from manufacturing exporters and toward commodity producers. This divergence has contributed directly to the rise in China's trade surplus and to a growing imbalance between global demand for Chinese goods and Chinese demand for foreign production.

Taken together, these three features, broad-based export gains, declining market shares for advanced economies, and limited import growth, define the current phase of China's trade dominance-one that is fueling concerns over global imbalances.

2. Industrial policy and sectoral trade outcomes

A central question in current policy debates is whether China's trade surplus reflects only macroeconomic fundamentals or also the effect of industrial policies and other non-market interventions. Standard analyses of external balances typically focus on factors such as saving-investment dynamics, productivity, currency valuation, and demographics, mostly abstracting from industrial policies.⁶ Recent work has begun to examine this link more explicitly, including Cesa-Bianchi et al. (2026) and Setser and Tordoir (2025).

To examine the role of China's industrial policies in shaping its trade outcomes, we use data from the New Industrial Policy Observatory (NIPO) database, part of Global Trade Alert (Evenett et al., 2024), which tracks trade-related policy interventions across countries and sectors. We construct a measure of industrial policy intensity by counting the number of interventions affecting each sector in China between 2017 and 2024, capturing relative differences in policy activity. A drawback of this measure is that it assigns equal weight to each policy intervention and does not account for differences in their magnitude. That said, we believe that the NIPO data offer two important advantages. First, it captures a broad range of industrial policy measures. As Table A.1 in the appendix shows, these policies span import restrictions and subsidies to credit policies and local procurement requirements. This breadth is particularly important in the case of China, where authorities rely on multiple policy levers to support targeted industries (DiPippo et al. 2022). Second, the NIPO data capture interventions that are difficult to quantify in monetary terms, including policies such as implicit loan guarantees and local labor requirements, which play an important role in China's industrial strategy. Taken together, these features make the NIPO data well suited to capturing the diverse set of industrial policy instruments employed by Chinese authorities.

Table 1 shows the sectors with the highest concentration of interventions. These include computing machinery, electronic components, motor vehicles, and pharmaceuticals, which were explicitly targeted under the Made in China 2025 initiative, as they are deemed central to strategic competition and industrial upgrading.⁷ Given this alignment, we believe the NIPO measure captures meaningful variation that corresponds closely to the actual priorities of China's industrial policy.

Table 1: Sectoral exposure to Industrial Policies in China, 2017-2024

Next, we assess whether China's industrial policies are linked to its export performance across sectors. Because these policies rely on a wide range of instruments, including subsidies, credit support, procurement rules, and import restrictions, they can affect trade outcomes along several margins at once. They can lower financing and production costs, facilitate capacity expansion, reduce risk for new entrants, and help firms scale more rapidly, thereby strengthening price competitiveness and export readiness. Consistent with these channels, Figure 3 shows that sectors with more policy interventions experienced faster export growth over the 2017 to 2024 period. The relationship is especially pronounced in motor vehicles and battery-related products, where extensive policy support coincided with rapid export expansion.

Industrial policy intensity is also associated with changes in sectoral trade balances. Many of the policy instruments captured in our measure, such as local procurement requirements, import restrictions, and support for domestic input production, are designed not only to promote exports but also to displace foreign suppliers in the domestic market. As a result, we would expect policy-intensive sectors to exhibit both stronger export growth and weaker import growth. Consistent with this prediction, Figure 4 shows that sectors with more interventions generally experienced larger increases in their trade surpluses between 2017 and 2024. These sectors contributed disproportionately to the rise in China's aggregate surplus: of roughly 200 sectors in our dataset, the top 15 in terms of policy support contributed 76 percent of the increase in the aggregate trade surplus over this period.

This pattern suggests that industrial policies affect trade balances through multiple channels, boosting external positions in targeted sectors by simultaneously supporting exports and reducing import penetration.

We should note that there is a long-standing literature on the effectiveness of industrial policies, with mixed evidence. Some studies find that targeted interventions can foster industrial development and productivity growth under certain conditions (e.g. Juhász 2018; Lane 2025), while others emphasize the risks of misallocation, political capture, and high fiscal costs associated with state intervention (Hsieh and Klenow 2009; Harrison and Rodríguez-Clare 2010).

As such, industrial policy does not automatically lead to higher exports or improved trade balances; its effectiveness depends on design, implementation, and market conditions. A notable feature of Chinese industrial policies is their emphasis on domestic competition and export competitiveness. Rather than promoting a few national champions, these policies incentivize a wide set of firms to pursue national priorities, fostering fierce competition that encourages innovation while enhancing exporters' global competitiveness.

In addition, this note focuses on a specific set of industrial policies that do not cover China's currency management.⁸ As we document, China has gained export market share across all sectors. This reflects its strong manufacturing competitiveness, but Chinese exports also benefit from significant price advantages arising from persistent deflation and a relatively weak currency, which has raised concerns that China may be keeping its exchange rate undervalued. That said, our analysis leverages variation in policy intensity across industries and documents a link between industrial policies and export growth. Our results suggest that industrial policies in China may have contributed to export growth beyond the effects of broad macroeconomic factors, such as a relatively weak renminbi, which do not vary systematically by sector.

Taken together, the sectoral evidence points to a systematic link between industrial policy interventions and China's trade outcomes. While the analysis does not isolate causal effects, it indicates that industrial policies are likely a contributing factor in shaping China's export performance and trade surplus.

Concluding remarks

China's record trade surplus has heightened scrutiny of external imbalances and the role of industrial policies in shaping them, prompting a reassessment of how much these policies matter relative to traditional macroeconomic fundamentals long viewed as the primary drivers of external imbalances.

At the aggregate level, China's growing imbalances stem from weak domestic demand amid high household savings and strong external demand. The weakness in domestic demand is rooted in structural features of China's economy and financial system-particularly those that constrain household consumption, such as a limited social safety net and few financial savings options beyond housing. This dynamic has been further amplified by the property market downturn and limited fiscal response.

At the same time, our evidence points to a systematic cross-sectoral association between industrial policy interventions and trade outcomes. Sectors receiving more policy support exhibit not only stronger export performance but also larger trade balances, consistent with both export expansion and import substitution. And these sectors also contributed more to the increase in aggregate trade surplus. Industrial policy therefore appears linked to the sectoral pattern of surpluses.

More broadly, China's industrial policies appear to channel resources toward investment in tradable sectors, effectively incentivizing firms to expand production capacity. At the same time, this allocation of resources comes at the expense of domestic-demand-supporting channels, such as social spending or measures that would reduce households' need to save. By prioritizing supply over consumption, these policies reinforce the economy's outward orientation. A comprehensive assessment of China's external imbalance should therefore consider both the sectoral effects of industrial policy and broader macroeconomic determinants.

References

Ates, Sina T., and Sharon Jeon (2025). "An Assessment of China's Innovative Capacity," FEDS Notes. Board of Governors of the Federal Reserve System, August 5, 2025.

Autor, David H., David Dorn, and Gordon H. Hanson. 2013. "The China Syndrome: Local Labor Market Effects of Import Competition in the United States." American Economic Review 103 (6): 2121-68.

Barcelona, William L., Danilo Cascaldi-Garcia, Jasper J. Hoek, and Eva Van Leemput (2025). "Is China Really Growing at 5 Percent?," FEDS Notes. Board of Governors of the Federal Reserve System, June 6, 2025.

Caines, Colin, Sharon Jeon, and Cheyenne Quijano (2025). "Developments in Chinese Chipmaking," FEDS Notes. Board of Governors of the Federal Reserve System, January 17, 2025.

Cesa-Bianchi, A., A. Ferrero, L. Fornaro, M. Wolf, 2026. "Industrial policies, global imbalances and technological hegemony," Economics Working Papers 1939, Universitat Pompeu Fabra.

de Soyres, Francois, and Dylan Moore (2024). "Assessing China's Efforts to Increase Self-Reliance," FEDS Notes. Board of Governors of the Federal Reserve System, February 2, 2024.

de Soyres, Francois, Ece Fisgin, Alexandre Gaillard, Ana Maria Santacreu, and Henry Young (2025). "The Sectoral Evolution of China's Trade," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 28, 2025.

DiPippo, G., I. Mazzocco, S. Kennedy, and M. Goodman. 2022. "Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective." Center for Strategic & International Studies (CSIS).

Dooley, Michael P., David Folkerts-Landau and Peter Garber. "The Revived Bretton Woods System," International Journal of Finance and Economics 9(4): 307-313, October 2004

Evenett, Simon, Adam Jakubik, Fernando Martín & Michele Ruta (2024) "The Return of Industrial Policy in Data." IMF Working Paper WP/24/1.

Goldberg, Pinelopi K., Réka Juhász, Nathan J. Lane, Giulia Lo Forte, and Jeff Thurk, "Industrial Policy in the Global Semiconductor Sector (PDF)," NBER Working Paper 32651 (2024).

Grossman, Gene M & Elhanan Helpman (1994). "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.

Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, vol 5.

Hsieh, Chang-Tai Peter J. Klenow, "Misallocation and Manufacturing TFP in China and India", The Quarterly Journal of Economics, Volume 124, Issue 4, November 2009, Pages 1403-1448, doi.org/10.1162/qjec.2009.124.4.1403.

Juhász, Réka. 2018. "Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade." American Economic Review 108 (11): 3339-76.

Lane, Nathan. "Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea", The Quarterly Journal of Economics, Volume 140, Issue 3, August 2025, Pages 1683-1741, doi.org/10.1093/qje/qjaf025.

Rodrik, D. (2006), "What's So Special about China's Exports?" China & World Economy, 14: 1-19, doi.org/10.1111/j.1749-124X.2006.00038.x.

Setser, Brad, and Sander Tordoir (2025). 'How German industry can survive the second China shock', CER policy brief.

Setser, Brad (2025). 'China's Massive Surplus is Everywhere (Yet The IMF Still Has Trouble Seeing It Clearly)'

Appendix

Table A.1: NIPO Trade Policy Interventions​