China crossed a $1 trillion trade surplus within just 11 months of 2025, a global first, achieved despite heavy US tariffs imposed in April 2025 that reduced Chinese exports to the US by 29%.

Paradox of Trade Surplus (Strength vs. Imbalance)

• The surplus is both a sign of strength and imbalance.
• Strength: It is attributed to the Production at Scale (massive factories established over 20 years), 
  • Strong Supply Chain Ecosystem (manufacturing clusters handling raw material, value addition, and export in one location), and Weak Currency (Renminbi), which makes Chinese exports cheaper and more lucrative in foreign markets.
• Imbalance: It stems from weak domestic demand and low local investment.
  • Factories are forced to sell abroad because Chinese citizens are not buying, leading to “unbalanced growth” rather than healthy growth.

Structural Shift in China’s Exports

• The “Old China” Export Model: China exported cheap goods like textiles, toys, and furniture, driven by cheap labour. 
• The “New China” Export Model: China has now moved up the value chain, exporting Integrated Circuits, Electric Vehicles (EVs), and advanced machinery. 

Key Concepts

• Involution: This is defined as intense internal competition that does not increase productivity. 
  • China’s overcapacity and low domestic demand lead factories to engage in fierce price wars to sell goods, cutting profits heavily and making the situation unsustainable.
• China Shock 1.0: China Shock 1.0 describes the period from 2001 to 2011, when cheap Chinese goods flooded global markets after China joined the WTO, leading to the loss of millions of jobs in the United States.
• China Shock 2.0: It refers to fears that China’s advanced technology products, such as Electric Vehicles, batteries, solar panels, and electronics, are dominating global markets.
  • This has caused alarm in Europe and the United States, especially in sectors such as the German automotive industry.
  • China faces accusations of dumping, which involves selling goods abroad at prices lower than domestic prices, often aided by subsidies.

Geopolitical Dimensions Contributing to Trade Surplus

• Shift to the Global South: Despite US tariffs, China secured its trade surplus by finding new markets in the Global South, including Africa, Latin America, and the Middle East.
• Expansion in Southeast Asia: China increased exports to Southeast Asia, particularly to ASEAN countries.
• Transhipment and Rerouting: China bypassed US tariffs by rerouting exports through intermediary countries such as Vietnam and Mexico, involving relabeling, minor assembly, or limited value addition before re-export.
• Final Export to the US: These goods were subsequently sent to the United States.

Check Out UPSC CSE Books

Visit PW Store

Conclusion

China’s $1 trillion trade surplus signals strong export competitiveness but conceals domestic demand weakness and structural imbalances. Achieving sustainable growth will require rebalancing towards consumption, reducing overcapacity, and managing global trade frictions, as emphasised by the Central Economic Work Conference (CEWC).

DOWNLOAD PDF