China's Export Maximization Strategy and the Reshaping of the Global Trade Order: South Korea's Policy Challenges

Executive Summary

China's record-high trade surplus is not the result of an industrial strategy but a structural choice to fill the gap in domestic demand, caused by a real estate slump, with exports. Overproduction is spreading across all advanced manufacturing sectors, including steel, electric vehicles (EVs), batteries, and robotics. Ahead of the Xi-Trump summit, the United States is considering additional tariffs under the pretext of "overproduction" and is redefining the issue as a national security problem linked to the loss of its advanced manufacturing base. This suggests that trade friction is solidifying into an economic sub-front of the U.S.-China strategic competition. The EU is also highly likely to phase in its Carbon Border Adjustment Mechanism (CBAM) and anti-dumping tariffs, starting with steel and expanding to EVs, batteries, and robotics, indicating that the response is moving beyond the U.S. alone to the multilateral level. In this context, the competition over industrial subsidies among countries is intertwined with the race for self-sufficiency in advanced technologies like semiconductors and AI, reinforcing a structure where trade policy functions as a direct tool of the tech hegemony contest. South Korea needs to establish an immediate response system for the steel industry, the primary target, while simultaneously pursuing a medium-term strategy to secure market leadership in batteries and robotics, which are lower on the list for tariff expansion.

I. Analysis of the Current Situation

China's Export Maximization Strategy: Ripples Through the Global Trade Order

1. Background and Developments

○ China's expansion of exports is not an industrial strategy but a structural choice to fill the gap in domestic demand [2].

○ The prolonged slump in the real estate market has dampened domestic consumption [2][6]. - A structure has become entrenched where production capacity that cannot be absorbed domestically is offloaded overseas [2]. - This trend began in the early 2020s in the electric vehicle (EV) and battery sectors [2][6]. - It has since expanded to steel, chemicals, and machinery [6][9]. - More recently, the scope has widened to include industrial robots [6][9].

○ The current account surplus expanded from 0.7% of GDP in 2019 to 3.7% in 2025 [2][6][7]. - Based on customs data, the trade surplus is even larger [7][9]. - In absolute terms, it reached a record high of $1.2 trillion in 2025 [4][5][10].

○ The Atlantic Council defines this as "the visible product of a deliberate strategy aimed at self-reliance" [4]. - It suppresses private consumption and provides subsidies for industrial investment [4]. - It exports volumes that the domestic market cannot absorb [4].

○ For Beijing's policymakers, this situation is not a new experience [2]. - It is expected that they will replicate the response methods already tested during the Eurozone crisis [2].

2. Current Situation

○ The United States is considering raising tariffs on China ahead of the Xi-Trump summit [17]. - A 7.5% tariff under the pretext of "overproduction" is being discussed [8][17]. - If imposed, tariffs on China under a second Trump administration would be restored to the 20% level [17]. - This aligns with the level agreed upon during the bilateral trade truce [17].

○ Chinese state media reject the "overproduction" frame itself [8][6]. - The Global Times reported an expert's view that "tariffs cannot solve America's productivity problems" [8]. - It counters that the U.S. multilateral trade deficit is due to domestic factors, not external ones [8]. - It puts forward the logic that U.S. companies should share in the opportunities from the development of Chinese manufacturing [8].

○ The EU is poised to phase in its Carbon Border Adjustment Mechanism (CBAM) and anti-dumping tariffs [2][6][9]. - The most likely scenario (50-55% probability) is an expansion from steel to EVs, batteries, and robotics [6][9]. - The EU-China trade deficit expanded to €360 billion in 2025 [2][6][9]. - Germany's ranking as an exporter to China has fallen from 2nd to 9th [6][9]. - Despite this, a paradox has emerged where Germany's trade deficit with China has actually widened [6][9].

○ The Swiss newspaper NZZ has reported on the growing support for stronger tariffs within Brussels [15]. - Subsidized Chinese products like citric acid are putting pressure on European companies [15]. - There are growing calls to model the response on the Trump administration's approach [15].

○ The Nikkei highlighted the phenomenon of "hypercompetition" within China [12]. - Citing the case of an EV parts manufacturer in Wuxi, it pointed to a structure where excessive competition leads to deteriorating profitability [12]. - It also reported that Beijing itself is concerned about this backlash [12].

3. Key Actors and Positions

○ Chinese Government - Prioritizes industrial investment subsidies and export expansion over stimulating domestic demand [4]. - Externally, it rejects the "overproduction" frame and responds with a narrative of industrial upgrading [6][8]. - It is expected to pursue diversification into emerging markets and wage a public opinion campaign concurrently [2][6]. - It may exploit policy divisions among EU member states (Germany vs. France and Italy) [6][9].

○ U.S. Government (Trump Administration) - Preparing to impose new tariffs under the pretext of "overproduction" [8][17]. - Coordinating the timing of the tariff announcement with the political calendar, specifically the Xi-Trump summit [17]. - Aims to restore tariffs to the level agreed upon during the trade truce (20%) [17].

○ EU and Member States - Expected to expand CBAM and anti-dumping tariffs in the order of steel → EVs → batteries → robotics [6][9]. - Germany is facing the dual challenge of a declining share of exports to China and a widening trade deficit [6][9]. - Within Brussels, support is growing for modeling tariffs on the high-rate U.S. approach [15].

○ Developing Countries (Africa, Asia, Latin America) - Growing concern that their domestic manufacturing bases are being eroded by China's low-cost export offensive [1].

○ South Korea - Has an opportunity to capture market share in the EU as Chinese goods are displaced [2][6][9]. - However, this is a limited opportunity available only to companies that have proactively established reporting systems for CBAM carbon intensity [2][6]. - The need for the steel industry to respond is more urgent than for other sectors [9].

4. Key Issues

○ Perceptual Gap Over Causation - The U.S. and EU point to industrial subsidies and unfair competition [1][3]. - China emphasizes structural factors like its weak domestic demand and real estate slump [6][7].

○ Debate on the Effectiveness of Tariffs - Within the U.S., some argue that tariffs fail to address the root cause of productivity issues [8]. - China counters that the structure of the U.S. multilateral trade deficit is the problem itself [8].

○ EU's Phased Expansion Strategy and Internal Divisions - A strategy of expanding the scope of measures starting with steel is likely, but member states' interests diverge [6][9]. - China is expected to exploit these divisions, as it did during the Eurozone crisis [2].

○ Dual Implications for Middle Powers - The opportunity to fill market gaps coexists with the risk of supply chain restructuring costs [2][6]. - The ability to respond is limited to companies that can proactively comply with sector-specific regulatory timelines (e.g., CBAM) [6][9].

II. In-Depth Analysis

China's Export Maximization Strategy: Ripples Through the Global Trade Order

In-Depth Analysis of the Issue

1. Analysis of Root Causes

○ The starting point of the current situation is not industrial policy but the collapse of the real estate sector [2][6]. - The real estate slump has become prolonged since the Evergrande and Country Garden crises [2]. - With a significant portion of household assets tied up in real estate, the decline in asset values has directly led to reduced consumption [2][6]. - Local government finances have also been hit by a decrease in revenue from land sales [7].

○ Beijing chose to maintain production capacity instead of stimulating consumption [4]. - The Atlantic Council defines this as a strategy of "suppressing private consumption and subsidizing industrial investment" [4]. - A structure has become entrenched where volumes that cannot be absorbed domestically are diverted to exports [4]. - This is also a political choice to avoid rising unemployment [7].

○ Competition among local governments to attract industries structurally reproduces overcapacity [12]. - The Nikkei, citing the case of an EV parts manufacturer, pointed to the phenomenon of "hypercompetition" eroding profits [12]. - A CEO in Wuxi lamented, "We've been swept up in a model of infinite-competition manufacturing" [12]. - Local government subsidies delay the exit of uncompetitive firms [12].

○ China rejects this diagnosis of the cause [8]. - The Global Times quoted an expert who stated, "Tariffs cannot solve America's productivity problems" [8]. - It counters that the U.S. multilateral trade deficit is not due to external factors but to its own domestic savings rate and fiscal structure [8]. - This discursive gap is a factor narrowing the common ground for negotiations [8].

2. Structural Context

○ Economic Structure: A growth model with a low share of consumption has persisted for over 20 years [2][7]. - The current account surplus expanded from 0.7% of GDP in 2019 to 3.7% in 2025 [2][6][7]. - The trade surplus based on customs data is even larger [7][9]. - In absolute terms, it is a record $1.2 trillion [4][5][10]. - The PIIE described this as a phenomenon of "the real estate collapse spilling across borders" [7].

○ Political Structure: The Xi Jinping leadership's prioritization of manufacturing obstructs a policy shift [14]. - Foreign Affairs analyzes that China has used trade as both "an engine of economic growth and a tool of geopolitics" [14]. - Export expansion is decided within an integrated system of national security, industrial policy, and energy policy [14]. - Support for manufacturing is a higher political priority than investment in the social safety net to expand domestic demand [14].

○ Security Structure: The United States is redefining the trade surplus as a national security issue [1][14]. - Foreign Affairs warns, "The next global economic crisis could be made in China" [1]. - The logic that the loss of advanced manufacturing capabilities leads to a weakening of the defense industrial base is being used to justify tariffs on China [14]. - This functions not merely as trade friction but as an economic sub-front in the U.S.-China strategic competition.

○ Multilateral Structure: The response is spreading beyond the U.S. alone to the EU and Asia [6][9][15]. - The EU is poised to phase in CBAM and anti-dumping tariffs, starting with steel [6][9]. - Switzerland's media reported on Brussels' growing support for stronger tariffs on subsidized items like citric acid [15]. - It has been pointed out that the manufacturing bases of developing countries in Africa, Asia, and Latin America are also being eroded [1].

3. Historical Precedents and Comparative Cases

○ The situation is structurally similar to "China Shock 1.0" after the 2008 global financial crisis [6][7]. - The PIIE notes that while the current surplus as a share of GDP is below the 2007-09 level, the absolute amount is much larger [7]. - At that time, there was also a debate that low-cost exports after China's WTO accession were eroding manufacturing employment in developed countries [13].

○ The possibility of China replicating its response pattern from the Eurozone crisis is being discussed [2][6]. - The three pillars of a discursive campaign, diversification into emerging markets, and exploitation of divisions among member states were also used at that time [2][6]. - Beijing is expected to try to undermine EU unity in the same way this time [2][6].

○ The differences from the first U.S.-China trade war (2018) are also clear [13]. - The 2018 conflict was centered on tariffs, whereas this time the key issues are industrial subsidies and overproduction [13][17]. - In a report at the time, EAI predicted a conflict that would "go beyond the scope of existing trade rules and norms" [13]. - That prediction has now materialized in a form that extends beyond tariffs to include CBAM and export controls.

4. Key Variables Shaping Future Developments

○ The outcome of tariff negotiations at the Xi-Trump summit is a short-term inflection point [17]. - Whether to impose an additional 7.5 percentage point tariff is under discussion [8][17]. - If imposed, tariffs on China would be restored to the 20% level [17]. - As this aligns with the agreement from the bilateral trade truce, a managed tension scenario is more likely than an escalation [17].

○ The sequence and speed of the EU's CBAM expansion is the second variable [6][9]. - The scenario of expansion in the order of steel → EVs → batteries → robotics has the highest probability at 50-55% [6][9]. - The division in policy preferences between Germany on one side and France and Italy on the other will determine the pace of expansion [2][6].

○ The success of China's transition to a domestic demand-led economy is the fundamental variable [2][7]. - Without stabilization of the real estate sector, the export-dependent structure is bound to continue [2][7]. - The pace at which local governments' fiscal capacity recovers will determine the sustainability of industrial subsidies [7].

○ The responses of developing and middle-power countries are also emerging as a variable [1][16]. - The erosion of manufacturing bases in Africa and Latin America could change these countries' stance toward China [1]. - To counter this, China is simultaneously expanding its networks through "economic soft power" [16].