Made in China: How Beijing Leveraged Industrial Policy to Gain an Early Edge
Manufacturing Dominance: The Foundation of China’s Advantage
The Trump administration fired the first shot in the US-China trade war on January 22, 2018, when it imposed tariffs on solar panels and washing machines. China had spent decades building manufacturing capacity across numerous sectors, creating an ecosystem that American companies couldn’t easily replicate or replace. When tensions escalated, this manufacturing foundation gave Beijing significant leverage.
Chinese factories controlled production of 70% of the world’s mobile phones, 60% of shoes, and 55% of global computer manufacturing by 2018. This dominance wasn’t accidental but resulted from decades of industrial policy that built entire supply chains within China’s borders. American companies faced immediate disruption when tariffs targeted these supply chains, while Chinese manufacturers had alternative markets and government support to weather the storm.
The integrated nature of Chinese manufacturing proved particularly challenging for American companies seeking alternatives. Moving production of a single component often meant relocating an entire manufacturing ecosystem. Chinese suppliers maintained price advantages even with tariffs applied, as their scale and efficiency outpaced competitors in Vietnam, Malaysia, and other alternative locations.
Strategic Resource Control: Rare Earths and Beyond
China’s control of critical resources provided another significant advantage in the early stages of the trade war. By 2018, China produced 85% of the world’s rare earth elements—17 metals essential for electronics, military equipment, and renewable energy technology. When trade tensions rose, Beijing hinted at restricting rare earth exports, sending prices soaring and highlighting American vulnerability.
The mining and processing of these elements remained concentrated in Chinese territory despite years of warnings from Pentagon officials about supply risks. American companies faced a stark choice: pay higher prices for these materials or invest billions in developing alternative sources that would take years to become operational.
Beyond rare earths, China dominated production of other industrial materials including graphite (essential for batteries), certain pharmaceutical precursors, and specialized chemicals. This resource control meant Beijing could selectively apply pressure to American supply chains by restricting exports or raising prices of materials with few ready substitutes.
Case Study: Pharmaceutical Dependence
American pharmaceutical companies discovered the depth of their dependence when the trade war intensified. China produced 80% of active pharmaceutical ingredients (APIs) used in American drugs by 2018. When Beijing threatened to restrict pharmaceutical exports, hospitals and medical suppliers faced potential shortages of antibiotics, pain medications, and blood pressure drugs.
The FDA noted that 13% of American pharmaceutical manufacturing facilities were located in China, with many more dependent on Chinese inputs. Relocating this production posed significant challenges due to regulatory requirements, specialized knowledge, and the capital-intensive nature of pharmaceutical manufacturing.
Financial Countermeasures: Currency as a Trade War Weapon
When the first rounds of American tariffs hit Chinese goods, Beijing deployed financial countermeasures that blunted their impact. The Chinese yuan depreciated by nearly 10% against the dollar between April and September 2018, effectively offsetting much of the tariff costs for American importers.
This currency adjustment maintained Chinese export competitiveness despite tariffs climbing to 25% on many products. American producers hoping tariffs would provide protection found Chinese goods still dominated market share due to this currency offset. Meanwhile, American exporters faced higher relative prices in Chinese markets, reducing their sales potential.
China’s state-directed financial system allowed coordinated action across multiple fronts. Chinese banks extended additional credit lines to exporters facing tariff pressures, while state-owned enterprises absorbed temporary losses to maintain market share in strategic sectors. This coordinated response contrasted with the fragmented American approach where individual companies made independent decisions based on shareholder pressures.
Market Access Leverage: The Consumer Prize
China’s massive consumer market provided significant leverage during the early trade war period. With 400 million middle-class consumers, access to China represented a major growth opportunity for many American companies. Beijing selectively applied regulatory hurdles, customs delays, and other non-tariff barriers to American products while maintaining open access for cooperative companies.
American automobile manufacturers saw their shipments held at Chinese ports for « safety inspections » that mysteriously resolved when company executives made supportive public statements about US-China relations. Agricultural exporters faced similar targeted delays, with soybeans and pork shipments subjected to heightened scrutiny while competitors from Brazil and Europe saw smooth processing.
This selective market access created divisions within American industry. Companies with significant China revenue openly questioned the wisdom of trade confrontation, creating domestic political pressure on the administration. Meanwhile, Chinese companies faced fewer internal divisions as the government coordinated messaging and support packages.
Technology Transfer Advantage: The Knowledge Gap
Decades of technology transfer requirements had provided Chinese manufacturers with technical knowledge that proved valuable when trade tensions escalated. Joint venture requirements in sectors like aerospace, automotive, and electronics meant Chinese partners had gained expertise in advanced manufacturing processes previously concentrated in the US, Europe, and Japan.
Chinese companies that once served as contract manufacturers for American brands had developed their own competing products by 2018. When trade barriers rose, these companies accelerated efforts to serve domestic markets and other international customers, reducing their dependence on American partnerships.
American companies found themselves competing globally with former suppliers who had absorbed their technology and production methods. This knowledge transfer meant Chinese manufacturers could rapidly adjust production methods, materials, and designs to circumvent specific tariff categories or regulatory restrictions.
Telecommunications Equipment Battle
The telecommunications equipment sector demonstrated China’s growing technological independence. Huawei and ZTE had evolved from producing basic networking equipment to competing directly with Cisco, Ericsson, and other Western vendors in advanced 5G infrastructure. When American export controls targeted these companies, they accelerated development of alternative technologies and components.
Chinese manufacturers quickly replaced American semiconductors and software with domestic alternatives or redesigned products to eliminate dependencies. While not always matching the performance of American technology, these substitutes proved adequate for many applications and markets, particularly in developing countries where price sensitivity outweighed performance requirements.
Strategic Patience: The Time Advantage
Perhaps Beijing’s most significant advantage was strategic patience built into its governance system. Chinese leaders operated with five-year plans and longer horizons, while American trade policy shifted with electoral cycles and quarterly corporate earnings reports.
This time horizon differential meant Chinese companies received consistent signals about government priorities and support, while American businesses navigated uncertain policy environments. Chinese manufacturers received clear directives to maintain employment and market share even at the cost of short-term profits, knowing government support would continue through difficult periods.
The Chinese government implemented targeted subsidy programs for industries affected by tariffs, including tax rebates, reduced electricity costs, and preferential loans. These supports maintained export competitiveness while encouraging domestic innovation to reduce dependencies on American technology and components.
American companies, focused on quarterly results and shareholder returns, often lacked the capacity for long-term strategic responses. Companies that announced plans to shift supply chains often reversed course when faced with implementation costs, seeking instead short-term workarounds like shipping through third countries or minor product modifications to avoid tariff categories.
Information Control: Managing the Narrative
China’s control of domestic information flows provided an advantage in maintaining public support for trade confrontation. State media presented the trade war as American attempts to contain China’s rise, generating nationalist consumer support for domestic products and companies.
This narrative control enabled the government to implement painful economic adjustments without facing significant public backlash. When certain industries faced disruption, state media highlighted government support programs and long-term benefits rather than short-term costs.
American companies and policymakers, by contrast, faced divided public opinion and media coverage that highlighted economic pain points. Every factory closure or price increase attributed to tariffs received prominent coverage, creating political pressure for quick resolutions rather than strategic patience.
Building Long-Term Resilience
The early phases of the trade war revealed structural advantages that allowed China to weather economic pressure more effectively than American policymakers anticipated. These advantages—manufacturing scale, resource control, financial coordination, market leverage, technological capacity, strategic patience, and information management—gave Beijing options for extending the confrontation while working to reduce dependencies on American markets and technology.
The recognition of these Chinese advantages eventually shifted American strategic thinking from short-term tariff negotiations toward longer-term efforts to rebuild industrial capacity and secure critical supply chains. This shift represented an implicit acknowledgment that confronting China’s economic power required more than trade barriers—it necessitated rebuilding America’s industrial commons and technological leadership through sustained investment and policy support.
As the trade war evolved from tariff exchanges into a broader technological and industrial competition, these initial Chinese advantages shaped the battlefield and forced a fundamental reassessment of economic interdependence between the world’s two largest economies.
This article is an excerpt from the book The First Round – Inside the US-China Trade War and China’s Early Edge by Olivia Brown -ISBN 978-2-488187-20-6.
