Globalisation 2.0: China exports industrial capacity, not just goods

For much of the past four decades, globalisation was based on a simple principle: countries connect with one another through trade, and production is organised according to cost and efficiency. China became the world’s factory because it could produce consumer goods at highly competitive prices and integrate itself deeply into global value chains. Not any longer. Globalisation 2.0 is increasingly connecting countries through productive capacity rather than through trade.

This is more than a change in terminology. Industrial resilience, advanced manufacturing, green technologies, artificial intelligence (AI) and integrated production ecosystems are becoming more important sources of global competitiveness. The key question now is about who can help countries build the capacity to produce, innovate and upgrade.

This transformation has profound implications for both developing and advanced economies.

From exporting products to exporting productive capacity

China’s own economic transformation illustrates this broader shift.

For more than 40 years, China’s international economic role was largely defined by consumer goods exports. Clothing, textiles, toys, furniture and other manufactured products were shipped to consumers around the world. The basic model could be summarised simply: China produces; the world consumes.

But China’s comparative advantage has changed. Its competitiveness is no longer based primarily on low-cost labour. It increasingly rests on a comprehensive industrial ecosystem, competitive manufacturing capabilities, engineering expertise and a large pool of skilled workers.

This transformation is clearly visible in China’s export structure. In 1992, consumer goods accounted for about half of China’s exports, intermediate goods made up only 35.2%, while capital goods represented only 14.7%. By 2025, the share of consumer goods had fallen to 28.7%, while intermediate goods had risen to 47.4% and capital goods to 20.1%.

The significance of this change goes beyond trade statistics.

China is increasingly exporting not simply goods for consumers, but the tools that enable other countries to produce. Machinery, industrial equipment, electrical systems, electronic components, renewable energy equipment, energy storage systems and industrial automation are becoming increasingly important components of China’s external economic relations.

China is therefore gradually moving from being primarily a supplier of products to becoming an enabler of industrialisation.

This distinction matters. Consumer products satisfy consumption, while machinery, production lines and industrial components can create productive capacity, generate employment and support future economic growth. The export of productive capabilities may therefore have a deeper and longer-lasting impact than the export of finished goods.

A new opportunity for the Global South

This transformation comes at an important moment for the global economy.

The world is experiencing what might be called dual industrialisation.

Across the Global South, many developing economies are entering new stages of urbanisation, industrialisation and infrastructure development. They need electricity, transport systems, construction equipment, manufacturing machinery and industrial inputs. Their challenge is not simply how to consume more, but how to build the productive capacity needed to create jobs, raise incomes and sustain development.

At the same time, developed economies are pursuing a different form of industrialisation: reindustrialisation.

The US, Europe and other developed economies are seeking to rebuild manufacturing capabilities after decades of deindustrialisation. They are investing in AI, data centres, renewable energy, electric vehicles and digital infrastructure. All these industries require large quantities of machinery, industrial equipment, components and intermediate goods.

The two groups are at very different stages of development, but they share one important characteristic: both are creating strong demand for productive capacity.

This is where China’s changing economic role could become particularly significant.

China has developed one of the world’s most comprehensive manufacturing ecosystems. Its strength is not simply that it can manufacture individual products competitively, but that it can integrate machinery, components, logistics, technology and industrial services into broader production systems.

For developing countries, this creates an important opportunity. Their greatest need may not be more finished consumer products, but access to affordable machinery, industrial components, infrastructure and technology that enable them to produce more themselves. In this sense, China’s industrial upgrading could complement the industrialisation of other developing economies rather than simply compete with them.

ASEAN provides an instructive example. China-ASEAN trade has increasingly shifted toward intermediate and capital goods, reflecting the emergence of a deeply integrated regional production network. China supplies machinery, components and manufacturing inputs, while ASEAN economies increasingly participate in higher-value-added stages of global production.

The result is not necessarily a zero-sum relationship in which China’s industrial development comes at ASEAN’s expense. Properly managed, it can become a process of industrial upgrading together.

Supporting reindustrialisation in advanced economies

The same logic can apply, in a different form, to advanced economies.

The US and Europe have strong concerns about supply chain resilience, industrial security and strategic dependence. Governments therefore have strong motivations to strengthen domestic manufacturing capabilities in sensitive sectors.

China’s manufacturing capabilities could therefore contribute to global reindustrialisation by reducing production costs and facilitating industrial upgrading. This is particularly relevant to renewable energy, energy storage, electric vehicles and other technologies associated with the green transition, as well as the physical infrastructure required for the AI economy.

This does not mean that Western economies and China will abandon strategic competition. Competition will remain, particularly in sensitive technologies.

But it suggests a possible way to reduce the tension between trade and geopolitics: differentiate between strategic competition and mutually beneficial economic cooperation.

Where genuine national security concerns exist, governments will protect legitimate strategic interests. But in non-sensitive sectors, maintaining open markets and cooperation can benefit all sides.

From product trade to productive cooperation

This points to a broader transformation in the nature of globalisation.

Traditional globalisation was largely organised around the movement of goods. The emerging model may increasingly involve the movement of goods, capital, technology, investment and productive capabilities together.

Chinese companies are already investing more overseas in manufacturing, industrial parks, logistics, renewable energy, digital infrastructure and production facilities. Trade and investment are becoming more closely connected with industrial cooperation.

If managed properly, this could create a more inclusive and mutually beneficial form of globalisation.

The objective should not be for China to replace local industries or dominate global manufacturing. Rather, China’s comparative advantage could help other countries develop their own capabilities through joint ventures, industrial parks, technology cooperation, workforce training, infrastructure development and local supply chains.

The underlying principle is simple: trade should increasingly create productive capacity, not merely satisfy consumption.

China needs to focus on local value creation

This opportunity, however, comes with significant challenges.

The first is geopolitical. As national security becomes more broadly defined, policies such as de-risking, friend-shoring, local content requirements and higher tariffs are increasingly influencing international trade. Economic efficiency and geopolitical security are sometimes pulling in opposite directions.

The second challenge comes from developing countries themselves. Many countries in the Global South want industrialisation but face limited public finances, high debt, weak infrastructure and concerns about excessive dependence on foreign suppliers. Local industries may also face direct competitive pressure from Chinese imports.

China therefore needs to respond with greater transparency and a stronger emphasis on local value creation.

The measure of success should not simply be how much China exports to a developing country, but how much productive capacity is created within that country. More local sourcing, joint production, skills development, technology cooperation and integration into regional supply chains can help ensure that Chinese engagement contributes to industrialisation.

This is also the best way to address geopolitical concerns. The more China’s international economic engagement is seen as helping partners build their own capabilities, the easier it will be to develop relationships based on mutual benefit rather than strategic suspicion.

The future of globalisation should not be about choosing between China and the West, or between trade and security. It should be about finding ways to reconcile economic interdependence with national interests, and efficiency with resilience.

Globalisation 1.0 connected countries through trade. Globalisation 2.0 can connect them through shared productive capacity.

China’s transformation from a major exporter of consumer goods into a major supplier of capital goods, intermediate goods, industrial systems and productive capabilities is therefore not simply a story about China. It is part of a wider transformation in the global economy.

If China can use its industrial strengths to help developing countries industrialise, support advanced economies in their reindustrialisation, and contribute to the green and digital transitions — while addressing the legitimate concerns of its partners — it could make an important contribution to a more inclusive, reciprocal and mutually beneficial form of globalisation.

Each country has different resource endowments and comparative advantages, and no country can achieve complete self-sufficiency. Globalisation 2.0 requires us to undertake a new division of labour under new conditions and share each other’s strengths. Just as the US excels in exporting high-end chips, China’s comparative advantage lies in exporting productive capacity, which should not be viewed as overcapacity in the traditional sense.

Unlike trade in consumer goods, China exports to partner countries the productive capacity that they urgently need and in which China has a comparative advantage. This can help enhance the productive capacity and competitiveness of partner countries, and is unlikely to trigger trade protectionist measures in these countries similar to those used to slow down imports of consumer goods.

The central question of the next stage of globalisation may therefore no longer be who can produce more goods.

It may be a more fundamental question: who can help more countries build the capacity to create wealth, generate jobs and sustain innovation?

That, ultimately, is the promise of Globalisation 2.0.

Related: Tan Kong Yam: China’s dual economy is built for the long game | How geopolitics rewired China’s economy