Competing Outward: Domestic Rivalry, Innovation Infrastructure, and China’s Export Surge amid Import Stagnation
Abstract
This paper argues that the recent surge in Chinese exports and the simultaneous stagnation of imports should not be interpreted primarily as evidence of a centrally directed strategy to flood foreign markets. Rather, it reflects the interaction of industrial policy, technological upgrading, and persistent domestic supply-demand imbalances within an intensely competitive internal market. In 2025, China’s goods exports rose markedly faster than imports, generating a record merchandise surplus, while producer prices remained under pressure and domestic demand stayed weak amid the continuing real-estate adjustment. At the same time, China’s manufacturing base moved further up the value chain, supported by large-scale R&D spending, data and compute infrastructure, and relatively favorable industrial energy costs. The paper’s core claim is that industrial policy has been important but insufficient as a stand-alone explanation. The fuller explanation lies in how policy-enabled capacity meets fierce domestic competition: firms facing low margins and excess supply at home search for external demand, and those that survive internal rivalry are often internationally competitive on both cost and increasingly on technology. The paper also argues that China’s external openness is now best described as selective openness: manufacturing and many non-sensitive activities have become more accessible to foreign investors, while technology-, data-, and sovereignty-sensitive sectors remain tightly regulated. This combination helps explain both the scale of China’s export expansion and the strategic anxieties it generates abroad[1].
1. Introduction
The renewed debate around a “China shock” has emerged in a different context from the first great wave of Chinese trade integration. China is no longer primarily a low-cost assembler of labor-intensive goods. It is now a large manufacturing economy whose export profile has moved further toward final goods, machinery, transport equipment, electronics, and strategic green technologies. The European Central Bank has noted that Chinese producers increasingly compete directly with euro-area firms in high value-added sectors such as automobiles and specialized machinery, and that recent euro-area price-competitiveness losses vis-à-vis China are largely explained by relative producer-price developments since 2021. This means that the current shock is not simply about scale. It is about scale combined with technological upgrading and cost compression[2].
Yet an explanation centered only on industrial policy or on a deliberate national objective of conquering foreign markets misses a crucial part of the mechanism. China’s recent export performance must be read against a domestic economy marked by weak demand, falling producer prices, a prolonged property adjustment, and mounting concern inside China itself about “disorderly price competition” and “involution.” The IMF’s 2026 Article IV summary describes strong export growth as a partial offset to deficient domestic demand and identifies the property downturn, local-government financial stress, and deflationary pressures as central features of the present growth model. World Bank analysis reaches a similar conclusion, stressing soft consumption, persistent property weakness, and the need to move toward a more consumption-led growth pattern[3].
This paper therefore advances a more specific argument. China’s export surge is best understood as the externalization of intense domestic rivalry inside a policy-enabled, innovation-rich, yet demand-constrained economy. Industrial policy, subsidies, and strategic state support matter. But the export push is transmitted through firm competition. When firms operate in a market where capacity is large, margins are compressed, and technological diffusion is fast, they seek profits where demand and pricing are more favorable. The result is an outward turn that is partly strategic, partly endogenous, and partly defensive[4].
2. The new trade imbalance
The basic trade picture is stark. According to China’s National Bureau of Statistics, total goods imports and exports increased by 3.8 percent in 2025, but this headline masks a sharp divergence: exports rose by 6.1 percent, while imports rose only 0.5 percent in renminbi terms. General Administration of Customs dollar data show an even starker result: total exports of about $3.58 trillion, total imports of about $2.44 trillion, and an annual merchandise surplus of roughly $1.14 trillion. These figures justify treating the current episode as a major external imbalance rather than an ordinary cyclical export rebound[5].
Import stagnation is difficult to explain without reference to domestic demand weakness. In 2025, China’s producer prices for industrial products fell by 2.6 percent, retail sales rose only 3.7 percent, fixed-asset investment fell by 3.8 percent, and real-estate investment declined by 17.2 percent. The IMF argues that the property-sector adjustment and its spillovers to local-government finances have continued to depress domestic demand, while the World Bank emphasizes soft consumption, weak confidence, and the need for stronger household-oriented support. These are precisely the conditions under which imports tend to underperform, especially imports tied to investment-heavy sectors and property-linked demand[6].
The ECB likewise links China’s current export-price competitiveness to domestic imbalances. It identifies three major drivers of declining Chinese export prices: lower commodity prices following the real-estate downturn, cost advantages in advanced manufacturing, and excess capacity that intensifies domestic competition and compresses profit margins. This last point is crucial. When domestic competition becomes severe, export markets cease to be merely an option for expansion and become a necessary outlet for revenue and profitability. That mechanism fits the current Chinese case more convincingly than a purely top-down flooding narrative[7].
3. Domestic rivalry and the outward turn
A central contribution of the paper should be to restore domestic competition to the center of analysis. Chinese authorities themselves increasingly describe the internal market as one in which unfair competition, fragmented local protectionism, and disorderly low-price behavior must be contained. The 2025 guideline on building a unified national market aims to remove local barriers, improve the flow of factors, and curb unfair competition. In July 2025, Xi Jinping went further, calling for regulation of disorderly price competition, oversight of local governments’ investment-attraction practices, and better sales channels for export-oriented goods inside the domestic market. These statements strongly suggest that the state itself recognizes the problem of hyper-competitive oversupply[8].
This matters because China’s export sector is not dominated only by state actors. Private enterprises accounted for 57.3 percent of total goods trade in 2025, and official Chinese sources report that private firms contribute over 70 percent of technological innovation achievements. The private-sector framework adopted in 2025 is designed to ensure fair competition and equal rights of access to capital, technology, data, land, and public services. In effect, the state is not eliminating competition; it is institutionalizing and scaling it. That makes the international success of Chinese firms easier to understand: many are forged in a domestic market of extreme rivalry, large volumes, rapid learning, and intense price pressure[9].
The logic is consistent with broader economic theory. The “venting out” literature shows that firms facing adverse domestic-demand shocks tend to increase export activity as an alternative outlet. While that literature does not concern China specifically, it provides a useful analytical lens: when internal demand weakens, outward orientation can intensify even without any change in long-run state objectives. In the Chinese case, the mechanism is reinforced by sectoral overcapacity and by relative profitability differences across domestic and foreign markets. The ECB notes, for example, that Chinese EV firms can enjoy far higher margins in foreign markets than at home. Exports therefore function not merely as a policy target, but as a margin-restoration strategy[10].
None of this implies that industrial policy is irrelevant. The IMF’s 2025 working paper estimates the fiscal-equivalent size of China’s industrial-policy instruments at about 4 percent of GDP annually and finds especially high intensity in manufacturing and high-tech manufacturing. But the same paper also shows that industrial policy is associated with factor misallocation and excess production. The implication is not that China exports because planning ministries simply order firms to do so. The implication is that policy expands and subsidizes capacity, after which competition among firms operating inside that expanded capacity structure pushes the most efficient and aggressive producers outward[11].
4. Innovation as infrastructure
China’s recent external competitiveness is also rooted in the transformation of innovation from a firm-level activity into a system-level infrastructure. Official policy has treated data as a factor of production since 2020 and later moved to construct a “basic system” for data by defining property rights, circulation mechanisms, revenue-sharing rules, and security governance. Chinese policy reporting also emphasizes lowering thresholds for market entities to gain access to data and promoting more efficient circulation of public, enterprise, and personal data under regulated conditions. This is not just digital policy in a narrow sense. It is a reorganization of production conditions. Firms innovate more cheaply and scale more quickly when access to data, compute, and digital services is embedded in wider national infrastructure[12].
The computing side of this story is equally important. By mid-2024, China had directly invested more than 43.5 billion yuan in eight national computing hubs, with total related investment surpassing 200 billion yuan. By the third quarter of 2024, the number of data-center racks in use exceeded 2.11 million. Newly established data centers had reduced power usage effectiveness to as low as 1.04, and policymakers expected major hubs to derive more than 80 percent of their electricity from green power by the end of 2025. These are the kinds of infrastructural conditions that reduce the fixed cost of experimentation, training, digital coordination, and industrial optimization. They help explain why innovation in China increasingly behaves like a shared production environment rather than a boutique function of a few frontier firms[13].
The R&D and capabilities data reinforce the point. China spent 3.93 trillion yuan on R&D in 2025, equivalent to 2.8 percent of GDP. High-tech manufacturing value added grew by 9.4 percent in 2025, compared with 5.9 percent for industry overall. WIPO’s 2025 innovation index placed China in the global top ten for the first time, highlighted its lead in knowledge and technology outputs and patent filings, and underlined the strength of Chinese innovation clusters and high-tech exports. The export surge, then, is not merely an outcome of cheap labor or subsidized dumping. It increasingly rests on productive ecosystems that combine scale, engineering, commercialization, and rapid diffusion[14].
Energy costs are part of this infrastructure logic. The IEA reports that electricity prices for energy-intensive industries in the European Union in 2025 remained more than 50 percent above those in China. This does not mean every Chinese manufacturer enjoys uniformly cheap power, but it does mean that, at the system level, Chinese producers often operate with an energy-cost advantage over European competitors. Combined with data centers, industrial clustering, logistics scale, and digital coordination, that pricing environment contributes to lower marginal production costs and strengthens China’s ability to sustain aggressive export pricing[15].
5. Why imports stalled
Import stagnation reflects more than cyclical softness. It is the mirror image of a growth model still struggling to rotate decisively toward household consumption. The World Bank’s 2025 economic update stresses that consumption growth remains soft and that stronger social safety nets are necessary to reduce precautionary saving and sustain spending. The IMF similarly argues that China’s spending composition should shift away from inefficient investment and toward support for consumption and the property sector. As long as household demand remains subdued and investment remains skewed or constrained, China’s import demand is likely to remain weaker than its productive capacity[16].
There is also a structural side. As manufacturing becomes more technologically capable, import dependence in some upstream and intermediate segments can decline even if total industrial output keeps rising. China’s policy framework increasingly aims at “new quality productive forces,” AI-enabled manufacturing, digital upgrading, and industrial modernization. Official 2025 policy language explicitly links AI integration to manufacturing strength and market scale. Thus, import stagnation is not only a demand problem. It is also partly a compositional problem: domestic capability in a growing number of sectors reduces the import content of expansion, even as final-goods exports rise[17].
Many external interpretations of “China shock” focus on excess capacity alone and fail to notice that capacity now sits inside a more complex domestic regime: weak demand keeps imports soft, internal rivalry pushes firms outward, and technological upgrading reduces dependence on some foreign inputs while improving the quality and competitiveness of exportable goods. The resulting surplus is therefore not caused by one factor. It is the joint product of demand deficiency, competitive selection, and cumulative capability-building[18].
6. Opening up, restriction, and strategic technology
The legal picture is more differentiated. The 2024 foreign-investment negative list reduced restricted items to 29 and removed all remaining restrictions on foreign investment in manufacturing. Official guidance in 2025 also emphasized national treatment for foreign-funded firms in access to factors of production, license applications, standards setting, and government procurement. The 2025 market-access negative list further reduced restricted items from 117 to 106 and streamlined entry in some sectors. China has therefore not abandoned opening up; in several areas, it has deepened it[19].
But openness is selective and increasingly strategic. The 2024 foreign-investment negative list still prohibits or restricts foreign investment in rare earths, radioactive materials, tungsten, tobacco, various media and cultural sectors, film distribution and operation, and requires Chinese control in nuclear power plants. It also specifies that sectors such as culture and finance remain subject to separate rules on qualifications and national security even when they are not fully captured by the basic negative-list framework. Meanwhile, the 2024 regulations on network data security management, effective from January 2025, explicitly tie data processing and cross-border data rules to national security and public interests. The message is clear: China remains broadly open where openness can support growth and upgrading, but it insists on sovereign control where technology, information, cultural influence, or strategic resources are at stake[20].
This dual track is especially visible in the treatment of foreign investment incentives. The 2025 Action Plan for Stabilizing Foreign Investment and the 2025 Encouraged Catalogue, effective in 2026, channel foreign capital toward advanced manufacturing, modern services, high-tech sectors, energy conservation, and environmental protection. In other words, China still welcomes foreign participation that strengthens domestic upgrading. But that welcome is increasingly conditional on alignment with developmental and security priorities. This implies that technology must be treated not only as a source of competitiveness, but also as a domain of sovereignty. This is why the foreign-investment discussion is crucial for the topic of this paper: it clarifies that the same state that lowers barriers in manufacturing is also building harder boundaries around data, digital governance, strategic minerals, and politically sensitive content sectors[21].
7. Conclusion
The emerging external imbalance associated with “China shock” should not be read as the straightforward product of a unified state intention to conquer foreign markets. A more convincing account is that China has built a dense production environment in which industrial policy, innovation infrastructure, and internal market competition reinforce one another. Industrial policy expands capacity, lowers financing and tax burdens in strategic sectors, and accelerates scaling. Innovation infrastructure reduces the cost of data access, compute, industrial coordination, and energy-intensive production. Weak domestic demand and sectoral overcapacity then intensify competition at home, pushing firms to seek higher-margin opportunities abroad[22].
This interpretation does not absolve policy. It instead reallocates explanatory weight. The present export surge is not well described either by a purely market story or by a purely statist story. It is a hybrid outcome. China’s state has created many of the conditions for scale and speed, but it is the competitive domestic arena—especially among private firms—that turns those conditions into export pressure. For European policymakers, this means that a useful response cannot rest only on tariffs or anti-subsidy cases. It also requires rebuilding domestic competitiveness through lower energy costs, stronger innovation systems, more resilient industrial ecosystems, and targeted defenses in genuinely distorted sectors. For China, the longer-run adjustment lies less in further expanding tradable supply than in strengthening household demand, disciplining local investment races, and allowing a more orderly exit of unproductive capacity. Without that domestic rebalancing, export success will continue to be accompanied by rising trade friction abroad[23].
[1] National Economy Pushed Forward with Innovation-led and High-quality Development and Expected Targets Achieved Successfully in 2025
https://www.stats.gov.cn/english/PressRelease/202601/t20260119_1962328.html
[2] Why competition with China is getting tougher than ever
https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog240903~57f1b63192.en.html
[3] People’s Republic of China: 2025 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China
[4] Why competition with China is getting tougher than ever
https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog240903~57f1b63192.en.html
[5] National Economy Pushed Forward with Innovation-led and High-quality Development and Expected Targets Achieved Successfully in 2025
https://www.stats.gov.cn/english/PressRelease/202601/t20260119_1962328.html
[6] National Economy Pushed Forward with Innovation-led and High-quality Development and Expected Targets Achieved Successfully in 2025
https://www.stats.gov.cn/english/PressRelease/202601/t20260119_1962328.html
[7] Why competition with China is getting tougher than ever
https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog240903~57f1b63192.en.html
[8] China unveils guideline for building unified national market, driving demand and openness
https://english.www.gov.cn/policies/policywatch/202501/07/content_WS677d2d7dc6d0868f4e8ee95a.html
[9] National Economy Pushed Forward with Innovation-led and High-quality Development and Expected Targets Achieved Successfully in 2025
https://www.stats.gov.cn/english/PressRelease/202601/t20260119_1962328.html
[10] Miguel Almunia, Pol Antràs, David Lopez-Rodriguez, Eduardo Morales, Venting Out: Exports during a Domestic Slump, in «American Economic Review» vol. 111, No. 11, November 2021, pp. 3611–62.
[11] Industrial Policy in China: Quantification and Impact on Misallocation, WP/25/155, August 2025
https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025155-source-pdf.pdf
[12] China unveils guideline on improving market-based allocation of production factors https://english.www.gov.cn/policies/latestreleases/202004/10/content_WS5e8faa09c6d0c201c2cc0922.html
[13] China invests over 6.1 billion USD in major computing hubs: official
https://english.www.gov.cn/news/202408/29/content_WS66d03a1ac6d0868f4e8ea539.html
[14] Statistical Communiqué of the People’s Republic of China on the 2025 National Economic and Social Development https://www.stats.gov.cn/english/PressRelease/202602/t20260228_1962661.html
[15] Prices – Electricity 2026 – Analysis – IEA
https://www.iea.org/reports/electricity-2026/prices
[16] Industrial Policy in China: Quantification and Impact on Misallocation, WP/25/155, August 2025
https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025155-source-pdf.pdf
[17] China evolving into AI ‘super market’ driven by scale, innovation https://english.www.gov.cn/news/202503/11/content_WS67cf8993c6d0868f4e8f0b3e.html
[18] People’s Republic of China: 2025 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China
[19] China to lift foreign investment access restrictions in manufacturing sector
https://english.www.gov.cn/news/202409/08/content_WS66dd6238c6d0868f4e8eabad.html
[20] Negative lists for foreign investment access Establish a Company
https://english.shanghai.gov.cn/en-EstablishaCompany/20241206/79a661cdd4da41b8b932b821b9ae5318.html
[21] 2025 Action Plan for Stabilizing Foreign Investment https://english.www.gov.cn/news/202502/22/content_WS67b9044dc6d0868f4e8efdff.html
[22] Industrial Policy in China: Quantification and Impact on Misallocation, WP/25/155, August 2025
https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025155-source-pdf.pdf
[23] Why competition with China is getting tougher than ever
https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog240903~57f1b63192.en.html
