By Sefa Yürükel
The global economic architecture has undergone a radical transformation since the beginning of the 21st century. China’s accession to the World Trade Organization (WTO) in 2001 fundamentally altered the geographical distribution of global production, celebrated in the West as a triumph of the neoliberal Washington Consensus (World Trade Organization, 2001). However, this integration has resulted not in the transformation of China by liberal free market norms, but rather in the reshaping of global markets by China’s state-driven capitalism model.
Initially concentrated in textiles and assembly industries, the Chinese economy pursued an aggressive ascent in the value chain in the years that followed. Particularly from the 2010s onward, strategic sectors such as solar panels, electric vehicle batteries, semiconductors, and artificial intelligence became the focal points of China’s industrial policy. The central research question of this study is this: Is China’s global dominance in strategic sectors a natural outcome of comparative advantages, as predicted by classical liberal trade theories, or is it the product of artificially constructed market distortion orchestrated by the state?
Theoretical Framework and Strategic Trade Policy
This paper is grounded in Paul Krugman’s (1987) theory of strategic trade policy. In contrast to the classical Ricardian model, Krugman posits that in oligopolistic markets characterized by increasing returns and imperfect competition, state intervention can create strategic advantage. Aiginger (2007) extends this view, noting that industrial policy has been reborn like a “phoenix” and has become a legitimate tool of economic policy, especially in an era of systemic rivalry.
China’s model represents the most extreme and aggressive application of this theoretical framework. The state has not only protected strategic sectors from foreign competition but has also provided them with limitless financing to build “predatory pricing” capacity. China’s industrial policy instruments primarily include the following mechanisms:
· Subsidized loans through public banks and regular debt write-off operations,
· Near-zero energy and land costs for strategic sectors,
· State-backed R&D and intellectual property transfer mechanisms,
· Export tax rebates and mandatory technology licensing.
Case Analyses: Solar Energy and Battery Industry
Restructuring of the Solar Panel Industry
Solar panel production, led by Germany, Japan, and the United States in the early 2000s, underwent a dramatic transformation with China’s aggressive entry into the sector. Thanks to state support, Chinese firms pushed production capacity far beyond global demand. In this process, market prices fell to historic lows, leading to the bankruptcy of dozens of Western companies such as Germany’s Solarworld. According to the International Energy Agency (IEA, 2022), more than approximately 80% of the entire supply chain, from polysilicon production to panel assembly, is now concentrated in China. This is a textbook example of the strategy of “creating a global oligopoly through state intervention” as identified by Krugman (1987).
Lithium-Ion Batteries and the Electric Vehicle Ecosystem
The shift in lithium-ion battery technology, commercialized by Sony in 1991, follows a similar pattern (Nitta et al., 2015). By supporting national champions such as CATL, BYD, and Gotion, China has seized global leadership not only in cell production but also in cathode and anode chemicals. As of 2024, approximately 75% of global battery production capacity is located in China (IEA, 2024). This success rests not only on manufacturing costs but also on the control of refining capacity for critical inputs such as lithium and cobalt.
The Geopolitics of Critical Minerals
The strategic advantage of the modern energy transition lies not in possessing mineral reserves but in the capacity to process these metals. China holds a unique monopoly position in this field. According to data from the United States Geological Survey (USGS, 2024) and the IEA (2023), China’s share of global refining capacity is approximately 45% for copper, approximately 80% for lithium hydroxide, approximately 75% for cobalt sulfate, and over approximately 90% for rare earth elements. This concentration has become an overt geopolitical tool with the licensing restrictions imposed on the export of gallium, germanium, and graphite between 2023 and 2024. Zenglein and Holzmann (2019) define this situation as the “weaponization of the supply chain.” The price shocks experienced in international markets, particularly following the restrictions on antimony exports, are concrete evidence of the national security threat posed by this dependency.
The US Policy Response: The Legitimation of State Intervention
This challenge from China has led to the shattering of the decades-long “free market” taboo in the United States. The US has begun to formulate its own industrial policy to counter China’s state capitalism model. The CHIPS and Science Act has provided billions of dollars in direct subsidies for semiconductor manufacturing, while the Inflation Reduction Act (IRA) has offered aggressive tax incentives to draw clean energy supply chains back to North America. Furthermore, the direct investments made by the US Department of Defense in rare earth element processors such as MP Materials demonstrate the disappearance of the distinction between industry and national security. This transformation not only confirms Aiginger’s (2007) prediction of the resurrection of industrial policy but also signals the advent of a new era in the global trading system characterized as “systemic rivalry.”
Artificial Intelligence: The Next Frontier
China’s strategy of scale economics and low cost is echoing in the field of artificial intelligence. Open-source large language models like DeepSeek, trained at low cost compared to their Western competitors, serve the democratization of AI while simultaneously being interpreted as a strategy to circumvent US export controls. However, unlike semiconductors and rare earth elements, artificial intelligence is a general-purpose technology that encompasses all sectors horizontally and vertically. Achieving superiority in artificial intelligence, which has become the fundamental layer of every field from healthcare to the defense industry and from finance to scientific research, presents the key not only to commercial but also to military and cultural hegemony.
Conclusion
The findings on this subject demonstrate that China’s rise in global manufacturing and technology cannot be explained by simple factor endowments such as cheap labor. China’s success rests upon long-term state planning, the ruthless utilization of scale economies, and the vertical integration of the supply chain. The overcapacity and predatory pricing policies in the solar and battery sectors have rendered WTO norms dysfunctional and pushed the West toward protectionist measures.
Consequently, China’s state-backed industrial model has transformed not only markets but also international relations. In the forthcoming period, competition will be shaped not solely by comparative cost advantages but by geopolitical influence over data control, energy transition, and critical raw materials. The rules of the liberal international order are being profoundly shaken by state capitalism.
References
Aiginger, K. (2007). Industrial Policy: A Dying Breed or a Re-emerging Phoenix? Journal of Industry, Competition and Trade, 7(3–4), 297–323.
International Energy Agency (IEA). (2022). Special Report on Solar PV Global Supply Chains. Paris: IEA.
International Energy Agency (IEA). (2023). Critical Minerals Market Review. Paris: IEA.
International Energy Agency (IEA). (2024). Global EV Outlook 2024. Paris: IEA.
Krugman, P. (1987). Is Free Trade Passé? Journal of Economic Perspectives, 1(2), 131–144.
Nitta, N., Wu, F., Lee, J. T., & Yushin, G. (2015). Li-ion Battery Materials: Present and Future. Materials Today, 18(5), 252–264.
State Council of the People’s Republic of China. (2015). Made in China 2025. Beijing.
United States Geological Survey (USGS). (2024). Mineral Commodity Summaries 2024. Reston, VA.
U.S. Department of Energy. (2023). National Blueprint for Lithium Batteries. Washington, D.C.
World Trade Organization (WTO). (2001). Protocol on the Accession of the People’s Republic of China. Geneva.
World Bank. (2024). Global Economic Prospects. Washington, D.C.
Zenglein, M. J., & Holzmann, A. (2019). Evolving Made in China 2025. Mercator Institute for China Studies (MERICS). Berlin.
Sefa Yürükel
Danish ethnographer and social anthropologist (MA)
Aarhus University, 1997
Independent Researcher
Fields of Research: International Politics, Public International Law, Geopolitics, Sociology, Psychology, Cultural Studies, Systems and Structures.
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