Chinese firms are producing more, working harder and competing more intensely than ever.
But profits are thin, margins are shrinking and growth is increasingly sustained by scale alone.
Economic analysts describe this phenomenon with a term borrowed from anthropology: “involution.” In China’s case, it refers to a system in which firms become trapped in a cycle of overproduction and diminishing returns.
“Involution as a phenomenon is real,” said Philippe Rheault, director of the University of Alberta’s China Institute.
“It’s partly a function of government support … but it’s also partly a function of an extremely competitive, innovative environment.”
Some leaders are warning involution could have dire implications for Western economies. With Chinese firms producing more than Chinese consumers can consume, and the excess being exported to foreign markets, Western companies are often hard pressed to compete.
French President Emmanuel Macron recently said Chinese goods pose an existential threat to manufacturing in Europe, calling the situation “a matter of life or death.”
What is involution
Involution reflects long-standing dynamics in how China generates growth.
“These problems are not new,” said University of Toronto economics professor Loren Brandt in an email. “At the core are deep structural problems.”
China’s national government sets a GDP growth target; provincial governments are responsible for meeting it. Political officials are incentivized to prioritize growth over profitability and heavily subsidize various industries — often in already saturated sectors.
Rheault points to China’s electric vehicle sector, where more than 100 firms compete for market share, despite only a handful being profitable.
“But right now, each province is trying to grow its own champion [automaker],” said Rheault, who served as consul general at the Canadian consulate in Guangzhou, China from 2019 to 2023.
Another dynamic is currency controls. China’s currency is not free floating, but is rather managed by the People’s Bank of China. The U.S. has long alleged that China’s currency is undervalued, providing a subsidy to its export sector.
But sources said it would be a mistake to chalk the China threat up to government intervention alone.
“We presume that what we see in terms of products and prices coming out of China … is entirely a product of distortion — in that it is government created … it’s anti-competitive … or it’s unfair competition,” said Anton Malkin, head of research at the University of Alberta’s China Institute. “But the way that I would look at it is that the system is hyper-competitive.”
China’s competitiveness is a function of how firms are organized and operate.
“ As an employee, you have a ton of KPIs to meet because CEOs set targets in terms of prices,” said Malkin.
Chinese industries also tend to be geographically concentrated by sector, boosting efficiency.
For example, the city of Shenzhen, in Guangdong province, has become a global hub for drone manufacturing. Likewise, precision manufacturing is clustered in Suzhou, a city west of Shanghai.
Domestic pressures, global exports
Involution effectively transforms internal economic pressure into external trade pressure.
In 2001, China joined the World Trade Organization, which permitted it to enjoy the same tariff rates as other member countries.
At the time, China was the world’s seventh leading exporter of merchandise trade, while the U.S. was the leading exporter. Since 2009, China has been the world’s largest exporter. In 2024, it exported about US$3.5 trillion in goods, far outpacing the U.S., the second ranked country, at US$2.2 trillion.
Donald Trump has said since the 2010s that the U.S. made “a bad deal” with China, pointing to manufacturing losses and trade deficits.
In his administration’s first term, the U.S. raised tariffs on Chinese goods by an average of about 16 per cent. The Biden administration maintained many of those tariffs. A 2020 WTO ruling found these tariffs to be in breach of WTO rules, but the U.S. left them in place.
In Trump’s second term, the U.S. further raised tariffs on China. Today, average tariffs stand at about 30 per cent.
These tariffs have redirected exports that would have gone to the United States into other markets, says Rheault.
“Some of those competitive exports … that would have found their way into the U.S. market are now finding their way elsewhere,” he said. “You’re seeing a lot of pressure in places like Africa, Western Europe — to some extent in Canada too.”
Structural imbalance
In free market economies, companies generally only stay in business if they are profitable.
Western firms generally do not receive state subsidies at the scale of Chinese firms, and operate in economies with free floating currencies. Key input costs, such as labour, can also be considerably higher than in China.
Firms that cannot compete either shrink or close.
“Canadians didn’t decide that they wanted Canada’s share of global manufacturing to decline,” said economist Michael Pettis, a senior associate at the Carnegie Endowment for International Peace, in a January email to Canadian Affairs.
But by maintaining open trade and capital accounts, the country effectively “accommodated the industrial and trade policies” of surplus economies like China, he said.
Countries such as Canada, the U.S. and U.K. absorb between 60 and 80 per cent of the world’s trade surpluses, Pettis said.
Canada’s merchandise trade with China totalled nearly $120 billion in 2024. However, Canadian exports to China were just under $30 billion — meaning imports from China were nearly three times as large.
Still, Rheault cautions policymakers against viewing the relationship purely through a defensive lens.
“There’s certainly a challenge, but there may be some opportunities,” he said, citing lower cost Chinese inputs into Canadian value-added manufacturing.
“If there are ways to integrate some of those components at a lower cost, that actually could make Canadian products and Canadian exports more competitive,” he said.
The challenge is, China now dominates not only lower end manufacturing, such as parts, but is also a leader in tech and high end manufacturing, such as cars.
“By now, we have certainly over a hundred EV manufacturers in China,” said Rheault.
But Rheault notes China’s model for sustaining growth may not be sustainable indefinitely. “There’s going to be a shakeout down the road,” he said.
But Brandt, of the University of Toronto, notes it is unclear when that will happen.
“I don’t have a crystal ball, but a reversal doesn’t seem likely anytime soon,” he said.
