The Prof G Pod: China Decode – How China Is Breaking the World of Trade

Hosts: Alice Han & James Kynge | Date: December 2, 2025
Episode Theme: This episode examines China’s relentless push toward near-total self-sufficiency in technology and industrial goods. The hosts analyze how China’s record-breaking trade surplus is upending the established logic of global trade, hollowing out foreign competitors, and fueling geopolitical tensions, especially around Taiwan and East Asia. The episode also explores Beijing’s latest domestic experiment: using school holidays to stimulate consumer spending and revive the faltering services sector.

Episode Overview

• China’s trade surplus is now the largest in peacetime history, prompting alarm in Europe and Asia as traditional exporters (notably Germany and Japan) find themselves replaced in critical supply chains.
• The hosts discuss how China’s strategy of import substitution is accelerating, reshaping both global trade balances and multinational companies’ strategies.
• The episode delves into geopolitical tensions in East Asia, with a focus on US-China-Japan-Taiwan dynamics and a high-stakes Xi-Trump call.
• The hosts analyze China’s unique social engineering: leveraging extended school holidays to drive domestic consumption.
• The episode ends with bold macroeconomic predictions for 2026.

Key Discussion Points & Insights

1. China’s Record-Breaking Trade Surplus and Its Global Impact

[01:58 – 05:55]

• James Kynge highlights the enormity of China’s trade surplus: “China’s trade surplus is bigger than the trade surpluses of the next eight countries combined… by far the largest trade surplus we’ve seen in peacetime.” (01:58)
• Alice Han frames the core tension: "Beijing still wants to sell to the world, but beyond raw materials, commodities and a few consumer goods, it doesn’t want to buy much. That imbalance is already reshaping growth... China is doubling down on self-reliance while squeezing already limited space for foreign companies and high-value imports." (03:52)
• Mounting concerns from Europe, especially Germany, as their industries – from chemicals to cars – face intensifying competition from Chinese firms.

2. Import Substitution and 'Made in China 2025'

[05:55 – 09:43]

• Discussion of Robin Harding’s FT piece, "China is making trade impossible." The article reflects the belief within China that “there is nothing that China wants to import, nothing that it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to.” (06:26; quoting Harding)
• Recognition that China still imports $2.6 trillion in goods, but the policy trend is to replace as many imports as possible.
• The "Made in China 2025" plan is cited as central to China's success in boosting self-sufficiency across 10 key industries (electric vehicles, robotics, biotech, etc.).

3. The Scale and Velocity of China’s Manufacturing Dominance

[09:43 – 12:59]

• Alice Han notes Brad Setser’s analysis: “China’s manufacturing surplus as a share of GDP is now exceeding 2%. It is definitely higher now than Japan’s and Germany’s were at their historic peaks... China’s manufacturing surplus growth is faster than Japan’s and Germany’s ever were, and its scale has outpaced both countries.” (09:55)
• Traditional macroeconomic criticism (overcapacity, inefficiency) is questioned; China’s sheer scale and executive flexibility complicate orthodox economic analysis.
• The hosts spotlight autos: China now exports 6 million cars (a tenth of the global market), with projections of 8 million by 2026. This will become a major political flashpoint, particularly due to labor and union stakes in Germany and Japan.

4. Impact on European Industry & The ‘Hollowing Out’ Worry

[12:59 – 15:13]

• James Kynge: “Volkswagen has just said it can make an electric vehicle entirely in China for half the cost of doing it elsewhere... All of the smart stuff that Volkswagen used to do back in Germany, it is now going to be doing in China.” (13:17)
• This trend is not an outlier but representative of large European manufacturers’ shift – “hollowing out” domestic industry and know-how. Raises existential questions on whether this dynamic will “break the world of trade.” (15:00)

5. Mirror-Image Industrial Strategies

[15:13 – 16:16]

• Alice Han: Emphasizes that now, Chinese battery giants like CATL are building plants in Spain—a reversal of the 1990s–2000s flow of Western FDI to China.
• Striking data point: Since 2019, Chinese exports are up 40% (in volume), but imports are nearly flat (1%). China’s export machine now fuels the world’s trade—but not its own demand for imports.

6. Geopolitical Tensions: US-China-Japan-Taiwan

[18:18 – 29:38]

• Intense diplomatic moves: Xi Jinping scolds Trump over Japan’s confrontation on Taiwan; Trump seeks Chinese cooperation on Ukraine, but both focus on Taiwan tensions.
• Taiwan unveils a $40B defense build-up; Hong Kong faces domestic crisis and Beijing ramps up censorship and arrests.
• James Kynge: “Xi Jinping clearly decided to focus on Taiwan... it is China’s geostrategic priority… I think Xi was trying to get reassurance from Trump that together the US and China will not drift further apart on Taiwan.” (20:03)
• Alice and James express doubts about the credibility and strength of US support for Taiwan: “In some way, behind the scenes, the US implicit support for Taiwan is taking a couple of steps back... the US pledge of support for Taiwan is ebbing just a little.” (26:10)
• Xi frames the Taiwan dispute in terms of WWII alliances, recalling US-China cooperation against Japanese aggression – seeking to revive “friendship” with Trump based on shared history.
• The new, hawkish Japanese administration is likely to intensify volatility, as Prime Minister Takaichi’s pro-Taiwan stance hardens.

Notable Quote

• James Kynge: "If Trump really does downgrade the US relationship with Japan in favor of China… that will be a shift in the tectonic plates that have really kept Asian security together since the Second World War.” (28:57)

7. Beijing’s Domestic Experiment: Stimulating Consumption with School Holidays

[30:31 – 39:56]

• China launches citywide autumn and winter school breaks to nudge families into tourism and boost the sluggish service sector.
• Travel spikes: Flights from Urumqi and Altai up 45–50%; some hotel bookings double. Provinces roll out subsidies, free ski passes.
• Alice Han: "The length of a Chinese school year is 245 days… 55 to 60 more than those in the West. I’m naturally skeptical this will boost consumption, given parents’ lack of paid leave or childcare.” (31:35)
• James Kynge offers a counterpoint: "China has a good stab at increasing spending on tourism by making life more fun. Paid holiday can reach 28 days, more than the US or UK." (34:06)
• Alice notes a “tourism substitution effect” – rather than going abroad, more Chinese travel domestically, aided by developed local tourism ecosystems and social media.
• Skepticism remains about whether more holidays can structurally lift household consumption, given low household share of GDP (40%) compared to Japan (60%) and the US (70%).

Memorable Moment

• James Kynge: “You can find pictures of humanoid robots sliding down the slopes… China now has 748 ski resorts.” (35:55)

8. Predictions for 2026

[40:12 – 41:25]

• James Kynge: Predicts China’s trade surplus will hit $1.5 trillion in 2026: “I do not think the outside world will be able to erect enough protectionist barriers or start manufacturing goods more cheaply… The word ‘imbalances’ will dominate media coverage of China’s rise.” (40:12)
• Alice Han: Predicts a return to infrastructure and manufacturing investment, and a higher fiscal deficit target (>4%) at the 2026 National People’s Congress, as China tries to sustain 5% growth. (41:25)

Notable Quotes

• James Kynge ([01:58]): “China’s trade surplus is bigger than the trade surpluses of the next eight countries combined… by far the largest trade surplus we’ve seen in peacetime.”
• Robin Harding (quoted by James, [06:26]): “There is nothing that China wants to import, nothing that it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to.”
• Alice Han ([09:55]): “China’s manufacturing surplus growth is faster than Japan’s and Germany’s ever were, and its scale has now outpaced both countries.”
• James Kynge ([13:17]): "Volkswagen can make an electric vehicle entirely in China for half the cost of doing it elsewhere."
• James Kynge ([28:57]): "If Trump really does downgrade the US relationship with Japan in favor of China… that will be a shift in the tectonic plates that have really kept Asian security together since the Second World War."
• Alice Han ([31:35]): "The length of a Chinese school year is 245 days… 55 to 60 more than those in the West. I’m naturally skeptical this will boost consumption, given parents’ lack of paid leave or childcare."
• James Kynge ([35:55]): “You can find pictures of humanoid robots sliding down the slopes… China now has 748 ski resorts.”

Segment Timestamps

• Trade Imbalances & Global Impact: 01:58 – 05:55
• Import Substitution & Industrial Policy: 05:55 – 09:43
• China’s Manufacturing & Autos: 09:43 – 15:13
• Hollowing Out European Industry: 12:59 – 16:16
• US-China-Japan-Taiwan Geopolitics: 18:18 – 29:38
• Destimulating Consumption – School Holidays: 30:31 – 39:56
• Predictions for 2026: 40:12 – 41:25

Overall Tone & Style

Alice Han and James Kynge engage in a well-informed, nuanced, but lively discussion. The tone is analytical, sometimes concerned, always grounded in data and storytelling. They tie micro-level anecdotes to large macroeconomic and geopolitical shifts and aren’t afraid to make bold, provocative predictions.

This episode provides a sweeping, data-driven look at how China’s turbocharged drive for self-reliance isn’t just changing global trade—it’s breaking the old order, with ripple effects across economics, politics, and even domestic life.