Claims of China's "overcapacity", tactics to justify trade protectionism

This undated photo shows a production line of new energy vehicles (NEVs) of BYD in Shenzhen, south China's Guangdong Province. (BYD/Handout via Xinhua)

by Lyu Hui

Recently, the United States has been hyping up the false narrative of China’s "overcapacity", accusing China of exporting excessive amount of cheap new energy products, which has impacted the global market.

Distorting the facts and laws of economics, the U.S. allegation is protectionism in nature and another example of U.S. economic coercion and bullying.

The hidden motive behind the rhetoric is to curb China’s industrial development so as to seek a favorable market advantage for the United States.

Overcapacity a fallacy

Against the backdrop of economic globalization, the world economy has long become an indivisible whole where production and consumption are global, requiring supply and demand issues be considered globally rather than solely within one country.

From a market viewpoint, the quantity of production capacity is determined by the relationship between supply and demand, taking into account the facts of global division of labor and global market, while the production capacity of different countries is determined by their comparative advantages.

It cannot be labeled 'overcapacity' simply because a country's production capacity exceeds its domestic demand. If so, don't the large annual exports of soybeans, planes and natural gas by the US constitute overcapacity?

He Hailin, a Ministry of Industry and Information Technology official said a nation's production capacity surpassing domestic demand is a common phenomenon globally as it mirrors comparative advantages and results from labor division.

Developed countries, including the United States, Germany and Japan have historically exported a large share of their products worldwide.

"For instance, 80 percent of U.S.-manufactured chips are exported, 50 percent of Japanese cars are sold overseas, and nearly 80 percent of Germany's auto output is shipped to foreign markets," said Ding Weishun, a Ministry of Commerce official.

China's new energy vehicle exports accounted for only about 12 percent of its total production last year.

Nicholas Lardy, a senior fellow at Washington D.C.-based think tank the Peterson Institute for International Economics (PIIE), said that the concept of excess capacity is "potentially harmful."

“The idea seems to imply that no country should produce more of a product than could be sold domestically,” the U.S. economist noted, adding that "Taken to an extreme this idea would lead to a world with no trade between countries, which would be economically catastrophic.”

Overcapacity might result in vast parking lots filled with unsold cars," Bloomberg reported. Chinese automakers' inventories "don't look high," and data on dealers' inventories from China's car dealer association also doesn't show an unusual increase, it said.

In recent years, the top ten automotive companies in China have higher capacity utilization rates than the industry average.

An opinion piece from Just Auto, a London-based magazine providing global automotive industry news and analysis, shows that in 2023, the capacity utilization rates of auto companies in China such as BYD Group, Tesla's Shanghai factory, and SAIC Group were around 80 percent. In comparison, Hyundai Motor's capacity utilization rate was only 23 percent, and Kia Motor's was only 25 percent.

On a global scale, there is no overcapacity in the new energy industry, but a shortage of production capacity.

The new energy sector remains in its nascent stages of rapid growth, with the demand for new energy products outstripping current global capacity.

According to projections by the International Energy Agency, the demand for new energy vehicles might skyrocket, reaching 45 million by 2030, 4.5 times that of 2022. Last year's G20 Leaders' Declaration called for a tripling of renewable energy capacity by 2030.

Contributor to world’s green transition

China's advanced production capacities in its "new three" industries like electric vehicles, lithium batteries, and photovoltaic products, are in high demand worldwide, which not only contribute to boosting global supply, alleviating global inflationary pressure, but also enhancing global green transition.

The rapid growth of China's new energy industries is built on continuous technological innovation, full-fledged industrial and supply chains and full market competition encompassing state-owned, private and foreign entities. Its competitive edge is a result of comparative advantage and the laws of the market combined, not by so-called "subsidies."

Actually, it's the U.S. that’s a major subsidizer of its industries. The U.S. government is providing approximately 369 billion dollars in tax incentives and subsidies for clean energy industries, including NEVs, through the 2022 Inflation Reduction Act, said Ji Xuehong, director of the automobile industry innovation research center at North China University of Technology.

Chinese new energy products with high quality, efficiency and cost-effectiveness have made important contributions to global green development.

Chinese-made NEVs, which met the surging global demand for eco-friendly transportation solutions, were exported to over 180 countries and regions last year, including France, Thailand, and Indonesia.

China's reach in the wind power and photovoltaic markets extends across more than 200 countries and regions, while driving down clean energy adoption costs.

Despite their competitive pricing, China’s new energy exports don’t meet the technical definition of dumping.

The prices of Chinese-made NEVs exported to Europe are higher than its vehicles sold at home.

Li Dawei, researcher at the Academy of Macroeconomic Research, said these products maintain prices aligned with their inherent value, underscoring China's adherence to fair trade practices.

Cover for protectionism

Like the "decoupling" and "de-risking" push in recent years, "overcapacity" rhetoric is just another discourse trap to suppress China's new energy industry and contain China's development, which exposes U.S. anxiety about its own competitiveness and market share.

Blaming China for "overcapacity" is not new. The United States has in the past branded China's flourishing exports of quality, affordable goods as the result of overcapacity.

This tactic reflects a longstanding pattern of politicizing economic and trade issues to safeguard U.S. interests and maintain U.S. hegemony.

The U.S. manufacturing industry has waned on account of intensifying financialization of its economy and the hollowing out of its industries.

Rather than addressing domestic competitiveness issues head-on, the U.S. has resorted to protectionist measures to curb the late coming countries’ technical progress and industrial development in order to maintain its monopoly in global global system of division of labor.

The overcapacity theory serves just as an excuse for protectionism. The White House has lately announced a tariff hike, jumping from 25 to 100 percent, on imported electric vehicles (EVs), solar cells and other clean-energy products from China.

The U.S. protectionist moves will only backfire and make its consumers and industries bear the cost.

Reflecting on history, any country listed as "harming" the U.S. industrial interests, got punished by the U.S.

Since the middle of the last century, Japan’s textile, automobile, and semiconductor industries have expanded, but the U.S. has conducted crackdowns on Japan’s related industries, by adopting anti-dumping tariffs, forcing Japan to voluntarily restrict exports and expand imports, among others, said Jin Ruiting, researcher at the Institute of Macroeconomic Research of the National Development and Reform Commission.

Today, U.S. is playing the same old trick again, using trade protectionism to alleviate its "hegemony anxiety." Nevertheless, history has proven that protectionism isn't the right answer to the economic woes confronting the U.S.

As Bloomberg recently argued, despite implementing steel protectionist measures over the past decade, Washington has failed to prevent the decline in employment within the U.S. metal manufacturing industry.

What is worse, these measures have increased costs across other sectors of the U.S. economy, diminishing industry competitiveness. If extended to the new energy industry, such policies would further weaken Washington's ability to address climate change.

The U.S. just can't wave the banner of climate response and ask China to take on greater responsibility on the one hand, while wielding the stick of protectionism and restricting Chinese green products on the other.

Such “double standards” will not only disrupt world economy’s green and low-carbon transition, destabilize and disrupt industrial and supply chains, but also undermine cooperation in tackling climate change.

Rather than clinging to zero-sum mindset and protectionism, U.S. should fairly and objectively evaluate the important role of China’s new energy products in the global green shift, cooperate with China on the basis of market principles to jointly boost global sustainable development.