Recently, China has been expanding its production and export of various goods linked to high-value-added industrial sectors such as solar panels, wind turbines, lithium batteries, and electric vehicles. This aligns with Beijing’s efforts to establish a new economic growth model based on boosting the supply side and export capacity. However, this raises international issues related to China’s so-called “excess production capacity,” which has caused growing global concern. U.S. Treasury Secretary Janet Yellen has repeatedly expressed that China’s excess production capacity poses a serious threat to both the global and American economies. This issue could place Beijing in a prolonged confrontation with major global powers, particularly the United States and the European Union.
Excess Capacity:
The term “excess production capacity” typically refers to a situation where a industry’s production capability significantly exceeds the demand for its products, resulting in a notable surplus in supply, which then leads to a sharp drop in prices. In other words, excess capacity occurs when an industry or factory produces more than it can sell. This definition ties excess capacity to an imbalance between supply and demand.
The issue of excess production capacity becomes international when a country begins to increase its exports to a level that disrupts sales of similar industries in other markets, causing significant harm. This negatively affects industrial development in competing markets, a situation known as “problematic excess capacity.”
This term only applies under certain conditions, including a drop in industrial product prices and a decline in the rate of industrial capacity utilization (the ratio of actual production to production capacity) in competing markets. A capacity utilization rate of 80% is sometimes considered ideal; higher levels are unsustainable, while lower levels are a waste of capacity.
China’s Unique Situation:
The issue of excess production capacity in China is not new. It first emerged ten years ago when China experienced a significant surge in the production of construction-related industries before 2014, following the Chinese government’s stimulus package to support infrastructure and real estate sectors. This led to the development of large capacities in related industries.
However, with the slowdown of the construction sector in China in 2014 and afterward, the Chinese market faced significant excess capacity in heavy industrial products like steel and aluminum. Consequently, China increased its exports of these products to Western markets to offload the surplus. Amidst this, the European Union launched investigations into the dumping of Chinese steel in European markets in 2016.
The issue of China’s excess production capacity has resurfaced with the recent focus of industrial policy on developing high-value-added strategic sectors such as solar panels, electric vehicles, and lithium batteries. China currently meets about 80% of the global demand for these goods, according to Oxford Economics estimates.
New Industrial Policy:
China’s new industrial policy has focused on developing high-value-added industries like renewable energy, electric transportation, and semiconductors, in an attempt to build a new economic growth model based on maximizing export capacity. However, this clashes with Western ambitions to control supply chains for these economic activities.
To support the productivity of these industries, the Chinese government has recently provided a generous package of incentives and credit facilities to encourage local companies and factories to improve their production efficiency. For example, loans from the four major state-owned Chinese banks increased by 25% in 2023, reaching $1.2 trillion, primarily targeting strategic sectors such as technology and clean energy.
With the generous government incentives, China’s exports of solar panels, electric vehicles, and lithium batteries (known as the “three new products”) rose by 29.9% year-on-year to 1.06 trillion yuan in 2023. Beyond absolute numbers, from a relative perspective, China has managed to control global supply chains for most of these products, accounting for 80% of global production capacity for solar energy units.
Mutual Arguments:
China’s excess production capacity has been repeatedly criticized by the current U.S. administration. Treasury Secretary Janet Yellen has spoken about the dangers of this issue on multiple occasions. Washington believes that China’s excess production capacity threatens not only the U.S. economy but the global economy as well. Therefore, it is not surprising that Yellen, as she stated last July, pledged to continue pressuring Beijing to adjust its production policy.
American criticism of Beijing reflects Washington’s concerns that China’s production policy could flood global markets with its cheap products, thereby weakening the competitiveness of Western manufacturers. In other words, China’s excess production capacity undermines the competitiveness of American and Western companies in international markets, ultimately preventing Western countries from getting their fair share of production and employment, while China takes more than its fair share in global markets.
In response to these accusations, Beijing has countered by arguing that Western claims about China’s excess capacity are exaggerated and that it is merely an American ploy to suppress superior industries in other countries. Beijing defends its excess production capacity, arguing that it has competitive advantages that should be invested in, and there is nothing wrong with producing and exporting quantities that exceed domestic demand as long as the total supply of the product does not exceed global demand.
At the same time, China asserts that the rise in Chinese productivity is due to economies of scale and innovation, not government subsidies to Chinese factories, as the West claims. On the contrary, Western countries, particularly the United States, themselves offer billions of dollars in incentives to clean industries (such as tax exemptions under the U.S. Inflation Reduction Act of 2022).
A Heated Confrontation:
Even before Washington raised the issue of “China’s excess production capacity,” the Chinese government had already begun reconsidering some of the tax incentives and financial subsidies provided to many Chinese companies across various sectors. However, this will not put an end to American criticism of Beijing, and it remains unlikely that Beijing will completely eliminate subsidies to Chinese factories and companies.
Moreover, China, according to statements from its senior officials, remains committed to maximizing its production and export efficiency, which it considers not only beneficial for containing global inflation but also for enhancing environmental sustainability and facilitating energy transition worldwide.
In the face of China’s determination, the United States and its partners may not hesitate to take more protectionist measures to counter China’s commercial influence, including imposing additional tariffs on Chinese goods. The United States and the European Union have already imposed tariffs on some Chinese goods in recent years, contributing to the rise of trade protectionism and the fragmentation of the global trading system.
As the confrontation between Beijing and Washington over excess production capacity intensifies, the Chinese government may engage in limited maneuvers in an attempt to minimize the trade losses resulting from tighter restrictions on its products’ access to Western markets. This might involve China offering to build new partnerships to relocate part of its production chains and factories abroad, which could help create more jobs and transfer knowledge and technology to international and Western markets. However, the question remains: Will Western countries themselves welcome such Chinese investments, given their growing concerns about national security threats posed by economic partnerships with China?
