China’s Overcapacity Hits the World Again

From April 4 to 9, U.S. Treasury Secretary Yellen visited China. This was her second visit to China since she took office, during which “China’s overcapacity” was once again in the spotlight. In an effort to turn around China’s sluggish economy in recent years, Beijing is selling cheap goods around the world, and Chinese companies are looking for overseas buyers for the vast amount of surplus goods, backed by cheap government-led loans. It’s a multi-trillion-dollar test that follows China’s impact on global manufacturing more than 20 years ago.

China in Transition

China’s economy is undergoing a painful transformation as Beijing tries to steer it out of the recession and real estate debt crisis that followed the Covid  pandemic. Specifically, the Chinese government is promoting the so-called “new three” industries of solar panels, electric vehicles and lithium-ion batteries to aggressively produce and export these commodities in order to boost the economy. Overcapacity in photovoltaic products is the most prominent of China’s three new industries in foreign trade. By the end of 2023, China’s annual production capacity of finished solar components will be 861 gigawatts (GW), which is more than double the amount of components installed globally.

When these products are exported to Europe and the U.S., the survival of local companies will be in jeopardy, just as it was more than a decade ago, when Chinese steel swept the global market. Moreover, China’s economy is so large today that actions taken by Chinese entities could change international prices, potentially putting the survival of companies in the U.S. and other countries in question. Yellen emphasized that concerns about overcapacity are not motivated by anti-China sentiment or a desire to disengage, but rather by a desire to prevent global economic dislocation and to build a healthy economic relationship with China. At the same time, Yellen did not threaten to impose new tariffs on “overcapacity” industries. Only Beijing apparently sees things differently.

China’s Deputy Minister of Finance Liao Min responded to the U.S. skepticism by saying that “excess capacity” is a function of market mechanisms, that supply and demand are in relative balance, that imbalance is often the norm, that it can occur in any economy with a market economy, and that it is largely up to the market to make adjustments in accordance with the law of value. He also emphasized that the current production capacity is far from being able to meet the market demand, especially the huge potential demand for new energy products in many developing countries.

Undeniably, the production price of solar cells, electric vehicles and lithium-ion batteries produced in China is cheaper than those produced in Europe or the United States. The wages of skilled workers in China are still much lower than those in the West, and the society has not promoted the rights of workers, so the price of the same factory in the West is indeed higher than the price of similar products produced in China. Under the premise of globalization, it is a fact that Chinese products have an advantage. In the past, China produced low-end daily necessities, which were not important to the West, so the West was willing to absorb these straightforward goods. However, electric cars, solar panels and lithium batteries are items that Western societies have researched and developed but have not been able to produce in large quantities. I believe it is unlikely for Western countries to import from China at the expense of their own industries.

After all, trade is a matter of mutual consent. In the face of the impact on the long-term development of their own economies, it is inevitable that the West will revert to protectionism. In human history, this has often led to wars between nations. When Japan’s semiconductor and automobile industries surpassed the United States in the last century, the United States implemented a tariff policy that devastated Japan’s economy, and only then did it maintain its status as a major economic power today. In the face of China’s challenge today, it can be expected that the U.S. will still insist on various policies to suppress China’s development.

Anyone with a basic knowledge of economics will realize that if policies are focused on creating supply rather than demand, global spillovers will naturally occur. This phenomenon is related to the imbalance in the global trade structure caused by the epidemic and the pursuit of security in the supply chain, etc. The current situation is not optimistic, and the phenomenon is likely to continue for several years.

Unfair Economic Behavior

Beijing wants to replace the U.S. as the world’s technology center, and it has no problem competing with other countries in the relevant industries. But there are a variety of inequities in trade between the United States and China. For example, while the Chinese government can intervene heavily in markets, producers, and supply processes, locking U.S. companies out of the country, it demands that China have free access to the U.S. market, which has led to today’s situation. When Trump was in power, he set punitive tariffs on the trade deficit between China and the United States and required China to buy agricultural products from the United States, which were means of solving the trade gap between the two countries at the national level, but he still failed to face up to the market intervention and protection of domestic industries. However, the U.S. has been able to verify the Chinese business model, and it has been able to grasp the means by which the Chinese government has been able to influence the development of its enterprises. Today’s allegation that China is dumping money all over the world at the expense of other countries by spending US$300 billion on subsidies, restricting market access, and forcing technology transfers is a different story. In other words, it means to other countries that it is one company competing with one country. From the Great Leap Forward to China’s real estate boom, overcapacity is part of China’s broader governance style, which favors “overcapacity” and overshooting targets.

In the last 20 years of China’s reform and opening up, “excess capacity” has been and remains one of the weapons of China’s industrial strategy. From the “Made in China 2025” program, to the “One Belt, One Road” program, to the New Three Types of New Quality Productivity, some of these have been about finding international markets for China’s excess productivity, or even about attracting and stimulating the creation of a new industry from scratch by means of astronomical government subsidies from the outset, in order to capture a share of the international market as quickly as possible. Some of them are looking for international markets for China’s excess productivity, and even using government subsidies to stimulate the creation of a new industry from scratch. The imbalance between domestic supply and demand in China, coupled with the economic downturn in the real estate sector and other sectors, has also led to doubts about whether China is trying to get rid of its internal economic problems through exports.

China’s current flood of exports has already overwhelmed foreign competitors in some sectors; the difference this time is that the West has been prepared. The United States and the European Union have erected trade barriers, and emerging economies such as Brazil, India and Mexico have joined in the fight. For example, India has launched an anti-dumping investigation into Chinese-made bolts and screws, Argentina is investigating Chinese elevators, and the UK is investigating excavators and e-bikes.

In the face of this global backlash, China’s response has always been to denounce the rise of protectionism, suggesting that it has no intention of changing its strategy. It is not entirely wrong for China to say this, but China’s offense this time around is actually affecting the European countries as well, so the European countries will not sit idly by as China clashes with the US over trade. Although Yellen’s visit to China indicated that the US does not want to break ties with China, if Beijing stays on its current course, it is not impossible to rule out the possibility that the US and the rest of the world will move in a more protectionist direction.

Australia’s future opportunities

Australia’s economic structure is different from that of the West. Australia’s main economic exports are not industries, but raw materials, agricultural products and services. In fact, Australia’s industrial output is not large, so it is not an absolute competitor with China. On the contrary, Australia is a complementary economy to any industrialized country, especially one that does not have a large supply of raw materials.

However, China’s “overcapacity” is a wake-up call for the world economy, and given the volatility of the relationship between Australia and China in recent years, Australia has been “thinking of danger in times of peace”, and has been pushing for a diversification of its supply chain in order to minimize its dependence on the Chinese economy. Many countries have already begun to shift their supply chains away from China to other countries in East, Southeast or South Asia, and Australia is naturally adjusting its trade relations with other industrialized countries. Last month, for example, Australia-Vietnam relations were upgraded to a comprehensive strategic partnership, with new ministerial dialogues on priority areas, including energy and minerals, to diversify supply chains and reduce reliance on China. The two countries have also launched a new arrangement to allow 1,000 Vietnamese workers to fill labor shortages in Australia’s agricultural sector.

In addition, the so-called “overcapacity” in Chinese electric vehicles is benefiting a wide range of Australian customers. Australian Prime Minister Albanese has been actively promoting an emissions reduction program since taking office in 2022, creating a strong boost to EV demand. Sales of EVs have surged in Australia as foreign carmakers face no trade barriers and owners enjoy subsidies, tax breaks and relief from high fuel prices. That’s why BYD and other Chinese EV makers are making a big push into Australia, which is “friendlier” to them. According to data, BYD now has a 14 percent share of the Australian EV market, second only to Tesla, which has 53 percent. After all, Australia’s car market is heavily reliant on overseas markets, whether from China, Japan or India, it makes no difference to the people here.

In the short to medium term, accepting large quantities of low-cost Chinese goods will have temporary benefits for an Australian society dominated by agriculture and the service sector; but in the long term, to create a healthier economic and trade relationship, Australia will need to continue to expand its own supply chain, starting with a weakening of its economic dependence on China, especially in the face of the US and China’s struggle for economic hegemony, and a growing awareness of the need to expand its supply chain, especially in the face of the US and China’s struggle for economic hegemony. In a world where the US and China are competing for economic hegemony, and where there is a growing ideological war, each side is carefully testing the boundaries of the other while trying to expand its own space, Australia needs to think about its own way forward.

Once seen as the “weak link in the Western camp”, and with Beijing trying to wean Australia away from the US alliance, the West is slowly coming to its senses in the face of the unexpected new strain of influenza that is sweeping the world. Perhaps today’s world change is the perfect opportunity for Australia, which has long been caught between the US and China, to capitalize on its immigrant and multicultural strengths and take a different path to development.

Conclusion

Australia is in a different position from Western countries in terms of its small population and large amount of resources. Australia’s inability to efficiently produce cheap and good quality products in various industries has made it a country that relies on foreign imports for a long time. As China and the West struggle for dominance in industrial production, Australia is likely to be a beneficiary, obtaining cheaper products as everyone fights for the market.

However, after 20 to 30 years of over-reliance on China for tourism, education, export and investment, the Australian government has realized that it has to trade with different countries in a more comprehensive manner, and not to put all eggs in the same basket. Therefore, it is now time for Australia to establish a broader and more comprehensive cooperative relationship with the world economy. When the United States and European countries have to compete with China’s production capacity, Australia can have more choices.

Article/Editorial Department (Sameway Magazine)

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