Overcapacity: Eastern Offense or Western Double-Standards?

The US Secretary of the Treasury Janet Yellen visited the People’s Republic of China (PRC) in early April, deeming the PRC’s industrial overcapacity harmful to the US economy, especially in high-tech and green energy sectors. She condemns the PRC’s strong production power as a ‘threat’. Such a statement, of course, does not go well with the PRC. The Chinese Foreign Ministry regarded her accusations as outright ‘bullying’ and an embodiment of US ‘hegemony’. 

Yellen’s concern rests on whether the PRC can adequately digest its own products, given the enormous production power of its industries. To determine whether Yellen is making a sound argument, there is a need to examine China’s internal demand for high-tech products compared to its exports. 

According to the PRC’s ‘Principles on Strategic Arrangements for Enlarging Domestic Demand (2022-2035)’, the state seeks to expand rural demand while promoting green and low-carbon products nationwide. Official figures for 2023 show that over 87.3% of PRC-produced new energy vehicles are sold domestically, with only 0.82% exported to the US. As such, the Chinese Ambassador to Russia, Zhang Hanhui, deems the US’ claim to be nonsense, a malign attempt to hinder Chinese development. 

While the state has been actively resolving the issue, overcapacity is not entirely fictitious. Reaching the break-even point for the automotive industry would require an 80% factory utilisation rate. The PRC’s rate for producing new energy vehicles, however, has only reached approximately 50%. The Paper, a semi-independent PRC press, comments that this is indeed a sign of overcapacity, in which most car enterprises have failed to reach sales targets. 

Whether overcapacity will persist, however, depends on how competent the PRC is in accelerating domestic circulation. The PRC’s Xinhua Institute projects that the market penetration rate of electric vehicles (EVs) will surge from 35.2% in 2023 to around 60% in 2033. Only time will tell whether the initiative will turn out to be successful.

Another concern is whether the PRC’s subsidies towards domestic electric vehicle makers resulted in unfair competition against foreign counterparts. Between 2009 and 2022, the PRC spent around $173 billion to back EV production. The PRC Ministry of Commerce has responded to this allegation by pointing out that the US and the EU also pushed forward similar subsidies. This is an accurate observation.

The EU offers a wide range of support to the EV sector, providing tax breaks for manufacturers and ‘subsidies per car for buyers’. The US has offered over $13.8 billion to EV and EV battery factories in recent years, noted Good Jobs First, a US policy resource centre. It is therefore difficult to bash the PRC purely based on the EV subsidies provided.

Certain observers note that US criticism is born out of trade protectionism, with which I concur to a certain extent. Nonetheless, a more fundamental question lies in the two sides’ differing understanding of how legitimate state intervention is in supporting economic activities.

The PRC upholds a national mobilisation system that allows the state to employ its visible hand to guide national development. Hong Xiaonan, the Director of the Dalian University Marxism School, considers it a socialist perk for the state to have extensive control over major economic sectors. In his view, the PRC’s system allows the state to take the lead in advancing economic reforms and policies, avoiding disputes while boosting administrative efficiency. 

This form of policymaking vastly differs from what the US perceives to be the economic orthodoxy. Yellen advised the PRC to reduce excess industrial capacity, steer away from ‘state driven investment’, and return to ‘market-oriented reforms’ that fuelled previous economic growth. Providing subsidies is one thing, but if a state is allowed to guide, finance, and intervene with domestic industrial decisions, it may be more difficult for Western countries to swallow. 

Ideological gaps further alienate the two countries at a time of tension. Lacking a way to facilitate consensus on fundamental politico-economic issues, both countries constantly perceive each other’s actions as threats. 

Top-level scholars in the PRC tend to view the US as the side that employs a Cold War lens to view US-China relations. 

For instance, Lu Feng, an Economics Professor at Peking University, contends that hegemonic opposition to the PRC’s rise is to be expected when the country has developed to a certain extent. The PRC must walk an independent and self-sufficient path, countering hegemonic oppression. Under such sentiments, trade protectionist statements from the US will very likely be regarded as crackdowns against China.

Meanwhile, the US takes a similarly antagonistic stance against the PRC. The FBI introduces China as an authoritarian regime that seeks strategic gains via espionage, economic offences and IP theft. Owing to past grievances, the US no longer believes that the PRC can be turned into a collaborative partner.

While both sides are taking steps that seemingly suit their respective interests, a rejection of dialogue entrenches both sides in a prisoner’s dilemma. In May, President Biden announced an increase in tariff rates against Chinese EV imports. The PRC, meanwhile, further distanced itself from the Western financial model, calling for a distinct Sino-Marxist path to economics. As tension surges, diplomatic and civil exchanges become increasingly important, albeit very unlikely to yield fruitful results.

Image: an.yonghua