Beyond Tariffs: Overcapacity Ignites Fresh Tensions in China-U.S. Trade Relations
The Diplomat
The following is an excerpt from Lizzi Lee's op-ed in The Diplomat. Lizzi is an Affiliated Researcher on Chinese Economy at the Asia Society Policy Institute's (ASPI) Center for China Analysis (CCA).
Overcapacity, particularly prevalent in technologically advanced sectors such as electric vehicles (EVs), now occupies a central place in the economic discourse between the United States and China. Overcapacity occurs when the production capacity of certain industries vastly exceeds demand, leading to a surplus of goods and reduced global prices.
In the United States, this issue is perceived as a deliberate strategic tactic on China’s part that disrupts global market equilibriums. American critics argue that China’s prodigious production capabilities not only skew global pricing mechanisms but also compromise the sustainability of industries globally by precipitating a downward spiral in prices.
Moreover, the United States considers the strategic ramifications of overcapacity within its broader narrative on economic security. It views with apprehension China’s accelerated expansion of capacities in sectors critical for future technological hegemony, such as semiconductors, clean energy, and telecommunications.
Conversely, China views overcapacity not merely as a byproduct of government policy but as an integral part of its broader economic strategy to transition from traditional manufacturing to a more innovation-driven economy. This strategic pivot entails a redistribution of resources toward dynamic, high-value industries, thus augmenting China’s global stature and resilience.
China contends that its developmental trajectory necessitates phases of overcapacity as it ascends the value chain. Chinese officials emphasize their efforts to mitigate these issues, such as implementing capacity reductions in traditional sectors like steel and coal and promoting high-tech sectors through innovation policies.
Moreover, the Chinese government perceives accusations of overcapacity as partly hypocritical, stemming from Western anxieties about losing global economic supremacy. Chinese leaders suggest that the United States and other Western nations employ the overcapacity narrative as a tool to curb China’s rise as a global economic power.
From Beijing’s perspective, Western critiques often fail to consider the context of China’s developmental needs and contradict global environmental commitments, resulting in a distorted portrayal of China’s strategic intentions.