THE US has found a new target in its criticism of China: overcapacity. A point is being made that, in green sectors, China is producing more than it can consume, thereby exporting its surplus capacity in what are labelled as “unfair” and “non-market” practices. There is also a highly relevant allegation over Chinese government subsidies to electric vehicles, solar panels and wind turbines, as subsides are said to be a main culprit behind the alleged overcapacity. In many ways, this argument is one-sided and unfair.
First of all, the US ought to have an objective understanding of its own industrial productions as well as the situation in the West in general. In economics, overcapacity is usually measured by capacity utilization rate. A higher rate indicates less overcapacity. In the US economy, this rate hovered around 78% or 79% throughout last year. In the eurozone, the highest point of this rate in 2023 was 81.5%, but it has stayed below 80% over the past two quarters. China’s official data show that its rate was close to 76% in the last quarter of 2023. In other words, China has a lower capacity utilization rate than in the US and Europe, but not by much. This fact is rarely mentioned when American officials point a finger at China, which creates a misleading perception that the US and other advanced economies utilize their industrial capacities much more efficiently than China does.
Putting aside China’s overall capacity utilization rate, there are other angles to evaluate the situation as well. Last year, China overtook Japan as the world’s largest car exporter thanks to its shipments of EVs. To some people, that headline might generate an assumption that China is dumping EVs to the rest of the world. Is that the case? In fact, the number of EVs exported by China in 2023 only accounted for 12.5% of the EVs manufactured in the country in the same year. By comparison, Japan exported nearly 68% of the passenger cars produced in the country in 2023. In the case of Germany, the same rate was 75% last year. For South Korea, it was around 64% in 2022. If China’s EV exports are seen as dumping of overcapacity, then Japan, South Korea and Germany are, under the same logic, super dumpers of excess auto manufacturing capacity.
In essence, trade is about different economies taking up roles in global supply chains by making use of their own competitive advantages, and a core spirit is to work together to complement each other. In industries where an economy has advantages, it naturally tends to export more than it imports. Japan and Germany have self-evident strengths in internal combustion engine cars, so it’s not surprising that they sell so many cars to other countries. When it comes to EVs, solar panels and wind turbines, China is competitive. So, there is a double standard when China’s exports of these products are accused of dumping overcapacity.
That’s why Nicholas Lardy, a senior fellow of the Washington DC-based Peterson Institute for International Economics, has openly expressed his skepticism about the idea of overcapacity. He makes a valid point that if this idea was carried to an extreme that would mean no trade globally, because you shouldn’t produce more than you can consume domestically.
Subsidies aren’t the sole driver of China’s competitiveness in green sectors. Rather, it’s a mix of factors including innovation, economies of scale, and consistent policies. China’s sustained investment since 2011, surpassing Europe’s solar panel manufacturing, underscores the role of policy consistency. Notably, China has phased out subsidies for new wind and solar projects since 2021 and for EVs since 2022. This demonstrates the increasing dominance of market forces in China’s green industries. In contrast, political shifts like potential re-election of Trump in 2024 pose challenges to policy continuity in the US, hindering its green transition efforts.
In green industries, overcapacity isn’t the issue; rather, it’s the gap between supply and demand. Despite record-high annual growth in wind power capacity, it falls short of what’s needed to meet the Paris Agreement’s targets. There’s chronic underinvestment globally in future capacity. China leads in new green power capacities, contributing 65% of global wind turbine installations last year. However, a study suggests China needs to increase its solar and wind power tenfold to achieve carbon neutrality by 2060.
China’s status as a global leader in green power is probably the best evidence that the country is translating its political will to tackle climate challenges into concrete industrial actions and technological breakthroughs. The urgency of climate change requires concerted global efforts to cope with it. Unfortunately, some forces are seeking to undermine the formation of such efforts by formulating a negative narrative about green products from a global leader in this field. This is not only misguided in an economic sense, but also morally unjustifiable.
—The author is a Beijing-based radio host and political analyst.
Email: dinghengcri@foxmail.com
