China’s Overcapacity: A Potential Global Solution
Introduction
In recent years, China has been experiencing a significant overcapacity in key green industries, including electric vehicles (EVs), lithium batteries, and solar panels. This has raised concerns among international experts, with some claiming that China’s overcapacity is the result of state subsidies and that it is disrupting international markets.
However, I argue that China’s overcapacity can actually be a solution to the world’s green development challenges. In a recent symposium on “80 Years after Bretton Woods,” I proposed a “Global South Green Development Plan,” which I later dubbed the Chinese Green Marshall Plan. The plan aims to assist developing countries in their green development, expand China’s aggregate demand, and enhance China’s global leadership.
The Nature of Overcapacity
Defining “overcapacity” can be controversial. Some argue that if Chinese companies can sell their products, whether domestically or internationally, there is no “overcapacity.” From this perspective, overcapacity is a case of supply exceeding demand, and it is essential to distinguish between the domestic and global contexts.
Three sets of factors are relevant here: macroeconomic imbalances, explicit and implicit subsidies, and the size of the industry in question. In the domestic context, China’s overcapacity is not new, as the country has a large current-account surplus since the 1970s.
Addressing Overcapacity
The first step to addressing overcapacity is to balance the current account. Chinese authorities have been working towards this goal since the 2008 global financial crisis by boosting domestic consumption.
State Subsidies
Concerns about state subsidies are also valid. However, China’s explicit subsidies for EVs, including direct subsidies, tax reductions, and exclusive licenses, are about average among a dozen countries surveyed in a 2022 working paper. They are less than those provided by the Norwegian, US, French, and German governments.
Implicit subsidies – reduced factor costs – are less transparent. US Under Secretary of the Treasury for International Affairs Jay Shambaugh cited an analysis by the Center for Strategic and International Studies (CSIS) that estimated China’s implicit subsidies to be about 5% of GDP – ten times the level of the US, Japan, and some other countries. However, this analysis is flawed, as China’s factor-cost distortion was designed as a transition policy, not an industrial strategy.
Size Matters
The perceived impact of Chinese overcapacity is exaggerated by the sheer size of the Chinese economy. China is a massive country, and its economic policies tend to concentrate investment in certain sectors and industries. This can create difficulties for China’s trading partners. The point is that the size of China’s green-tech sectors is probably a larger problem than subsidies.
A Global Solution
China needs to reduce the influence of state direction on resource allocation and work with other countries to ensure mutual prosperity through cooperation. This was the rationale behind my proposal for a green development plan for the Global South. China has already built substantial production capacity in green-tech sectors, but it faces rising barriers in developed markets.
A Conclusion
In conclusion, China’s overcapacity is not a solely negative phenomenon. It can be a solution to the world’s green development challenges. By addressing domestic overcapacity, reducing state direction on resource allocation, and working with other countries, China can drive global green development, boost its own economy, and strengthen its international leadership.
FAQs
* What is the nature of overcapacity?
+ Defining “overcapacity” can be controversial. It is a case of supply exceeding demand, and it is essential to distinguish between the domestic and global contexts.
* How can China address overcapacity?
+ China needs to balance its current account, reduce state direction on resource allocation, and work with other countries to ensure mutual prosperity through cooperation.
* Are Chinese state subsidies for EVs fair?
+ China’s explicit subsidies for EVs are about average among a dozen countries surveyed in a 2022 working paper and are less than those provided by the Norwegian, US, French, and German governments.
* What is the size of China’s green-tech sectors?
+ The size of China’s green-tech sectors is probably a larger problem than subsidies, as it is the result of the country’s massive economy and concentrated investment in certain sectors and industries.