Global Tensions Over China’s Overcapacity Will Rise Under Trump

A Larger, Core Challenge for the Global Economy

While president-elect Donald Trump’s tariff threats are likely to dominate headlines in the near term, China’s industrial overcapacity remains a larger, core challenge for the global economy and trading system in the coming years.

Evolution of the Issue

On Oct 29, a month after US tariffs targeting China’s overcapacity went into effect, the European Commission imposed its own tariffs on Chinese electric vehicles (EVs). While these actions attracted significant media attention, China’s recent World Trade Organization complaint against Turkey’s EV tariffs – a case underscoring China’s failure to discourage major emerging markets from following the lead of developed economies – passed largely under the radar.

Structural Trends

Structural trends suggest that the European Union could bear the brunt of a new China shock and ensuing trade tensions. As Europe’s trade conflict with China escalates, the EU’s EV tariffs – which faced resistance from some member states – may prove to be just the opening salvo.

China’s Export Surge

In response to these pressures, Chinese exporters have turned their attention to developing economies, which accounted for more than 50% of China’s exports in 2023. This trend is expected to persist, further widening China’s trade deficits with major emerging markets.

New US Tariffs Under Trump

New US tariffs on China under Trump, who has also promised a 10-20% across-the-board tariff on all imports from other countries, will accelerate the shift of Chinese exports to emerging markets and the EU. This, in turn, would exacerbate these economies’ concerns about Chinese “non-market overcapacity” and trade imbalances.

Non-Market Overcapacity

Non-market overcapacity, though an imperfect term, captures three interconnected economic forces. For starters, China’s industrial policies promote strategic sectors and push for import substitution, systematically reducing foreign imports across multiple industries.

Macro Imbalances

At the same time, persistent macroeconomic imbalances weaken domestic demand and drive China’s massive trade surplus. Lastly, the global economy is highly dependent on Chinese supply chains, which heightens the risk of disruption and economic coercion.

Global Response

Through public messaging, multilateral engagement, and targeted tariffs, the US and EU have prompted a necessary reckoning with China’s industrial overcapacity, starting to address the problem before it wreaks havoc on industries and communities.

Chinese Response

Encouragingly, there are signs that Chinese firms have scaled back their expansion plans, owing to weak domestic demand and the growing difficulty of exporting excess capacity to international markets. While Chinese authorities have, as expected, largely denied the issue publicly, the external pressure has forced policymakers to take notice.

Future Challenges

Addressing the complex global challenges posed by China’s overcapacity will require additional trade restrictions and innovative policy tools. The speed with which G7 countries were able to reach a consensus on this issue signals more coordinated action ahead.

Conclusion

China’s overcapacity problem is a complex issue that requires a comprehensive and coordinated response from the global community. While there are signs that Chinese firms are scaling back their expansion plans, the issue is unlikely to be resolved without additional trade restrictions and innovative policy tools. The global economy must continue to work together to address this challenge and ensure a more sustainable and equitable trading system.

FAQs

Q: What is China’s overcapacity problem?
A: China’s overcapacity problem refers to the country’s excessive production capacity in various industries, leading to a surplus of goods and a strain on global trade.

Q: Why is China’s overcapacity a global issue?
A: China’s overcapacity affects the global economy by disrupting trade flows, causing job losses, and threatening the stability of financial markets.

Q: What are the consequences of China’s overcapacity?
A: The consequences of China’s overcapacity include a surge in exports to emerging markets, a widening trade deficit, and a potential disruption to global supply chains.

Q: What is the global response to China’s overcapacity?
A: The global response to China’s overcapacity includes targeted tariffs, public messaging, and multilateral engagement to address the issue and promote a more sustainable and equitable trading system.