09/09/2024 | Press release | Distributed by Public on 09/09/2024 10:53
Photo: Costfoto/NurPhoto/Getty Images
Commentary by William Alan Reinsch
Published September 9, 2024
The semi-new buzzword in town is "overcapacity." This refers to China's policy of building state-subsidized capacity in selected sectors and then flooding the global market with their production. This is not new, although the word is. In a nonmarket economy where credit is allocated directly and indirectly by the state, overinvestment in favored sectors is inevitable. This creates overcapacity, which leads to overproduction of goods that far exceeds domestic demand. The resulting surplus is dumped on the rest of the world. Recent or current examples are steel, aluminum, wind turbines, solar panels, telecommunications equipment, fast-fashion apparel, and electric vehicles.
There are internationally agreed upon rules for dealing with this problem. The most prominent are laws in most countries that permit the imposition of compensatory (not punitive) tariffs on imports that have benefited from subsidies or being dumped (essentially, sold below their cost of production). These laws are usually consistent with World Trade Organization rules and require determinations that dumping or subsidization has occurred and that a domestic industry has been injured as a result of it. In the United States, these laws originated over 100 years ago, and there is a large body of litigation history explaining how to use them properly.
It appears, however, that we have reached the point where these laws are no longer adequate. They take too long, provide insufficient relief, and are subject to evasion and circumvention. Some of those problems can be fixed, but even so, it has become obvious that proceeding one country at a time is too little, too late. While a single country can take action to keep these goods out, doing so is like squeezing a balloon. The goods simply pop up somewhere else. The problem continues, and Chinese policy does not change.
Recent developments, however, hint at a different approach. It appears a growing number of countries have seen this movie before and are determined to deal with it more aggressively. The result has been an unprecedented wave of actions against Chinese imports:
These actions are individual and uncoordinated, but most of them have taken place in the past six months. Clearly, something new is happening. Many countries, not just the United States, have begun to wake up to the fact that Chinese overcapacity is a systemic problem growing out of the structure of China's economy and not just a series of one-off incidents of companies trying to capture market share by underpricing. That this is happening now reflects China's strategy of trying to export its way out of its domestic economic problems, a tactic it has employed repeatedly in the past and is now trying again.
Unfortunately, the "right" solution for China-increasing reliance on market economics and growing domestic consumption-is not politically attainable. It is easier for China to export its domestic economic problems than it is to make the hard decisions of dealing with them at home, decisions that would likely undermine the Chinese Communist Party's control. This leaves victim countries with little choice but to push back.
The United States has been pushing back for years with little help from other countries that either welcome the cheap imports or don't want to stand up to a Chinese government with a long history of economic coercion. Now it appears that help might be on the way as more countries understand the threat overcapacity poses for their own economies. The challenge now is to convert that newfound concern from a series of uncoordinated individual actions into an organized, coordinated global strategy. That will be a task for the next administration. Whether either of the candidates is up to it remains to be seen.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2024 by the Center for Strategic and International Studies. All rights reserved.