Are the Chickens Coming Home to Roost

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:

• The United States has imposed 100 percent tariffs on Chinese electric vehicles (EVs) and increased tariffs on Chinese steel and aluminum to 25 percent.
• Canada is imposing 100 percent tariffs on EVs and 25 percent on steel and aluminum products from China. It is also looking at other sectors, including batteries and battery parts, semiconductors, solar products, and critical minerals.
• The European Commission has set provisional duties of up to 37.6 percent on Chinese EVs in addition to the regular 10 percent tariff.
• Brazil has reinstated tariffs on EVs, having exempted them since 2015. Fully electric vehicles have faced an 18 percent tariff since January that will increase to 35 percent in July 2026.
• Chile has imposed temporary anti-dumping tariffs on Chinese steel bars (24.9 percent) and steel balls (33.5 percent).
• Indonesia plans to impose tariffs of up to 200 percent on a number of Chinese products, primarily textiles.
• South Africa has imposed a 10 percent tariff on imported solar panels, cells, and modules, most of which come from China. In addition, South Africa has started charging an import duty of 45 percent plus the value-added tax on all clothing as part of efforts to stop Chinese-backed shopping platforms like Shein and Temu from undercutting domestic retailers.
• Both India and Turkey are considering tariffs on Chinese steel, and India is also targeting Chinese glass fiber products.
• Thailand has proposed a 9 percent tariff on Chinese hot-rolled steel.
• Mexico has pulled back incentives like low-cost public land or tax cuts for EV production, affecting Chinese manufacturers' strategies.

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.

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