The real reason for US, EU complaints about Chinese overcapacity

For centuries, the West has relentlessly pursued market access for their surplus goods. Imperial Britain even resorted to gunboats to open up China to its products, including opium, in the 1840s. Indeed, disposing of surplus products is an important feature of the West’s wealth creation. It is largely what has made the West rich and what will keep it prosperous.

US farmers sell one-fifth of their products to China. Intel Corp, Advanced Micro Devices (AMD) and Nvidia also derive around 20 per cent of their revenues from the Asian country. Last year, General Motors sold more than 2 million cars in China. German automobile companies exported some 3.1 million cars out of a total of 4.1 million manufactured last year.

Are the US and EU prepared to apply the same criterion for overcapacity to themselves and only sell their products domestically?

Moreover, the United States and European Union are also vanguards of and giants in state subsidies.

In agriculture, the US and EU pumped in over US$230 billion in subsidies to their farmers per year from 2019 to 2021, according to the OECD. These subsidies deprive millions of small farmers in the developing world of their livelihoods, and led to the collapse of the World Trade Organization’s Doha Round negotiations.

In civil aviation, Washington and Brussels had a long and notorious history of subsidising their companies. The WTO ruled in 2011 that Boeing had received some US$5.3 billion in US state subsidies. It found in 2019 that the US had defied the previous ruling to continue to provide subsidies to the company. On its part, the EU was found by the WTO in 2018 to have provided US$22 billion to Airbus in violation of global rules.

In semiconductors, an intense subsidy race is on between Washington and Brussels. With its 2022 Chips and Science Act, the Biden administration is pushing one of the largest subsidy programmes the world has ever seen.

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In truth, China’s formidable manufacturing capacity in the green energy sector is largely due to market forces, rather than government subsidies.

Take EVs for example. Beijing has stressed that while subsidies were provided for research and development at the initial stage, in line with WTO rules, no subsidies have been made available to support manufacturing.

Consequently, China “is likely to continue to grow as an exporter of EVs, thanks to the increasing competitiveness of Chinese EVs, cost advantages of production and large production capacity in China”, according to Ilaria Mazzocco, a senior fellow at the Centre for Strategic and International Studies.

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If Washington and Brussels practised what they preach about maintaining the rule-based international order, they would address their grievances against China through the WTO. Taking matters into their own hands is akin to setting up court and appointing oneself as the judge.

Apart from undermining the WTO’s authority and credibility, the moves by Washington and Brussels call into question the validity of their accusations. Commentators say Washington and Brussels intend to shut China out of the global market.

To be fair, not all of China’s manufacturing prowess is seen as “overcapacity”. They were happy to see China trade tens of millions of its shirts for a Boeing or an Airbus. And they do not seem upset by China’s manufacturing capacity in clothes, furniture and toys, low value-added sectors they have no plan to resurrect.

But they are concerned when China competes in what they consider critical sectors, such as steel, semiconductors and clean energy. They desire to maintain their dominant position in advanced manufacturing.

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US President Joe Biden’s “unprecedented” move against Chinese cars on national security grounds – which was, as the Financial Times put it, “designed to ensure America maintained what he said was its ‘dynamic auto industry’” – suggests Washington’s accusation is nothing more than trade protectionism.

The fact is, the so-called overcapacity in China’s EV and other clean energy sectors benefits consumers in the West, and helps the US and EU to transition to a greener economy. It could also spur Western manufacturers to design and make better products at reduced cost.

For many in the developing world, China’s industrial capacity means they can afford what had been priced out of their reach by Western multinationals.

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Equally important, China’s manufacturing capacity has been an enabler of economic development in the developing world. It has enabled the world’s largest single-site solar power plant near Abu Dhabi in the United Arab Emirates to generate enough power for 200,000 families. It is boosting the automobile parts sector in Mexico and Thailand, and the semiconductor sector in Malaysia as Chinese manufacturers set up shop overseas.

Are Washington or Brussels capable of seeing the global benefits of China’s “overcapacity”? Probably not, as long as their egoistic interests continue to blind them.

Zhou Xiaoming is a senior fellow at the Centre for China and Globalisation in Beijing and a former deputy representative of China’s Permanent Mission to the United Nations Office in Geneva

South China Morning Post