EP59: China’s overcapacity problem aka Dumping

Summary:

In this episode, we examine the issue of China's overcapacity problem and its impact on global trade. The problem arises from excessive production in various sectors like steel, cement, and solar panels, leading to low export prices and accusations of dumping by China's trading partners. These low prices threaten the viability of foreign competitors and distort global markets. We analyze the factors contributing to overcapacity, including government subsidies, tax breaks, and strategic policies aimed at promoting domestic industries. They also explore the consequences of China's overcapacity, such as deflationary pressures, trade tensions, and the potential for economic instability. We conclude by discussing the challenges posed by China's overcapacity, emphasizing the importance of maintaining fair trade practices and competitive neutrality in the global economy.

Questions to consider as you read/listen:

1. How has China's overcapacity affected global markets and competition?

2. What are the economic and political implications of China's export practices?

3. How is China's "Made in China 2025" strategy shaping the global economy?

Long format:

 China’s overcapacity problem aka Dumping

TL;DR: China is flooding global markets with artificially dirt-cheap goods in some industries, from steel to solar panels, using aggressive government subsidies and tax rebates as trade tactics that make it difficult or impossible for foreign competitors to compete who don’t have these advantages. Critics decry that China isn’t practicing free trade but rather it’s a means of bankrupting non-Chinese capacity by supplanting competition for long term hopes of driving non-Chinese companies out of business and therefore the only suppliers to survive are Chinese monopolies. The result is eventually we are all at the mercy of Chinese supplies and Chinese prices for these products and goods. Industries in the U.S. and Europe are scrambling to fight back as China’s overproduction, pumped up by billions in subsidies, slashes prices and threatens jobs worldwide. The EU and American politicians are awakening to this. China’s “Made in China 2025” plan? Is it a blueprint for total tech and manufacturing dominance? Are we now or about to be in a trade war fueled by heavy government subsidies to bankrupt foreign competition to gain long term dominance, featuring tactics of forced tech transfers and industrial/commercial espionage, and raw material hoarding, all while the world struggles to keep up playing by rules that China neither accepts or follows? I look at these issues using sources and data. 

WHAT IS OVERCAPACITY 

China's overcapacity problem is the result of high production levels in certain industries, which leads to low prices on exports and can harm foreign competitors. This issue has become a contentious topic in global trade, and the US and European Union have responded with countervailing and antidumping duties.

WHAT OVERPRODUCTION CAN DO

Excess supply can create deflationary pressure in the world market which can lead to lower prices, which can create a cycle of lower wages, lower consumer spending, and even lower prices. Overcapacity can distort global prices and threaten the long-term viability of foreign competitors. Supportive policies can keep firms alive that should have failed under normal market competition (zombie companies). 

DUMPING

People and countries on the receiving end of the subsidized overproduction exports call the practice “dumping”. 

China is accused of “dumping” a variety of products including:

1. Steel: China exported 90 million tons of steel in 2023, which was a 35% increase from the previous year. In the first nine months of 2024, China's steel exports increased 21.2% year-on-year to 80.7 million tons. The low cost of Chinese steel is driving down domestic steel prices in other countries.
2. Cement: China's industrial policies have led to overinvestment in production facilities, resulting in a surplus of cement. While not as extreme as the case of Chinese steel, it is growing. China's domestic cement market is struggling due to a real estate bubble that burst in 2021.
3. Non EV (ICE) cars, diesel powered trucks heavy equipment and New Energy Vehicles (NEVs) (think EVs): The increase in NEV exports, especially in the ASEAN region, crowned China as the top vehicle exporter in the first half of 2023, with 1.07 million sales, leaving Japan behind, which managed only 950,000 vehicle sales. China's construction equipment exports were higher than domestic sales in 2023 for the first time (Zoomlion, Sany Heavy Industry, Xuzhou Construction Machinery Group Co., Ltd). The issues both in Europe and America as far as EV cars has been well documented and covered in the press and therefore will not be further addressed.
4. Solar panels: China is the world's top exporter of solar panels and modules, and its low manufacturing costs have led to accusations that it's "dumping" solar panels on foreign markets. In 2023, China exported over 212 gigawatts of solar PV modules and 39 gigawatts of solar cells. In 2022, the value of China's solar photovoltaic equipment exports was $52 billion. Thanks in part to government subsidies Chinese companies can manufacture solar panels for around $0.15 per watt, while the average cost for U.S.-made and EU-made solar modules is $0.46 and $0.34 per watt, respectively. To highlight how bad the overproduction is consider China's production capacity is double the global installations, and prices have fallen 42% in 2023. 
5. Chemicals: Biodiesel In 2024, the EU imposed anti-dumping duties of up to 36.4% on Chinese biodiesel imports due to the influx of cheap Chinese imports. Alkyl phosphate esters (APE) The European Commission initiated an anti-dumping investigation into imports of APE from China in August 2023. The investigation was launched after a complaint from the Union industry of APE. Polyoxymethylene copolymer China launched an anti-dumping probe into imports of this plastic, which is used in electronics and cars.
6. Lithium batteries: China's production costs for lithium iron phosphate (LFP) prismatic cells have fallen dramatically in 2023. This is due to cost savings in the cathode, especially lithium carbonate.

Dumping is when a company exports goods at a lower price than its domestic price. China's oversupply of goods is due to a number of factors, including factories producing more than the economy can use, a global trade surplus, and slower economic growth.

Undoubtedly a reason for the overproduction is that the Chinese are concerned with high unemployment. Disaffected folks who are unemployed tend to organize into long marches and gatherings that seek regime change. Xi Jinping knows this leading him to pledge to make full employment a “priority goal” and youth employment the “focus of the focus” at the May party meeting.

HOW THE CHINESE GOVERNMENT CREATES DUMPING

The Chinese government subsidizes dumping in a number of ways, including:

• Subsidizing companies: The Chinese government heavily subsidizes companies in industries like wind power, rolling stock, and electromobility. Subsidies are often conditional on production within China.
• Providing tax breaks: Chinese producers benefit from tax breaks, below-market credits, and below-market equity.
• Providing public support: The Chinese government provides public support at almost every stage of production.
• Safeguarding raw materials: The Chinese government safeguards critical raw materials. 
• Forced technology transfer: The Chinese government forces technology transfer. This comes in the form of forced joint ventures, licensing, industrial espionage or outright demands of surrendering of intellectual property or technical knowledge in order to access the Chinese marketplace. 
• Strategic use of public procurement: The Chinese government strategically uses public procurement.
• Preferential treatment: The Chinese government gives preferential treatment to domestic firms in administrative procedures.

The Chinese government's subsidies have been shown to promote exports and limit imports. The effects of these subsidies are magnified by supply-chain linkages.

China's "Made in China 2025" strategy is focused on developing the country's own intellectual property and products. China's technology transfer policies have helped the country become a leader in sectors like artificial intelligence and high-speed rail. However, these policies have also contributed to the U.S.-China trade war.

CONCLUSION

In conclusion, China’s overcapacity and subsidy-driven export practices have significant implications for global markets, competition, and economic stability. By bolstering domestic industries with subsidies, tax incentives, and strategic policy measures, China has enabled overproduction across multiple sectors, including steel, cement, vehicles, solar panels, chemicals, and lithium batteries. These practices, often perceived as “dumping,” distort market prices, disrupt foreign industries, and pressure global economies through deflationary trends and the erosion of competitive balance.

Countries impacted by China’s low-cost exports, such as the United States and European Union, have responded with trade remedies like countervailing and antidumping duties to protect domestic industries. However, the issue persists, amplified by China’s focus on self-sufficiency and technological advancement under initiatives like “Made in China 2025.” While this strategy strengthens China’s domestic industrial base and global market presence, it has contributed to rising tensions in international trade relations, as other economies grapple with the effects of cheap Chinese exports and the strategic advantages these policies afford China in high-tech and resource-critical sectors.

As global trade partners address the challenges posed by China’s overcapacity, the balance between fostering fair trade and maintaining competitive neutrality will remain a critical issue, particularly as the world navigates the economic ripple effects of China’s approach to industrial and economic growth.

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