Since US Treasury Secretary Janet Yellen’s visit to China in April 2024, during which she focused on “China’s industrial overcapacity,” the belief has settled in that China’s protection of its own market and mercantile approach to everyone else’s markets amounts to a massive unfair trade practice based on state-sponsored hyperproduction. Yellen and the European Union both focused on green-economy sectors (solar panels, electric vehicles), conjuring a scenario in which China would underprice the Western green economy to such an extent that it would never develop, giving China a geo-economic stranglehold on the post-carbon future. At that point, economic policy began to seem actually immoral. SIG’s view is that this popular argument is partial at best and certainly misleading.
Strictly speaking, “overcapacity” means having a production capacity in excess of demand. It is measured by the capacity-utilization rate. In an efficient, market-based economy capacity utilization should be around 80 percent. In China’s electric-vehicle industry, the capacity utilization rate is much higher than that, which means that the sector has the opposite of overcapacity. There is enough demand, domestic and international, for China’s biggest electric-vehicle maker (and largest private employer), BYD, to operate at close to 100% capacity. It is true that capacity-utilization rates in China’s solar-panel industry are much lower, but that tends to depress prices (in order to stimulate demand). Affordable Chinese solar panels have been the key to the spread of solar-panel usage across the globe, speeding the green transition and stimulating the growth of panel-installation and maintenance industries. With cheap panels available, the cost of solar energy in the US dropped 40 percent over the past decade, and solar’s share of electrical power generation has gone from 0.1 percent in 2010 to 6 percent.
The current narrative on Chinese overcapacity also overemphasizes the China part. The three leading electric-vehicle exporters in China are BYD, SAIC, and … Tesla. BYD’s largest shareholder for years has been Berkshire Hathaway. Pension-fund favorite BlackRock has also been a major and long-time shareholder. BYD certainly did receive government incentives for EV development and production but the benefits of its ensuing success did not only accrue to China or the Chinese.
The case of state-owned SAIC might seem simpler. However, SAIC and its state-owned competitor FAW have both been leaders in joining with Western automakers. There are FAW-Toyota and FAW-Volkswagen, along with SAIC-GM-Wuling, SAIC-GM, and SAIC-Volkswagen. These ventures, many begun in the 1990s, were created to bring Japanese, German, and American internal-combustion-engine manufacturing technology and expertise into Chinese industry, and to get Chinese-market access for the Western partners. FAW-Volkswagen was second to BYD in 2023 car sales in China. Other similar joint ventures (SAIC-Volkswagen, GAC-Toyota, SAIC-GM, FAW-Toyota) were in the top 10.
These corporate relationships have changed over time. Non-Chinese venture partners today learn at least as much as their Chinese counterparts do from working together. That process occurs with green companies as well. SAIC-GM-Wuling is third in the 2023 ranking of Chinese sales of new-energy vehicles (NEVs, which includes battery electric vehicles and plug-in hybrids), after Tesla and market leader BYD.
In short, Western and Japanese multinationals and investors have been part of, and have benefitted from, the growth of Chinese production and consumption that is behind the charge of overcapacity.
That is not so true of these sectors in countries like India, Brazil, or Turkey. They have perhaps piggy-backed on the overcapacity narrative, joining “the chorus of naysayers voicing concerns over China’s overcapacity conundrum,” as Bloomberg put it. The number of investigations brought by China’s trading partners against it more than doubled from 2023 to 2024 (from 69 to 160). Among the 28 trading partners involved, developing countries played an unusually large role. The major sources of complaint in 2024 were, in order of importance, India, the EU, Brazil, and the US, rather drawing into question BRICS solidarity, but Thailand, Peru, and Chinese ally Pakistan were also active. A strikingly high number of cases were brought after Yellen’s China visit and the related publicity given to overcapacity.
What is going on? States are using tariffs, non-tariff trade barriers, dumping complaints, and so on partly because of genuine concerns about unfair trade practices, partly in response to political pressure from domestic sources, and partly to force Chinese companies (including those with Western and Japanese investors or partners) to relocate manufacturing from China to their own territories, transfer technology to their own industries, and create jobs for their own citizens. The charge of overcapacity, especially in green industries like electric-vehicle production, gives a moral sheen to the unedifying process of using consumers as hostages to force in-country location of production. It is a hard pill for China to swallow. China has ample unemployment problems of its own. But the successes of Chinese manufacturing lead competing countries to desperate measures, particularly as US-China decoupling and US industrial policy force Chinese companies into less lucrative markets.
Ultimately this could have the effect of diffusing green-economy production and technology, notably in poorer manufacturing countries. That ought to be good for the planet. It can at least be good for investors as it creates opportunities that are not subject to the increasingly capricious US-China conflict.