US Officials responsible for the economic work group between China and America have stated the need to strengthen defenses against China’s overcapacity issues. They also warned that it would be better for China to initiate changes on its own before defensive actions are taken by the United States.
Jay Shambaugh, the Deputy Treasury Secretary for International Affairs of the United States, spoke at the Council on Foreign Relations in New York on Wednesday regarding China’s overcapacity and its impact on the global economy.
As the head of the US side in the US-China economic work group, Shambaugh has participated in numerous discussions with the Chinese counterparts.
Shambaugh pointed out that the US has observed risks of overcapacity in new areas in China, similar to those seen in the past.
“We are increasingly concerned that China’s long-standing macroeconomic imbalances and non-market policies and behaviors pose significant risks to workers and businesses in the US and other regions globally. We are worried that these features of the Chinese economy could lead to industrial overcapacity and significant spillover effects globally, jeopardizing the overall supply chain flexibility in the United States,” he said.
“To be clear – we still fully support free trade, which obviously includes countries producing and exporting goods. But overcapacity is another matter: it is not just about producing beyond domestic demand, but also about producing capacity unconstrained by global demand.”
“The previous rounds of overcapacity have resulted in unemployment for Americans and closures of American companies,” he noted. “Given China’s current scale, the spillover effects from its economy will be even more significant.”
Shambaugh, with an academic background in researching international macroeconomics and decades of studying US-China economic relations, believes that China’s overcapacity is a consequence of imbalances in China’s macroeconomic policies.
He pointed out that China has an extremely high savings rate, more than twice the average of the OECD, while the consumption as a percentage of GDP is less than 40%, lower than similar income-level countries.
Therefore, the Chinese economy has been reliant on domestic investments and foreign demand to drive growth. With a slowdown in the Chinese real estate sector and domestic economy, it will increasingly depend on foreign demand to sustain economic growth.
“We are all familiar with the so-called ‘China shock’, which has affected not only American workers and businesses but also global workers and businesses. For example, from 2008 to 2013, China aggressively developed solar panel manufacturing, resulting in an 80% drop in international prices and leading to bankruptcies and closures of companies. And China’s solar production continues to expand with $18 billion in low-interest loans from the Chinese government,” Shambaugh explained.
Beijing has allocated China’s massive savings into specific industries, exacerbating the challenge due to China’s economic scale, he noted.
“China cannot rely on global growth as it did from 1990 to 2010; its economy today is too large,” Shambaugh stated.
China’s share in the global manufacturing industry has reached 30%. Its trade surplus in manufacturing represents a significant share of the world’s GDP and is growing rapidly at a rate of 2%. This is higher than the sum of the peak earnings of Japan and Germany’s manufacturing industries.
“The current trend among Chinese (Communist) decision-makers is to further drive the manufacturing sector’s growth in China, which means they seek to take larger shares of global production, leaving other countries’ manufacturing sectors to shrink and make room,” the official explained.
He expressed that when China’s production growth surpasses its own demand or global economic growth rates, other countries worldwide are unable to resist the growth pace of the Chinese manufacturing industry and are forced to adjust.
“These situations wouldn’t occur in a normally functioning market economy,” Shambaugh said, “What we are witnessing is a fundamental distortion driven by government policies (of the Communist Party).”
He stated that China’s own massive economic imbalances result in spillover effects, but China’s non-market policies and practices further distort the market, weaken fair competition, and concentrate spillover effects in certain industries, amplifying this effect.
“In particular, China’s long-standing macroeconomic imbalances and the massive government support to specific industrial sectors have collectively led to industrial overcapacity,” he remarked.
The scale of industrial subsidies by the Chinese Communist Party is staggering, far exceeding that of other countries. Research by the Center for Strategic and International Studies (CSIS) found that China allocates around 5% of its GDP to industrial subsidies, which is ten times that of the US, Brazil, Germany, and Japan. In industries like semiconductors, steel, and aluminum, Chinese subsidies account for 80% to 90% of global subsidies.
What’s worse, these subsidies lack transparency.
Studies estimate that from 2000 to 2018, these funds provided over $1 trillion in capital and guarantees to over 28,000 private companies. Government funding specifically for the semiconductor industry (known as the “Big Fund”) is larger than the entire US CHIPS Act.
“While cyclical oversupply may occur in a natural business cycle, what concerns us is structural overcapacity rooted in sustained and government-supported overinvestment patterns,” Shambaugh raised.
The proportion of industrial enterprises in China operating at a loss has reached a near-high in recent years, with the total number of loss-making industrial enterprises at the highest point since the 1990s. Additionally, capital efficiency indicators for all data sub-industries have declined over the past decade.
In China’s automobile industry, the proportion of listed companies operating at a loss is 28%, exceeding the 20% average for the entire economy. Among China’s electric vehicle manufacturers, only a few are currently profitable, and these companies are now facing immense profit pressures. However, this has not hindered or slowed down the rapid expansion of Chinese electric vehicles in overseas markets.
Some Chinese officials publicly argue that having surplus production exceeding domestic demand is a normal component of trade.
To this, Shambaugh rebuts, “As I mentioned before, what concerns us are not exports or even Chinese companies having comparative advantages in certain areas. We are concerned that the Chinese government’s support means production cannot respond to global market demands.”
Chinese companies sustain production under government subsidies and push surplus supplies into foreign markets, distorting global prices and threatening the long-term survival of foreign competitors.
The Biden administration is responding to China’s overcapacity issue, including imposing tariffs on $18 billion of Chinese exports.
“We are not alone in seeking to address the negative spillover effects brought about by China’s non-market practices,” he said.
The EU and Turkey have recently imposed tariffs on Chinese electric vehicle imports; Mexico, Chile, and Brazil have taken trade actions against Chinese steel; India is using tariffs and other trade tools to protect its solar manufacturers from Chinese dumping.
“We should be clear: defending against overcapacity or dumping is not protectionism or anti-trade; it is an attempt to protect businesses and workers from distortions created by another economic entity,” he added.
Shambaugh expressed that if necessary, the US would take defensive actions, but it would be best if China took action on its own, acknowledged the growing concerns of its main trade partners, and cooperated to address these issues.