On Thursday, May 16, Lael Brainard, the National Economic Advisor to US President Biden, emphasized the challenges posed by China’s industrial overcapacity. She stated that it is necessary for the United States to impose new tariffs on Chinese products to ensure that American employment and investment are not weakened by China’s unfair trade practices.
Brainard spoke at an event held by the Center for American Progress, discussing record investments by the US in clean energy and advanced manufacturing. However, she stressed that “investment must be combined with trade enforcement to ensure that the recovery we see across America’s communities is not undermined by an influx of unfairly low-priced exports flooding the global market from China. We have learned from the past. The US cannot afford a second ‘China Shock.'”
The recent trend of China’s expansion of low-cost goods echoes the “China Shock” experienced by the US and global economy in the late 1990s and early 2000s. This current impact is being referred to in the West as “China Shock 2.0.”
Economists, including David Autor from the Massachusetts Institute of Technology, published a paper in 2016 regarding the “China Shock.” They estimated that from 1999 to 2011, the impact of low-cost Chinese goods led to the loss of over 2 million jobs in the US.
Brainard noted that today, as the US experiences a robust recovery being driven by domestic consumption and investment, there are signs that China is seeking recovery through exports. China is utilizing the same strategy as before, investing in significant excess industrial capacity and flooding global markets with artificially cheap export products to drive its growth.
“We have seen the aftermath of the first ‘China Shock,’ which harmed factory towns across America. Twelve years ago, at the Center for American Progress, I discussed my concerns that China’s imbalanced investment and export-driven growth model was exacting a cost on US and global growth. I emphasized that ‘only by shifting from an economy reliant on external demand and exports to one driven by domestic consumption demand,’ could China achieve long-term growth consistent with broader global growth goals,” she said.
The senior economic advisor to President Biden emphasized that China now holds nearly 30% of the global manufacturing share through a series of non-market behaviors, including forced technology transfers, intellectual property theft, and discriminatory regulations.
“The US Trade Representative’s 301 investigation on China documented evidence and cited sources from around the world, proving that China (the CCP) acquires foreign technology through forced transfers, cyber theft, and other means,” Brainard said.
She condemned China’s actions of not playing by the rules. “China’s industrial capacity and exports in certain industries have grown so large that they could potentially harm the viability of investments in the US and other countries. In fact, many of our partners worldwide have expressed similar concerns about the impact on their industries.”
Regarding overcapacity, Brainard cited that by the end of this year, global solar panel supply is expected to exceed global demand by about three times, mainly due to China’s policy of continuing to expand investment under conditions of overcapacity and significantly reduced prices. China’s industrial overcapacity undermines “market-based innovation and competition” and also harms US workers and supply chain flexibility for three reasons.
First, markets need reliable demand signals and fair competition to allow the best companies and technologies to innovate and invest in clean energy and other areas. The Chinese government has explicitly stated that significant investments in electric cars, solar panels, and batteries are strategic intentions to dominate these fields effectively. By driving down global prices for these commodities, China’s policy-driven overcapacity disrupts the necessary demand signals. Similarly, if companies cannot protect their developed intellectual property, it weakens market-based incentives for research and development investments.
Second, China’s policy-driven overcapacity and surge in exports in a new cycle could have negative consequences for American workers. Analysis shows that the initial China shock resulted in the loss of nearly a million manufacturing jobs in the US. Therefore, it is crucial for the US to use legal enforcement tools to ensure that the second China shock does not occur.
Third, the concentration of control over high-value-added parts of critical industry supply chains in China could weaken US flexibility. Overreliance on a few production nodes in supply chains can be easily affected by regional disruptions. The COVID-19 pandemic exposed what could happen when the US and the world rely entirely on Chinese exports of medical equipment and other goods. Given the scale and importance of the clean energy transition, the US must mitigate risks of concentration of control in the supply chain.
Two days before Brainard delivered this speech, the Biden administration announced an increase in tariffs on Chinese imports worth $18 billion, including steel and aluminum, semiconductors, batteries, critical minerals, solar panels, and cranes. The tariffs on Chinese electric cars will be raised from 25% to 100%.