The US government is reportedly set to announce a significant increase in tariffs on strategic clean energy products from China, including more than tripling the tariff rate on electric vehicles, a move that has sparked strong backlash from China. Experts believe that China’s practice of cheap dumping and unfair trade practices has raised concerns in the US and Europe, with the excess capacity stemming from China’s long-standing structural mismatch in its economy, making it difficult for China to effectively boost its economy through exports.
Recent reports from multiple US media outlets suggest that the Biden administration is preparing to substantially raise import tariffs on key Chinese industrial goods, with the tariff rate on electric cars set to jump from 27.5% to 102.5%, and rates for other industry products increasing by 1 to 2 times.
This action by the Biden administration is seen as a latest measure taken to prevent China’s dumping practices from weakening US business capabilities and threatening manufacturing jobs in the country.
US Treasury Secretary Janet Yellen stated at an event on Monday that any action taken by the US against China’s excess production capacity should be targeted and not broad. She mentioned the possibility of reconfiguring tariffs imposed by former President Donald Trump for the same purpose.
“We do believe that the competition environment should be fair, while China engages in unfair practices such as massive subsidies,” Yellen said. She highlighted concerns over clean energy, semiconductors, and areas where China’s policy encourages investment leading to excess capacity.
Yellen further expressed hopes that China would not react strongly to these measures.
However, China strongly pushed back on Monday. The China Association of Automobile Manufacturers claimed that the US exaggerates China’s excess capacity in the new energy vehicle industry and the so-called national security concerns, labeling it as typical trade protectionism. Chinese Ministry of Foreign Affairs Assistant Minister Hua Chunying also asserted on social media platform X that Yellen’s remarks implied US “double standards”.
On Monday, People’s Daily, the official newspaper of the Communist Party of China, published an article asserting that the recent US narrative around China’s new energy “excess capacity” is aimed at supporting domestic industry development and serving US domestic political needs by shifting the focus outward.
It’s not just the US, the EU is also closely monitoring the issue of China’s excess capacity. EU President Ursula von der Leyen stated in Berlin last week that the flood of cheap Chinese electric cars into the market must be stopped. She urged Chinese authorities to address the “structural excess capacity problem”. However, during his recent visit to Europe, Xi Jinping denied the existence of China’s excess capacity issue.
China’s excess capacity and electric car dumping have become the focal points of trade disputes between China and the West.
US economist David Huang analyzed for Dajiyuan that the People’s Daily article provides significant conclusions on the financial aspects of China. He pointed out that China had already significantly increased its exports to Europe and the US in 2020, with the aim to control and suppress China’s excessive exports this election year, intensifying.
Huang believes that China aims to use batteries, electric cars, and other sectors as a new breakthrough. While China has traditionally held a monopoly in global exports of electronics, furniture, and clothing, the US is now warning against the “new three” – electric cars, lithium batteries, and solar panels – being dumped worldwide, causing economic impacts globally. In some ports in Belgium and Germany, thousands of Chinese electric cars have been stranded for months, awaiting European customers.
Some media outlets in Europe are warning about the “Chinese industrial tsunami”. The Nikkei Asia previously reported that in 2022, 60% of global electric vehicle production came from China.
Huang noted, “Europe and the US are very concerned about this huge trade surplus, which will increase their external economic dependence and unemployment rates. This immense pressure on traditional automotive manufacturing powerhouses Europe, the US, and Japan is mainly due to China’s current export products. This is an objective reason.”
EU data shows that by 2023, Chinese brands held a 7.9% share of electric vehicle sales in Europe, compared to just 0.4% in 2019. Analysts predict that by 2027, Chinese auto companies will capture a 20% market share in Europe.
The lower prices of Chinese electric cars are a key factor. London-based automotive industry data company JATO Dynamics reported that Chinese electric car brands are priced on average 24% lower than European brands in Europe.
While Europe and the US also offer export subsidies, Huang pointed out that compared to China’s extensive, broad, and disproportionate subsidies, China’s practices are much more exaggerated. This discrepancy reflects a positive countermeasure from Europe and the US against China’s further monopolization and strengthening in the manufacturing sector.
Taiwanese macroeconomist Wu Jialong also analyzed for Dajiyuan that China must first prove it is engaging in fair competition. He highlighted that Chinese companies receive subsidies for technology acquisition, bank loans, and government tax incentives but emphasized that they must comply with rules of fair and free trade.
“If your products are cheap, they will certainly impact others,” Wu said. “Exporting cheap products will lead to trade frictions, protectionism will rise, trade wars will escalate, and ultimately, China will encounter these difficulties.”
Does China truly have an excess capacity issue? For example, in the automotive industry, the Jiangsu Intelligent Networked Vehicle Innovation Center released a report at the end of April stating that the top 20 passenger car companies in China have a combined production capacity of about 35 million vehicles, accounting for roughly 70% of the total, yet the average capacity utilization rate is only 47.5%.
A capacity utilization rate between 80% to 85% is considered relatively healthy and sustainable, with anything above 60% ensuring basic operational capabilities for companies. When capacity utilization falls below 60%, it indicates “serious excess capacity”.
Regarding this situation, Huang explained, “Firstly, it is due to the economic system because as long as goods pass through customs for export, they add to the export value, generating political capital accumulation for local governments and enterprises. Sometimes they do not truly care whether the product is profitable because they can receive subsidies from the government.”
Secondly, “Many of the exports now are actually utilizing a self-buying and self-selling scheme, where they establish corresponding companies in Europe and then order products for export, but these products are sold very slowly and poorly in European markets.”
Huang stated that China does not acknowledge its excess capacity issues because they believe that once the goods are exported and sold smoothly according to Chinese customs data, leading it to deny any excess capacity, representing a different standpoint.
Since the 1980s when China initiated its reform and opening up policy, the country’s economy has rapidly developed. However, Wu Jialong believes that a fundamental problem has persistently existed, “the mismatch of economic structure, where production structure and demand structure are not aligned properly, meaning that Chinese enterprises overproduce items that the market demand cannot absorb.”
“But there are certain needs in China that they cannot cater to, thus they have to import. This reflects a misalignment in economic structure, with production and demand structures showing a gap.”
Wu Jialong pointed out that China’s economy has relied on globalization to activate its economic resources to achieve maximum economic benefits. Should China adopt a closed-door policy or remain inward-looking, there would be problems with “de-globalization”. He believes that China’s path to economic development has always been correcting the deviations and mismatches in economic structure to bring production and demand structures closer and more aligned, allowing for most production to be consumed by domestic demand, which is the optimal state.
He stated that the mismatch in economic structure has affected other industries and employment opportunities, making it a fundamental issue unrelated to US elections.
The US has been hoping that China will take measures to address weak domestic demand and rejuvenate the economy by boosting domestic consumption. While this aligns with China’s propaganda of “domestic circulation”, Xi Jinping has insisted on exporting the so-called “new three” items overseas.
Huang believes that the US suggesting China solve its domestic demand issues is relatively challenging from the current substantial progress in China’s economy. He pointed out that China does not wish to follow a path of increasing welfare, reducing taxes, or enhancing social security, as it goes against their social Darwinism viewpoint.
He added, “Therefore, Beijing’s current approach is rather difficult to effectively boost the economy because it does not wish to pursue policies that aim to truly stimulate economic growth. Backtracking to the original path, which is export-oriented industrialization, remains the most effective way to develop the economy. The old ‘three items’ were able to monopolize the global exports; hoping to boost the ‘new three items’ is merely wishful thinking. These new items have relatively higher transaction prices and value-added benefits compared to previous items.”
Explaining further, Huang stated, “At present, much of the world’s large-scale automobiles are from century-old businesses in Europe and the US, refined through decades of experience and selection. However, the current so-called new energy, such as electric car technology, has a relatively lower level of sophistication, essentially being a few washing machine fans with a battery. Therefore, there is no technical advantage for Europe and the US.”
He continued, “It’s just that at the moment, globally, the safety tests and regulatory standards for electric cars are not yet perfect. As collision and safety testing standards continue to rise, these ‘toy-level’ new energy cars that are essentially made from refrigerators, washing machines, and sofas will find it challenging to truly monopolize the market.”
Huang added, “In reality, China hopes to dominate the market quickly using its massive production capabilities and complete national system before the safety regulations are fully established. Yet, from China’s customs data, they have successfully exported and sold products, rejecting the notion of excess capacity—a difference in perspectives.”
China’s economic development path has progressed significantly since the 1980s, but challenges related to excess capacity, structural mismatches, and global trade dynamics continue to shape its economic landscape. The ongoing trade tensions between China, the US, and the EU highlight the complex interplay of economic policies, industrial strategies, and competition on the global stage. Addressing these issues requires a delicate balance between market forces, regulatory frameworks, and international cooperation to ensure sustainable and inclusive growth for all stakeholders involved.