Chinese President Xi Jinping is in Europe this week and met Monday with the head of the European Commission and French President Emmanuel Macron. The conversation they had is one that the U.S. has had with China as well, about something called overcapacity — the idea that China is flooding the world with underpriced products. That’s something China, of course, denies.
Overcapacity is kind of a fuzzy word, and that’s saying a lot for an economic term.
“At a basic level, overcapacity is too much production and too little demand,” said Geoffrey Gertz, a senior fellow at the Center for a New American Security.
It’s the idea that a country has subsidized or propped up its industries so much that it’s drowning in products.
“And therefore, you tend to a have a surge of exports often at a lower cost that are undermining industries elsewhere,” said Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies.
This is what the U.S. and Europe are saying that China is doing with electric vehicles and in a lot of other industries related to clean energy — flooding countries with leftovers and potentially justifying U.S. and European retaliation.
“I think it’s an excuse for protectionism,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics.
He said when it comes to electric vehicles, there isn’t overcapacity. China is just better at making them, and the U.S. and Europe are bitter. That’s basically what China says too.
“They got started in the industry earlier, they’re far and away the largest market, the very successful firms such as BYD — remember, Warren Buffet invested in BYD more than a decade ago. He saw this coming,” Lardy said.
Gertz at CNAS said it’s not just about electric cars. China does pump up its manufacturers with cheap credit and tax benefits, and he said that’s messing with international markets.
“Chinese companies may be operating at a loss for a very long time, but are not necessarily incentivized to exit the market as would otherwise happen,” he said. “You have a continual excess reserve of production, and you’re incentivized to continue producing, even if the market is telling you there’s no need for it.”
Overcapacity is a problem that has been identified by the Chinese government itself in official reports going back a decade, said Jeremy Chan, senior analyst at the Eurasia Group.
“Now that Beijing has signaled in the last six weeks or so that overcapacity doesn’t really exist, that it’s a myth concocted by the West, when it wasn’t a myth in the government work report two months ago, we’re headed towards a darker, more difficult place,” he said.
Expect more trade restrictions from Europe and possibly the U.S. Because what was a debatable economic question has now entered the world of politics.
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