A serious look at the Chinese overcapacity theory

You can’t turn to any financial news network these days without seeing a new big story: China’s over-industrialization is becoming a major problem for the global economy, especially in the transition to renewable energy and electric transportation. US Treasury Secretary Janet Yellen The European Commission has warned that China is flooding the market with cheap exports, President Joe Biden has imposed huge tariffs on Chinese electric cars and solar panels, and European Commission President Ursula von der Leyen worries that China’s protected industries are damaging the EU’s industrial base.

But what is this debate about? Does it reflect big differences in how countries view the global economy, especially in the context of renewable energy and electric vehicles (EVs), or is it something else?

There are two main perspectives.

1. The first focuses on limited demand and fair competition. Demand for a product is Resources like cars and solar panels are finite, even though they are growing. Jobs are tied to production, so every country should have a fair opportunity to produce these products. When China uses government support to drive down prices and produce more than its fair share, it creates “excess capacity” and takes jobs away from other countries.
2. The second perspective emphasizes global competition. When companies compete globally to make better and cheaper products, everyone benefits. Consumers get more affordable goods, and businesses that rely on these products thrive. Importantly, if these goods also contribute to clean energy or reduced carbon emissions, it helps reduce global risks. From this perspective, government support for domestic companies is not unfair, but a strategy to increase competitiveness, and countries concerned about Chinese dominance should focus on improving their own industries. As investor Bill Gurley recently put it: Expressed an opinion Responding to a social media post about new tariffs by the Biden administration, he said, “I don’t understand how ‘shielding/hiding’ our companies from the realities of global competition leads to American ‘leadership’. Instead, it will limit and weaken our companies’ ability to adapt. It will also cause more inflation. I’m sure the Washington lobbyists are happy with this outcome.”

Philosophically speaking, this seems like a debate between conflictual zero-sum thinking and collaborative positive-sum thinking. But what are the key points we can use to think clearly about this debate? I think there are a few:

1. First, China is not alone in using government policies to support domestic industries. The United States, Germany, Japan and India have all taken steps to protect auto and manufacturing jobs.BA, BA: Canada) and Airbus (OTCPK:EADSF, OTCPK:EADSY) receive significant government support. Policies like the Combat Inflation Act in the U.S. and the EU’s Green Deal industrial program favor domestic clean energy companies. China simply has an industrial policy on a much larger scale.
2. Second, the assumption that countries should produce as much as they consume (Anything more than that constitutes “excess capacity” in zero-sum theory.) has never actually been achieved. Saudi Arabia and Norway produce more oil than they consume. Taiwan produces more than half the world’s semiconductor chips. American farmers are heavily subsidized and export products worth over $100 a ton. $100 billion Every year, China buys Chinese products. It is not a crime to export goods that other countries want to buy. If each country does its best, the world benefits from cheaper products. This is the core of economics since Ricardo (1817). Everyone knows it, and no one complains about cheap toys or running shoes made in China.

The core of this debate is really about jobs. Concerns about “excess capacity” have arisen mainly for goods associated with high-wage jobs, not for low-wage industries like clothing or toys. Rich countries are worried about losing advanced manufacturing jobs and feel that China’s government support is unfair. China, on the other hand, sees its success as the result of a system that blends government coordination with market forces.

To address concerns about overcapacity, China could work with other countries to share advanced manufacturing jobs and encourage its companies to set up factories overseas and partner with local companies (although there are already few examples of this). Tesla (TSLA, TSLA:CA)’s partnership with CATL is certainly an important step, but much more is needed. Understanding other countries’ perspectives is certainly important in a time of rising economic nationalism, but creating good jobs globally as new technologies spread would ease a lot of the anger and resentment and, therefore, political and economic risks, including the risk of war.

And especially the risk of the climate crisis. Despite the growth of renewables and EVs, global efforts are insufficient to significantly slow the climate crisis. IEA warning Given that the world’s renewable energy capacity needs to at least triple over the next 5.5 years to have any hope of limiting warming to 1.5 degrees, can one reasonably claim that China, or any other country, is overproducing solar panels? When we throw around accusations of overcapacity, we need to think carefully about what exactly is meant. Overcapacity of what?

Ultimately, the debate about China’s industrial excess capacity should be reframed in economic terms that prioritize economic efficiency and global interests. Instead of viewing state-supported manufacturing as a threat, we should recognize the potential for such practices to lower costs and spur innovation in critical sectors like renewable energy and electric vehicles. In other words, this does not have to be a zero-sum game. Positive-sum cooperation can boost economic growth and also provide the coordination (so far sorely lacking) to take real action on the climate crisis.

Fostering competitive yet cooperative international markets can help build economic resilience, create quality jobs, and effectively address the urgent demands of the climate crisis. Embracing this perspective will lead to more sustainable growth, reduced global risks, and shared prosperity.

Green Alpha is a registered trademark of Green Alpha Advisors, LLC. Green Alpha Investments is a registered trademark of Green Alpha Advisors, LLC. Green Alpha also owns the trademarks “Next Economy,” “Investing in the Next Economy,” “Investing for the Next Economy,” “Next Economy Portfolio Theory,” and “Next Economics.” Green Alpha Advisors, LLC is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration as an investment advisor does not imply a particular level of skill or training. The content of this post should not be construed as personal investment, tax, or other personalized financial advice. See other important disclosures here. Legal Disclosures and SEC Filings – Green Alpha Investments

Original Post

Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.