The Chinese counter-narrative to US tariffs and excess capacity accusations

Chinese economists and officials fiercely deny US accusations of excess capacity.

The Biden administration's decision to impose an array of tariffs upon Chinese imports has triggered a firestorm of recrimination from economic pundits and state-owned media outlets in China. 

Leading Chinese economists have led the charge to counter claims that China's industrial sector is in a state of excess capacity, as well as accused the Biden administration of protectionism and political point-scoring in a presidential election year. 

Biden applies tariffs on $18b in Chinese imports

On 14 May, the Biden administration announced that it would raise tariffs on $18 billion in Chinese imports, on the grounds that China's "unfair trade practices concerning technology transfer, intellectual property and innovations are threatening American businesses and workers."

At the crux of the tariff decision lie accusations of growing overcapacity and surging exports from the Chinese economy. 

During a visit to Guangzhou at the start of April, US Treasury Secretary Janet Yellen expressed concern over mounting excess capacity in China's manufacturing sector  

"Overcapacity isn't a new problem, but it has intensified, and we're seeing emerging risks in new sectors," Yellen said. 

According to Reuters, the Treasury Secretary called for China to shift away from state-fuelled investment, and instead resume the path of market-oriented reforms. 

The introduction of tariffs has triggered a sharp reaction from China's state-owned media and economic pundits, as well as the publication of a flurry of articles seeking to deny accusations of industrial overcapacity. 

"US confuses overcapacity with comparative advantage"

The state-owned Xinhua News agency convened a special "China Economic Roundtable Discussion" (中国经济圆桌会) on 20 May, bringing together Chinese officials and experts to offer arguments against allegations of industrial overcapacity. 

Ding Weishun (丁维顺), a research official from the Ministry of Commerce (MOFCOM), took a page from Ricardian free trade economics in a bid to counter the accusations.

He argues that US accusations confuse overcapacity with the economic specialisation, which is the natural result of different economies capitalising upon their respective advantages as part of the free trade between nations. 

"The emergence and development of free trade entails the international division of labour between countries based upon their comparative advantages in different industries," Ding said. 

If overcapacity is defined as productive capacity greatly exceeding market demand, then Ding argues that "we need to look at the world as a whole, and not just a single country, when it comes to supply and demand issues."

Ding used disparities in the export percentages of different countries to counter accusations of overcapacity in China's EV sector. 

"80% of US-manufactured chips are exported, nearly 80% of German cars are for export, and around 50% of Japanese cars. Most of Boeing's and Airbus's passenger planes are produced for export," Ding said. 

"For China, EV exports only accounted for 12.7% of total production volume."

"Industrial data counters overcapacity claims"

Zhang Rui (张锐), director of the Chinese Association of Market Development (中国市场学会), claims that industrial data proves accusations of productive overcapacity in China are unfounded. 

His argument hinges upon the use of equipment utilisation rates as the chief metric for assessing industrial capacity. 

In an opinion piece published by Diyi Caijing,  Zhang points out that the normal range for equipment utilisation lies between 79% to 83%, while anything above 90% is considered a sign of inadequate capacity. 

Conversely, an equipment utilisation rate of less than 79% is often viewed as a sign of potential overcapacity. 

Zhang cites data indicating that the capacity usage rate of China's industrial manufacturing enterprises currently stands at around 76%, which is three percentage points past the threshold for overcapacity. 

He points out, however, that US industrial capacity is also beyond this threshold at 77.3%, and that neither reading can be considered a firm indicator of overcapacity, given the cyclical nature of sales and utilisation rates. 

Is Chinese EV production at undercapacity?

Zhang notes that accusations of overcapacity from EU and US politicians have focused on China's clean energy sector, in particular electric vehicles (EVs), lithium batteries and solar photovoltaic devices. 

These three sectors saw export levels collectively hit 1.06 trillion yuan in 2023, for a year-on-year (YoY) rise of nearly 30%. 

"From the perspective of politicians in the US and EU, capacity for these products, and for electric vehicles in particular, not only greatly exceeds Chinese domestic demand, it also surpasses the carrying capacity of the global market" Zhang writes. 

"This situation would pose a threat not just to the industrial development of the EU and US, but also to that of many other countries as well."

Zhang points out, however, that equipment utilisation rates for China's electric car industry are well above the threshold for under-capacity, straying beyond 90% for many leading firms. 

At Li Auto and Changan Automobile, for example, utilisation rates have continually remained above 90%. Zhang also claims that at BYD - China's biggest EV maker, capacity utilisation hit a peak of 159.5% in 2023. 

Capacity utilisation rates for lithium batteries and photovoltaic components in China are around 70%, putting them just past the threshold for overcapacity. 

These utilisation rates remain far higher than the global average of around 40%, however, which Zhang cites as further proof that China's clean energy sector is far from overcapacity in relative terms. 

"To put the label of 'overcapacity' on the Chinese clean energy sector, which is currently thriving and completely supersedes the metrics of other nations, is manifestly inconsistent with objective facts," Zhang fulminates. 

EV sales and profits still robust

Zhang claims sales and profit figures serve as further evidence that China's EV sector has yet to reach the state of overcapacity that would warrant tariff measures. 

Companies usually struggle to achieve sales growth or profitability under conditions of gross excess capacity. 

China's EV sales have continued to surge, however, both domestically and in export markets. 

In 2023, China's domestic EV sales rose 36% to hit 7.75 million, while in the first four months of 2024 the sales figure hit 2.52 million, for a YoY rise of 34.4%. 

Growth in EV exports has been even more impressive, with a rise of 67% in 2023 to 1.77 million units. These gains have eased considerably since the start of the year, yet still remain robust. In the first four months of 2024, China's EV exports totalled around 421,000 units, for YoY growth of 20.8%. 

Chinsee EV makers have also continued to rake in healthy profits. Zhang notes that the sector-wide profitability rate rose nearly 3% YoY in 2023, while BYD's profitability posted an increase of 10.62% in the first quarter of 2024. 

"Subsidies are applied by all sides"

Zhang accused the US and EU of hypocrisy in criticising Chinese subsidies for the EV sector, given that both these economies provide government largesse to the clean energy market as part of efforts to drive reductions in carbon emissions.

"Whether it's the US or the EU, they both provide fiscal subsidies to the clean energy sector in the same way that China does," Zhang writes. 

"The Biden Administration's Inflation Reduction Act outlines USD$360 billion in tax incentives and subsidies for the clean energy sector, including electric vehicles.

"Multiple countries in Europe have provided subsidies of between EUD3000 - 6000, via company tax rates and individual capacity reductions."

Biden accused of protectionism

Chinese commentators are unanimous in levelling accusations of protectionism against the Biden administration for the imposition of tariffs. 

Wang Yiwei (王义桅), the head of the International Affairs Research Institute at Renmin University, said the Biden administration has imposed tariffs against China for the purpose of political point-scoring in a presidential election year. 

"China's EV sales to the US are very small, so the Biden administration's tariffs are entirely due to the demands of the election," Wang said at a forum held on 17 May.  

"The US wants to put pressure on China, and hopes that industry and capital will flow back to the US."

Wang also accused the US of engaging in protectionism which is part of a reaction to China's pursuit of an independent development path that isn't prescribed by the West. 

"The 'China overcapacity theory' is definitely a form of protectionism," Wang said.

"The real goal of accusations of excess production capacity by the West is to deal with the 'systems threat' that Chinese policy creates for them.

"China has not developed in accordance with the formulas designed by the West, so the West does not accept this development model."

Zhang Rui writes that claims of Chinese productive overcapacity are an "implicit endorsement of protectionism."

"The Chinese overcapacity theory is a new version of the China threat theory, and is the inevitable outcome of the China decoupling theory," Zhang writes. 

"The final goal is US and EU protectionism, which is intensifying by the day and continually elevating."

Ding Weishun slammed the EV subsidy measures outlined by Biden's Inflation Reduction Act, as well as discriminatory provisions that bar cars with foreign battery components from USD$7,500 in tax credits. 

"This is manifestly discriminatory and exclusionary, and is in breach of the fundamental rules of the World Trade Organisation, as well as breaches the concept of free trade," Ding said. 

"In essence, it's a form of protectionism."