Sun, Jun 09, 2024 page8

• China’s ‘overcapacity’ strategy

  • By Cathy Fang
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  Since 2015, the US has openly criticized China’s excessive exports of low-cost products, viewing it as a threat to American job security and a contributing factor to the increasing trade deficit between the two nations. While the overarching problem remains the same, the industries under scrutiny have shifted.

  Now, the term “overcapacity” is being used to refer to China’s expanding production in the renewable energy sectors, specifically solar panels, electric vehicles (EVs) and EV batteries.

  This issue has come to the forefront again as these growing industries become increasingly significant — or “threatening” from the US perspective — particularly when coupled with China’s moribund domestic consumption.

  Overcapacity is a deliberate strategic whole-of-society tool for the country to fulfill its “China Standard 2035” vision, a key piece in China’s great rejuvenation picture.

  As the world’s second-largest economy, China’s future goes beyond merely winning in numbers — it is about setting the rules. Winning this game could dominate the modus operandi of the global economy. Chinese President Xi Jinping (習近平) has said: “Whoever sets the standards has the discourse power; whoever controls the standards occupies the strategic high ground.”

  China’s ambitions are laid bare in its “Made in China 2025” and “China Standard 2035” initiatives, going beyond mere economic growth or technological advancement.

  The former seeks to move from low to high-level value chains, the latter to dominate strategic industries by gaining substantial market share. Achieving both, China can secure its position in the global market, which would provide a stepping stone to influence the global economic order.

  China is pursuing not just short-term superiority in industrial choke points, but long-term influence and control over global economic arteries. With its hands firmly on the levers of key industries, China can dictate the direction of these industries, setting the pace and path for future innovation and development.

  This control also reaches into the realm of pricing structures, where China can manipulate market prices to align with its own economic needs and objectives.

  By skillfully leveraging the vastness of market size and the non-transparency of subsidies, Chinese businesses can offer low prices to secure a wide market share, causing overseas manufacturers to exit the market, eventually granting China significant control over market prices.

  In the fields of international trade and diplomacy, the influence gained from controlling key industries can be leveraged to dictate trade terms and agreements.

  At the Central Economic Work Conference in December, an “intermediate goods strategy” was prioritized. The expansion of “intermediate goods trade” was identified as the primary method to “accelerate the cultivation of new foreign trade momentum.”

  Among Asian countries, China maintains a leading position in the trade of intermediate goods.

  Of 22 types of intermediate goods with the largest transaction volume, China leads in 20 categories, including rubber tires, paper and cardboard, yarn, textiles, faucets and bearings. In China’s narrative, expanding trade in intermediate goods is evidence of its increased participation in economic globalization and supply chain cooperation, branding China as a staunch supporter of free trade opposed to rising global protectionism.

  However, the underlying intention is that mastery of intermediate goods is the starting point for managing the supply chain. Ultimately, China can steer the direction of global commerce, shaping the rules and norms that govern it.

  Overproduction is used intentionally to meet national goals. The triangular relationship between overcapacity, Made in China 2025 and China Standard 2035 can be explained by looking at two main product categories: essential raw materials like steel, petrochemicals and rare earths, which are vital to Chinese manufacturing and strategically significant for the Belt and Road Initiative, and technology, particularly in the “new three areas” proposed by Xi (electric vehicles, lithium batteries, solar cells) and semiconductors.

  By gaining market share, China aims to dominate the current technology manufacturing, which is primarily led by the US.

  After obtaining the manufacturing capacity, China will start campaigns to set standards. The strategy of strengthening national power to increase influence, expanding market capacity to encourage standards, and improving science and technology to advance standard layouts is subtle but evident.

  Traditional economic models, typically focused on supply-demand dynamics, struggle in the face of China’s state-driven market interventions. In Xi’s era, this interventionist approach has expanded considerably.

  This is evident in China’s substantial control over key green-energy industries, facilitated by extensive government subsidies and enterprise control. These subsidies can offset potential tariffs, rendering economic countermeasures like tariffs less effective against China’s strategic maneuvers.

  Chinese companies have recently circumvented these tariffs by relocating to third countries, forming joint ventures or engaging in mergers and acquisitions.

  Many businesses in other countries are economically intertwined with China, further complicating matters. European automakers depend heavily on China’s batteries for their electric vehicles. This interdependence complicates the implementation of tariffs and diminishes their potential effectiveness.

  The US seems to be on the back foot, reacting with protective defensive measures. Its economic approach seems overly fixated on reducing trade deficits and increasing tariffs, overlooking the broader, more critical aspect of economic power: the ability to influence and shape rules. Indeed, the US-launched Indo-Pacific Economic Framework for Prosperity (IPEF) is on the right track.

  It is maneuvering to set standards for labor, the environment and next-generation technologies such as AI and quantum computing.

  However, its success is primarily echoed within the Commerce Department and the Office of the US Trade Representative, not by the US government, Congress or the general public — let alone allied countries, suggesting that IPEF’s approach is not entirely “down-to-earth.” Despite the substantial influence of economic rule-making, it has yet to achieve the same level of recognition as the rule-based order.

  To counter China’s strategic economic moves, the US and other nations must first reconsider the perception of economic power — a paradigm shift is needed.

  Forming alliances to establish and enforce global economic rules could serve as an effective strategy against China’s attempts to reshape the world order. Engaging deeply with developing countries, going beyond mere capital infusion but with a package of human talent, technology transfer, capacity building and infrastructure development should be on the “must-do” list. A broad-based inclusive approach can ensure a more balanced global economic order that respects the interests of all stakeholders, not just the most powerful ones.

  Grasping the strategic motive behind overcapacity is key to understanding the larger game China is playing. Rather than adopting a tactical numbers-focused approach, the US and other countries should adopt a more strategic rule-focused approach to effectively counterbalance China’s economic gambit.

  Cathy Fang is a policy analyst at the Project 2049 Institute and a research associate at Armitage International, L.C.
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