China's “overcapacity”

The West envies China's economic success and popularity in the global south, which is why it accuses the country of unfair competition.

The latest narrative for Western audiences is that China is subsidizing its companies to such an extent that they can expand production at will, “flooding world markets” with dumping prices and destroying “the good, decent market economy of the free West”. What are simply “good” exports in the West are “bad” overcapacities in China. In his article, the author takes apart a number of double standards and provides insights into a country that many people talk about but few really know anything about.
by Wolfram Elsner

[This article posted on 7/13/2024 is translated from the German on the Internet, https://www.manova.news/artikel/chinas-uberkapazitaten.]

International trade and economies of scale
Even the hunter-gatherers traded because both sides had developed excess capacity: the one side, for example, through the technology of collecting and storing nuts, the other through hunting cave bears and processing their pelts. Clans had specialized, were able to achieve gains in efficiency, but still had to trade. Even then, it was also about dynamic capabilities. The term “(over)capacity” has come to mean not only a static production potential that exceeds one's own needs, but also the dynamic ability to perform: “capacity”, an ability to develop further in the future.
When the English economist D. Ricardo established the bourgeois theory of international trade in 1817, he was in fact talking about overcapacity in both trading countries. He called it comparative cost advantages. In his example, England and Portugal exchanged their specialized goods, industrial products for agricultural products. And this division of labor between industrially developed England and the developing countries supplying raw materials and food was to be perpetuated.
This is precisely why the theory of the economist of the Prussian upstart and competitor of England, F. List, was dynamic and development-oriented. His idea: to pull oneself up by one's own bootstraps along the international value chain by developing skills at ever higher levels of value creation in a catch-up process.
The dynamization that was later taken into account, the mobilization of so-called economies of scale in the course of specialization, continued to justify the oligopolization of the imperial club in the economic mainstream. The division of labor and specialization between the most advanced capitalist countries and their increasingly narrow oligopolies became more and more fragmented. From national comparative advantages between large groups of goods to mutual market conquest by international corporations. How was it to be explained that goods were transported in both directions? It was “explained” that in the end an American Ford is not the same as a German Mercedes.
The average European likes to buy the first brand, while wealthy Americans prefer the second. In the end, the Ford and the Mercedes, that is, the company and the individual model, were each a separate category of goods, no longer substitutable with a product that had the same functionality but a different brand and symbolism. The mainstream called this intra-industrial trade. It reflected international monopolistic competition, over-accumulation and the mutual conquest of domestic markets.
The rise of countries, especially the Soviet Union and China, or the resurgence of Russia under Vladimir Putin, was not foreseen, not allowed and was fought against.

Dynamic structural change and national rise

A country that breaks ranks with the neo-colonial “order of values and rules”, in which, with few exceptions, there have been no more ascents for decades, and takes its fate into its own hands, must generate long-term social and economic dynamics. The structural change that it has to organize consists of creating excess capacity at higher levels of the value chain and eliminating outdated and environmentally harmful excess capacity.

China, for example, has built up overcapacity in all ecologically relevant technologies and product groups over the last 15 years and has shut down gigantic old overcapacities in coal mining, coal-fired power generation, steel production and so on.

In contrast, Germany has not even considered reducing its relatively large global overcapacity in combustion engine technology, its decades-long flooding of world markets with combustion engines, or the overproduction of a “flagship” industry that has been pampered for decades. As a result, the German automotive industry is now lagging behind in terms of technology and price in the new forms of mobility such as electric vehicles (EVs), hydrogen, solar panel induction, etc.

Germany, former export world champion

Germany had become the hegemon's main economic competitor and, in the 2000s and 2010s, especially with the Chinese demand boom after 2008, it once again became the world's most important exporter. The German boom was only ended for good by Corona in 2022, the subsequent crisis mode of the world economy and the destruction of the Eurasian economic integration with Russia by the USA.
Until then, Germany was the world's leading exporter. With a world population share of 1.1 percent and a world export share of 7.3 percent in 2021, it had excess capacity of a factor of 6.6. For the USA, with a world population share of 4.3 percent and an export share of 7.9 percent, the overcapacity factor is 1.8. China, with 18.5 percent and 15.5 percent, has an overcapacity factor of 0.8!

Multiplying customs duties and new value chains
The political measures for the overcapacity campaign had been prepared for a long time. In the USA, “Joe, the Donald” had not repealed any of Trump's measures, but had tightened and expanded many of them. Now came the multiplication of protectionist tariffs, ironically on the Chinese product groups that are indispensable for the global climate turnaround. The tariff rate for EVs was increased from 27 percent to 100 percent. The EU obediently follows suit, prepared by von der Leyen's politicized “anti-subsidy” review, and now imposes tariffs of 27 to 48 percent.

According to all the studies conducted after Trump's tariff increases in 2017, US and EU consumers are the ones who will suffer, given the non-substitutability of Chinese products with non-existent Western products. They will pay the higher customs revenues, a redistribution from private households to the state coffers.

China will retaliate, in an ecologically correct manner, by imposing tariffs on the EU pig industry, US agricultural exports and EU combustion engines, which have no place in China anyway. Habeck wanted to mediate in Beijing, but shot himself in the foot with his first statement on Chinese soil, with slander about Chinese child labor. The meeting with the Chinese Prime Minister was canceled. Off home!

The global value chains cannot be broken up as easily as Western political amateurs fantasize. Products from third countries still contain many Chinese parts, Chinese products are also manufactured in third countries, including now the EU, for example Hungary, and re-imports from China by German manufacturers are also affected by the EU tariffs, “so our own exports that are only supplied from China”.

Chinese EV exports to the EU account for 8 percent of the EU automotive market. Of the Chinese EVs, over 88 percent go to the domestic market, and only 12 percent are exported at all. And they are sold here at double the price of in China, where you can buy a small, highly intelligent EV for 10,000 euros. No dumping! Chinese companies will probably be able to absorb the new tariffs to a large extent. And what China offers, the most modern and affordable entry-level EVs, simply does not exist in the EU. There is nothing to protect.
While German and international carmakers and their joint ventures still serve almost 50 percent of the Chinese car market and German manufacturers sell 30 to 40 percent of their global sales in China, no one in China is talking about being “flooded by foreign attackers”.

China's alternative markets are well developed, in cooperation with the more reliable partners of the Global South, 150 partner countries of the New Silk Road, the new engines of global economic development and newly organized value chains. China's trade with the Global South has doubled in the last four years.

End of climate change

A “climate advisor” in the White House seriously claims that China is producing more climate change technologies than there is global demand for.

While the collective West, due to its industrial decline and ecological failure, urgently needs China's excess capacities in climate change technologies, the climate change child is being thrown out with the “decoupling” bathwater.

The current decoupling and isolationist blow will finally bury the climate turnaround in the West. Because it could only have been saved with the highly developed and affordable Chinese eco-transition technologies.

China's overcapacity is developing the Global South

China's excess capacity in climate change technologies is now putting the Global South at the forefront of eco-investments and thus driving the global climate change. Renewable energies are now cheaper than coal, oil, gas and nuclear power. China is now the world's green and sustainable factory, as German management consultant Roland Berger says.
But China's green energy capacities are also insufficient. The speed of expansion of renewable energies must be tripled in order to achieve the global climate targets. The International Energy Agency calculates that the global sales of vehicles with new energy must increase 4.5 times by 2022, and the sales of photovoltaic panels must increase tenfold in order to achieve the climate targets by 2030.

Subsidies and the “secrets” of Chinese efficiency
In contrast to the Western world, China is pushing ahead with the climate turnaround with virtually no operational subsidies. With its “Inflation Reduction Act”, Washington has thrown 700 billion US dollars into the ring for production relocation. The EU has a “resilience fund” of 723 billion euros, and subsidies for green projects also come from the EU's structural and cohesion funds. Germany has always been one of the countries with the highest subsidy rates. Currently, subsidies are being provided for the establishment of EV, battery and semiconductor production facilities. Intel is receiving 10 billion euros for a production site in Germany, the Taiwanese semiconductor manufacturer TSMC 5 billion euros, and so on.
In China, for example, e-mobility has not been subsidized at all since 2019, contrary to claims in Brussels and Berlin. The same applies to photovoltaics and batteries. China is pushing structural change and ecological development almost exclusively indirectly, in line with WTO rules. The “secrets” of China's socio-economic success are obvious to everyone:
Economies of scale: an economy with 1.4 billion inhabitants that is growing into the global middle-income bracket can realize lower unit costs than one with 80 million inhabitants.
Complete and effective value chains: Hundreds of thousands of young start-ups provide an unparalleled supply infrastructure and regional clusters.
Free provision of complete and effective infrastructures: Free use of infrastructure is a factor in the high purchasing power of households, but also in the cost savings of companies.
Education and training: Good school education and 600,000 newly trained engineers every year. From workers to development engineers, there is a qualified potential for the climate turnaround that is greater than that of the entire West. This is also being promoted through public research and development.
Price competition: Overall, an environment has emerged that capitalism has not seen for a long time: Chinese companies must once again generate real price competition in favor of buyers and users. In recent years, China has subjected corporations to a tough competitive culture and carried out corresponding crackdowns on the oligopolies of the IT, real estate, banking and financial sectors. It is the
“fitness club” for German industry. Western companies are now coming under pressure because Chinese companies have to and can pass on their high level of efficiency in the form of lower prices.

In German engineering circles, people have recognized why China's companies are leading: “Tough competition combined with good framework conditions.”

“Overcapacity” has many economic facets and dimensions, as well as positive and negative potential for humanity. In any case, no one should believe the narrative for the infantile audience anymore.

Wolfram Elsner was a professor of economics at the University of Bremen until 2016. He has published numerous international publications in scientific journals, textbooks, book chapters, handbooks and encyclopedias. From 2012 to 2016, he was President of the European Association for Evolutionary Political Economy (EAEPE), from 2012 to 2018 Managing Editor of the Forum for Social Economics (FSE) and from 2018 to 2023 Editor-in-Chief of the *Review of Evolutionary Political Economy *(REPE).

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