China’s Options In Response To The ‘Overcapacity’ Pressure Imposed by The US – Analysis


By He Jun

At the beginning of her six-day visit to China, U.S. Treasury Secretary Janet Yellen raised an important issue of concern for the United States, i.e., China’s “overcapacity” problem. From American perspective, under the subsidy mechanism of the Chinese government, China has experienced overcapacity in certain industries, and Chinese companies are exporting products to the U.S. at extremely low prices, posing a threat to relevant sectors of American businesses.

According to information tracking by researchers at ANBOUND, the so-called “overcapacity” issue is not a new one. In the past, the U.S. and Europe’s “de-risking” process included systematic competition from China in certain industrial sectors against American and European companies. Essentially, this reflects the strategic competition between the U.S. and China in multiple fields, and it is one of the ways the U.S. seeks to “contain” China, seen as its “long-term strategic competitor”. However, with “overcapacity” being highlighted, this is to indicate that it is an economic and industrial issue rather than geopolitical pressure from the U.S.

Reuters reports that on April 6, Yellen’s meeting with Chinese Vice Premier He Lifeng lasted for more than 4 and a half hours, with the U.S. Treasury Secretary stating that two hours were spent discussing the issue of overcapacity. Yellen later issued a statement saying it was a “extensive and productive” discussion, and both sides agreed to hold more talks to address the U.S.’ major concerns about China’s economic model. Yellen told reporters, “I think the Chinese are aware of how concerned we are about the impact of their industrial strategy on the United States, about the possibility of flooding our markets with exports that make it harder for American companies to compete”. “It’s not going to be solved in an afternoon or a month, but I think they’ve heard that this is an important issue for us”.

However, unlike past geopolitical pressure on China under the guise of “national security”, the issue of “overcapacity” is fundamentally an economic and market one. The assertion that the U.S., which emphasizes the free market, demands that China address the “overcapacity” problem, is actually untenable. The New York Times, in an article, stated that as the Biden administration subsidizes the clean energy supply chain, the U.S. hopes to persuade China to abandon its green energy industry strategy. The article quoted Scott Lincicome, a trade expert at the free-market oriented Cato Institute, as saying, “It’s a very tough sell when we’re doing much the same thing”. Lincicome’s perspective hits the nail on the head: “the fact is that the rhetorical and political effect is inevitably going to be undermined when your argument is, do as I say, not as I do”.

The Wall Street Journal is not optimistic about the effectiveness of Yellen’s pressure on China regarding “overcapacity”. The journal states that although Biden has not announced the abandonment of the trade war with China initiated by Trump, the situation has evidently changed. The Biden administration no longer focuses on bilateral trade deficits and punitive tariffs but instead provides subsidies to companies to encourage them to relocate their production lines to the U.S. Harvard economist Godron Hanson stated that against the backdrop of the Biden administration vigorously promoting new subsidies for semiconductor manufacturing and green technology, Yellen may find it difficult to persuade China to address the issue of overcapacity. In fact, the U.S. Treasury Department also expects that there will be no significant policy change in China after Yellen’s visit, but U.S. officials believe that it is important to explain the economic risks posed by excessive investment in certain industries and weak consumer demand to China and its trading partners.

Yellen’s visit to China is currently underway, and the conclusion of the talks remains to be seen. Researchers at ANBOUND believe that against the backdrop of efforts by both countries to avoid the deterioration of bilateral relations, it is unlikely that the tensions over the economic issue of overcapacity will be escalated. China is expected to extend sufficient courtesy to Yellen, demonstrate flexibility in addressing disagreements, and temporarily set aside disputes. The fact that the two sides are engaging in dialogue rather than trade war is something positive. However, the confrontation between the U.S. and China over overcapacity is just beginning. According to reports from the Singaporean media Lianhe Zaobao, after two days of talks between Yellen and Vice Premier He Lifeng, they agreed to formally discuss “balanced growth” in China, the U.S., and globally. From these indications, it is evident that under the guise of “balanced growth”, a game of economic interests between the U.S. and China is unfolding.

In the face of the “overcapacity” issue raised by the U.S., how should China perceive and respond to it? Researchers at ANBOUND believe that there are several aspects in this.

Firstly, it is essential for China to maintain a bottom-line mindset in the game between the two countries. We believe that the issue of “overcapacity” is not spontaneously raised by the U.S. but a carefully chosen strategy based on a detailed assessment of the situation. Given the characteristics of American strategy and policy formulation, it is highly likely that the U.S. has prepared follow-up pressure tactics and sanction tools. In response, China needs to take this seriously and prepare to address the economic pressure from the U.S. based on the worst-case scenario which plays on overcapacity and government subsidies.

Secondly, China needs to differentiate between economic and political issues. In the game between the two major powers, the issue of interests is undoubtedly highly complex, involving both political and economic aspects. However, in the process of dealing with specific issues, economic issues are best not politicized. Even if there is an issue of “overcapacity”, fundamentally, it is a market phenomenon, stemming from the competitive behavior of microeconomic entities. It should not be defined as a political or administrative issue, nor should it be addressed through political or administrative intervention. The significance of this differentiation lies in clarifying the principles for problem-solving and imposing certain constraints on the U.S.’ maneuvering.

Thirdly, it is important for China to anticipate and prepare for various possibilities of US pressure on Chinese enterprises regarding “overcapacity”. ANBOUND researchers believe that such pressure may manifest in the following aspects: (1) increasing tariff barriers on exports from relevant industries in China to the U.S., such as imposing punitive tariffs directly; (2) imposing administrative restrictions on exports from relevant industries in China to the U.S., including restrictions based on rules of origin; (3) strengthening scrutiny of Chinese enterprises’ investments in third countries to reduce or block channels through which Chinese enterprises export to the U.S. via investment in third countries; (4) restricting or prohibiting Chinese enterprises in relevant industries from investing in the U.S. to prevent Chinese enterprises or capital from manufacturing in the U.S. at low cost to compete with American companies.

Fourthly, in response to new issues such as “overcapacity” and “balanced and growth”, China can proactively take certain measures to reduce the leverage that the U.S. may use against Chinese enterprises and the government. For example, for some relatively mature industries in which Chinese enterprises have already formed systematic competitiveness, China may consider reducing or eliminating subsidies from government finances to promote the transition of these industries towards market-based competition. In areas such as electric vehicles, solar panels, lithium batteries, etc., where Chinese enterprises and related industrial chains have already established competitiveness, reducing or eliminating subsidies should not be a problem. This adjustment is based on the adjustment of industrial competitiveness and is not a policy retreat.

Final analysis conclusion:

U.S. Treasury Secretary Janet Yellen’s visit to China raised the issue of “overcapacity” in certain industries, marking the beginning of a new chapter in the economic competition between the two countries. In the face of this new challenge, while China attaches great importance to it, it is more important to be prepared for various responses. “Overcapacity” is essentially an economic issue that should be addressed through market mechanisms and should not be overly politicized.

He Jun is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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