"China's overcapacity" is a pseudo-proposition fabricated by the U.S.: experts

Accusations of "overcapacity" have been leveled against China for exporting new energy products at lower prices. How do we differentiate between legitimate market competition and dumping in the context of global trade? What might be the possible impacts of the EU's probe into the Chinese EV market? Given the Chinese government's investments in the R&D sector, have these investments paid off? Tune in to this episode for answers from experts.

Guests:
Joseph Gregory Mahoney
Professor of politics and international relations at East China Normal University
Zhu Chaoping
Global market strategist from JPMorgan Asset Management

Transcript

Host:

Hi everyone, welcome to China Trends. Let’s stay on top of trends shaping our future. The accusation of overcapacity has been leveled against China for exporting new energy products at a lower level. So how do we differentiate between legitimate market competition and dumping in the context of global trade? Today, I invite two guests to share on this topic. Welcome.

Zhu Chaoping:

Hello, I'm Chaoping Zhu, a global market strategist from JPMorgan Asset Management.

Joseph Gregory Mahoney:

Hi, I'm Joseph Gregory Mahoney, a professor of politics and international relations at East China Normal University here in Shanghai.

Host:

First of all, I think the issue of overcapacity should be viewed in the context of global trade and globalization. So what's your view? Do you think the accusation from the U.S. government of overcapacity really exists, or is it a manifestation of globalization?

Chaoping Zhu:

I agree that we should put this discussion against the backdrop of globalization. If China’s EV makers could export their products to the rest of the world at a lower price than those by the local automakers, and if the automatic cars of China could make profits, that means they might have some comparative advantages in this area. This is in line with some basic economic principles. If this happens, the overcapacity should not be a very big problem for Chinese automakers or for their clients in other countries, because those customers could enjoy some benefits from the lower cost and higher technology inputs from Chinese automakers.

At the same time, we still need to have some concerns about the political repercussions from this kind of trade relationship because international trade is not only about economics — it's also a part of politics in each country. Some groups might benefit from the trade, but others might be hurt. If the shocks from the imports happen too fast or at too large a scale, there may be some interest groups in import countries that will have concerns about their own benefits and welfare. In this way, there will be some political discussion in this area, and both the export and import countries might need to work together to find solutions to help their people who may be hurt by this international relationship.

Host:

Mr. Zhu just shared his view as an economist. As a professor of politics, what's your view?

Joseph Gregory Mahoney:

I think we have to distinguish between capacity, overcapacity, as well as comparative advantages, and in this context, look critically at the question of dumping.
Now there's no evidence that dumping has taken place, at least not in the EV industry, which is one of the key industries that the U.S. is really targeting in China. So why do we have this narrative where EVs don't even have a position in the U.S. market? There are already so many restrictions in place that there are no Chinese EVs in the market. And Washington is saying we need more restrictions because China has this overcapacity and they might blow past our tariffs, they might blow past the restrictions that we already have in place because they have so much overcapacity that they may be willing to sell their products for almost nothing.

Now, on one hand, if I'm an American consumer, my government is telling me “I don't want you to buy cheap, well-made automobiles that are good for the environment because that's not in your best interest,” I would be worried about that as a citizen. But in fact, that's not really what's happening. What's happening is we have people like Janet Yellen, who, as we recall last year, went to Africa and told lies about the Belt and Road Initiative, talking about debt traps and other concerns. And then she came to China and she promoted this message of overcapacity. These are not real issues. These are political issues, and they are political issues that are really at the heart of a couple of different problems that Washington is trying to deal with.

On the one hand, Washington doesn't like the fact that China has risen. It doesn't like the fact that China has become a global competitor. What's really ironic is that the EV industry, although I agree that there are some concerns about local governments trying to get into the game, and so many companies trying to get into the game quickly with EVs, nevertheless, the EV industry in China has been held up most recently as a case study of global competition: China welcomed Tesla and other players in. And what it really had the advantage of doing was making sure that there was a complete supply chain, a complete logistic support, which then made it possible for China to realize comparative advantages.

Now we have to contrast this with the United States in the 1980s when I was living in Washington as a student. I was working as an intern with an environmental lobby that was trying to promote public support to push back against the Congress, which at that time was still supporting an unholy alliance between the automobile industry, the oil industry, and the coal industry that were actively suppressing green technologies, including EVs. And then we have in the 1990s and in the early 2000s, we have these various campaigns in the Middle East that secure the United States’ access to oil. Now, with Biden, the U.S. is reemerging as the largest oil producer in the world. We've had this long position in the U.S. of suppressing green development, of suppressing EVs, in support of fossil fuels and legacy automobiles. So the U.S. didn't build this capacity at all.

Now, American automakers are finding themselves behind the curve globally, not just at home, but globally, not well positioned to compete at all. So they're unhappy. Bring into this Washington's general concern about China's rise, and Biden’s very difficult reelection campaign, particularly in swing states like Michigan, which is home to the legacy automobile industry. He goes there and he panders to voters and says, “we're opposed to Chinese EVs, right? This is going to protect your job,” right? He's wrong. That's not going to protect their jobs. They've been losing jobs in Michigan for decades and not just to China, but to other car companies that are built in the south and were able to evade unions and other types of protections that existed for workers and the environment in Michigan. This is what's happened. The U.S. wants to promote this narrative.

Now, Gina M. Raimondo, the U.S. Secretary of Commerce, she came out last month and was talking about Chinese EVs that they have this capacity to spy on Americans that can track where you're going. They can even spy on American infrastructure and even she raises this specter of the Chinese Communist Party as the ghost in the machine that's able to maybe seize control of EVs like enemy drones and start destroying U.S. assets, right? And she's doing all of this, right? As Europe is starting to think about maybe we should investigate whether or not the Chinese EV industry has been unfairly subsidized.

The Chinese EV industry does have market share in Europe, and that is growing. This really disappoints the United States because the United States wants to try to re-extend and reinvigorate its hegemony over Europe. We've seen this through the U.S. supporting the UK’s Brexit. We see it with the United States extending NATO and fighting the proxy war. In Ukraine, we also have seen the United States encouraging this false narrative that China is somehow responsible for the war in Ukraine, or should be responsible for, which is played very strongly, unfortunately, with some countries in eastern and central Europe who have a longstanding historical concern about Russian power. The U.S. continues to play up this, and we saw this as something that Blinken was talking about when he came to China, most recently, maybe China's possible role in that conflict. We have to look at it in this broader context. This overcapacity narrative largely exists as something that is serving America's strategic ambitions at home, in Europe, or globally, but also Biden is more narrow political interest in this election year.

Host:

In referring to capacity and overcapacity, the definition by some U.S. media said overcapacity is when production capacity exceeds domestic demand. But we've seen the data on the other side, like in 2023, global NEV sales were more than 50 million units, of which China's NEV sector only accounted for 8%. So do you think Chinese new energy products are really in high demand globally?

Chaoping Zhu:

I think China is exporting EVs or solar power at lower prices to the rest of the world, but at the same time, Chinese makers are making profits. So, in this point, to some efficiency in Chinese sectors, instead of the some dumping efforts at loss for those makers, in this way, we can.

If you track back to like 10 or 20 years ago, these sectors are very, very small in China. Since that time, Chinese business and the government are working together to establish those industries and to improve the domestic efficiencies and cut cost and make those sectors competitive across the world. So I think this is a very normal or very ordinary case to show that how the government and business sector could work together and establish some advantages in the high-tech sector. And this also happened half century ago as the U.S. government is supporting its chip industry, or 40 or 30 years ago, like the Japanese companies and the Korea companies are supported by the government in the technology sectors. So I think when the economy enters a stage for high technology and which demand high investment at the startup stage, the government's role is very important. They are providing some seed funds and they are supporting the entrepreneurship here. And to make things happen in these sectors. Without this kind of supports, I think, not only for China, but for the U.S. or for Japan, they could not reach this stage for the technology development. If we only think consider these things from the perspective of economics, I think the current overcapacity is a representative of the house. China is working on these technologies and how China could contribute to productivity in these sectors. And it could not be purely overcapacity or waste of resources, or as a result of those inefficient inputs.

Host:

Mr. Zhu reviewed the development of the China's NEV sector by drawing experience from Japan and Korea. So what's your view on how to differentiate legitimate market competition with dumping in the context of globalization?

Joseph Gregory Mahoney:

It's interesting because I would have added to his list of examples, Airbus. For years, Boeing has been screaming that Airbus received unfair subsidies or supports, but so does Boeing in terms of military contracts and other benefits. A lot of American companies receive these messages. So what we've seen China doing is really no different from what other countries have done to support the development of industries. And I think this was your key point.

But I think one of the issues here is, for many years, the United States was crying about trade imbalances. But to what extent were those trade imbalances due to the fact that the United States didn't want to sell products to China that China wanted to buy? For years, even before the current era of tech decoupling, the United States was restricting China's access to quantum computing and other high-tech equipment. Right? So China's position is, if you sell us what we want to buy, then maybe there would be less trade amounts. Instead, you choose to buy all these things.

Now, if we go back to your question about the definition of overcapacity, during the pandemic, I was trapped in the United States due to travel restrictions. My son was in school online and I needed to buy an extra computer. Unfortunately, we're in the Apple ecosystem, so I needed to buy a new Apple computer and I went online to order one. It said it's gonna take a month for it to arrive. And I'm a little worried because that's gonna be into his history. Why is it gonna take a month? Because it had to be manufactured, it had to be assembled in China, right? China makes a lot of products, assembles a lot of products that far exceed domestic consumption. This is quite normal. China is the world's leading manufacturing base in the world, right? And so as a result, almost everything that it produces is for a global market. Now, a step back again and say, Chinese companies have been enthusiastic and building in this new industry, and they've been encouraged by the government to do so.

But at the same time, we've seen the United States trying to suppress domestic demand in the U.S.. We've seen it trying to suppress global demand for Chinese EVs. We've also seen a world trying to struggle to recover from the pandemic, but also the soaring inflation, which generally has been blamed on the conflict in Ukraine, but it's largely a product of the U.S. expanding the money supply in 2020 and 2021 in order to cover over their failed covert policies. When you create capacity, you build this capacity, and yet there are forces overseas that are trying to suppress global demand. I think if we had free and fair market competition, taking into account that what China has done to support the EV industry is quite normal and not only that good for the world, good for the world, where the world on the brink of collapse due to climate change and global warming. We have this positive industry. We have this capacity, we have global demand. Let it go, let's let it roll.

Host:

Now we've seen the EU is probing into the Chinese NEV sector, but we still see some German automobile industry are still investing more in the Chinese market. How do you interpret this?

Chaoping Zhu:

The mutual investment represents some demands from the consumers in each market. Actually, Chinese consumers, part of that still have some preference for German cars because they like the decoration, they like the power and they like the driving experience. But at the same time, Chinese EVs are also gaining some market share in Europe because they found lovers of Chinese EVs.

So the consumer demands are diversified, and automakers need to find out how they could meet the demands and establish their own market share or brand names in different markets.

In China, China’s economic growth still remains around 5%. The consumer demands are growing. I think foreign companies still could find opportunities to expand in the Chinese market. And in fact, we see that even the German automakers are not so favorable for this kind of proposals for the trade barriers. I think they understand about this economy and they are also trying to benefit from their relationship with China.

Host:

Professor Mahoney, what's your focus on what might be the possible result of the EU’s probe to the Chinese EV market and what might be its impact?

Joseph Gregory Mahoney:

Again, I think that what they will find, if they find anything, is that what China has done to support that industry is quite normal, especially in the European context of supporting their own local industries. I don't think there's anything exceptional there.
I do think that the probe is something that's being used as a way to stall decision-making. And this is because Europe right now is split. There's a lack of consensus about what the EU's policy should be towards China. Other countries can't agree, so they're holding positions. This is one way to avoid making a decision while gaining some leverage.

One of the things that we're seeing as this probe is taking place is that these announcements are happening: for example, France would welcome BYD to build a plant in France; Chery may be building a plant in Spain; Italy is in talks with Dongfeng; BYD plans to build a plant in Hungary. So, I think what we're seeing are markets responding to these political concerns and trying to find a way to bring manufacturing to Europe, to create jobs in Europe.

And then I think we'll see this type of conversation about whether or not Chinese EVs have a negative role to play in the European economy largely withering away. But again, part of this stalling tactic is that everyone in the world right now is waiting to see what happens this November in the United States. Will we have a new occupant in the White House? What will be his strategy and tactics towards China, towards Europe? The big question here remains Ukraine. Ukraine is the issue that has really frozen and divided Europe, even though it also looks like the issue that has united Europe, but it has made Europe, at least, in a technical sense, dependent on the United States for security. And this is what's pushing Europe to go further and further down the path of “derisking,” if not decoupling. And that includes, potentially, if the US gets its way, something directed against Chinese EVs as well as other Chinese tech products.

So this probe, I think, it slows down potential negative decision-making. It gives these companies a chance to move some of their operations to Europe, which will help smooth things out. And it also buys time to see what happens this November when everything may change.

Host:

So it still needs a lot of time, as it takes several months to see the consequences.

Joseph Gregory Mahoney:

I think even if there are consequences, they wouldn't necessarily be the endgame. It would be, "Okay, now we have another negotiating position." I think this is what we saw with President Macron in Paris. He's not looking to destroy Chinese, French, or EU ties. He's looking to improve his position. He's trying to gain leverage so he can improve France's position in the EU. That's his job. That’s his responsibility, right? And so they're going to talk tough, and they're going to try to find ways that they can ring some advantage on behalf of their people and their economies. But I don't think we should look at it as a dark specter, the way that it's being portrayed in the US.

Host:

It might be a back-and-forth.

Joseph Gregory Mahoney:

It's negotiable.

Host:

So, Professor Mahoney, within the Chinese government, there has been a lot of investment in research and innovation. It may not be at the level compared with the US, but it's already increasing hugely. Do you think these investments have been paid off?

Joseph Gregory Mahoney:

We saw during this year's budget with the “two sessions”, there's a dramatic increase. I think the only concern there is if the increase is too big. If you have that much investment flowing into research and development, it can have the habit of chasing bad ideas instead of good ones. So I'm hoping that's being managed; I'm sure it is. I know that there's a tremendous capacity out there now for R&D, and it's hungry for funds. So that's probably not going to be an issue.

It's also clear that President Xi and other leaders have acknowledged many times that driving innovation forward is the key, because China needs to develop some tech independence, given the decoupling efforts that we've seen being advanced by the United States, in which some of America's allies have been supporting.

There are some questions about where we might see breakthroughs. So, for example, E-town in Beijing, some people are optimistic this might be a place for breakthroughs. The experts that I talk with think that some of these government-supported locations, like E-town in Beijing, at this point in time, are probably more useful as policy labs, where the government can work closely and help develop policies that will support these types of projects, but that we're more likely to see breakthroughs in the south in the Shanghai-Hangzhou area and in the Greater Bay Area (which refers to the Guangdong-Hong Kong-Macao Greater Bay Area), in some of the private firms, maybe Huawei, maybe others. This is where we might expect. So definitely, this money is much needed. Hopefully, it will be flowing to the right places. But most people seem to think that we're going to see a private sector solution to a lot of these problems, but one that's been encouraged by central government support.

Host:
Very convincing. Thank you for sharing your deep insights on this topic. And thank you for watching today's program. See you.