With the findings of a United States Trade Representative (USTR) Section 301 investigation looming—along with the potential of new tariffs—China is hitting back at the U.S. government’s claims of industrial excess capacity.
This week, the Chinese government published a white paper addressing the allegation that led to the USTR’s investigation—that it maintains production capacity that exceeds its domestic needs, effectively flooding the market with cheap products that undermine U.S. manufacturers and contribute to a persistent trade imbalance.
According to the USTR, China’s government bolsters its industrial base by subsidizing its activities—actions it believes give Chinese manufacturers an unfair advantage.
The European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan and India were also targeted by USTR probes launched in March, with Ambassador Jamieson Greer saying “many U.S. trading partners are producing more goods than they can consume domestically,” and that overproduction “displaces existing U.S. domestic production or prevents investment and expansion in U.S. manufacturing production.”
Once the U.S.’ biggest trading partner—and the one with the biggest and most persistent trade surplus—China has long been in President Donald Trump’s sights, and he targeted the country with a Section 301 investigation during his first term with the aim of rebalancing trade.
But China believes the trade war has gone too far.
“In recent years, international economic and trade landscape has gone through profound shifts with major-country rivalry intensifying and global industrial and supply chains reshaping quickly. With growing concerns about their industrial competitiveness and market positions, some countries and economies”—namely, the U.S. and the West more broadly—”have politicized economic and trade issues,” China’s Ministry of Commerce wrote this week.
“Hyping the so-called excess capacity of China, they accuse the country of flooding the world market with Chinese capacity and have used this as an excuse to ramp up restrictions on China, stoking up protectionism,” the paper said.
In China’s estimation, addressing excess capacity in certain economies requires a “rounded, objective” approach rather than the erection of trade barriers and sanctions. Invoking tools like tariffs “will only serve to disrupt global economic and trade order and undermine the security and stability of global industrial and supply chains,” the Ministry wrote. That could spell “long-term risks for world economic growth.”
Ministry researchers wrote that the change in the world’s industrial landscape has been a gradual one that began after World War II, when globalization began to gain pace. Industrial capacity transferred first from the U.S. to Europe, then from Europe to East Asia, and in the present day, Southeast Asia is absorbing more industrial market share.
“It is by actively integrating into economic globalization and taking part in international labor division that China has become ‘the workshop of the world’ and a key component of the global manufacturing network,” the paper said.
Trade surpluses aren’t necessarily the result of overcapacity, it argued, and subsidies can be helpful to “help correct market failures, advance technology innovation, protect environment, reduce poverty, and promote balanced development,” it added.
Excess capacity is a dynamic, not static, market phenomenon, the paper said, cycling between balance and imbalance over time. Those constant shifts are linked with the rise and fall of supply and demand, but with time and adjustments of the market, “supply and demand will converge towards a new equilibrium,” the Ministry wrote.
As such, it’s unnecessary and harmful for the U.S. to seek to control or constrain trade with countries with which it has a trade imbalance, it added.
“Economies make progress through exchange and inter-connectivity and fall behind because of seclusion and closeness,” the writers wrote. “China cannot develop in isolation from the rest of the world, nor can the world as a whole maintain prosperity without China,” they concluded.
