If Chinese industrial capacity is a problem the US has better measures to deal with it
Published: 04 August 2024-
Gary Hufbauer
Peterson Institute of International Economics
In Brief
Chinese overcapacity in industries such as solar panels, electric vehicles and steel has become a contentious issue in global trade, with high levels of production driving exports to low prices and discouraging overseas industries. In response, the United States and European Union have imposed countervailing duties and antidumping duties to provide relief to affected domestic industries. As well, they sometimes add overcapacity to the basket of unfair trade practices even when remedies in the form of CVD and ADD duties are readily available, widely accepted, and could in principle address the unfair component of Chinese exports.
Overcapacity in China’s green industries is now said by the United States and others to be a major problem in international trade. Subsidy and dumping practices are well defined in the WTO rulebook, which spells out remedies to compensate aggrieved producers. But ‘overcapacity’ has never been defined by the World Trade Organization, nor have remedial measures ever been articulated to deal with it.
In one sense, overcapacity could be said to characterise Swiss exports of financial services, French exports of champagne and US exports of civil aircraft. Yet overcapacity has become a negative buzzword solely with respect to China. An old complaint is China’s huge steel industry which accounts for about half of world production and about a quarter of world exports. More recently critics have pinned the label on China’s green industries — electric vehicles, batteries and solar panels. Chinese policies are denounced for encouraging plant investment far ahead of domestic demand, leading to exports at bargain prices and discouraging industries abroad.
The US Tariff Act of 1890 and the Antidumping Act of 1916 launched countervailing duties (CVD) and antidumping duties (ADD) — both additional import duties that aim to provide relief to affected domestic industries — on their way to becoming fixtures of world trade law.
Why do critics add overcapacity to the basket of unfair trade practices when CVD and ADD remedies are readily available, widely accepted, and could in principle address the unfair component of Chinese exports? The main reason for this is that only with careful analysis can the extent of subsidisation or dumping be determined and corresponding penalty duties be justified.
By contrast, once the ‘overcapacity’ label is invoked, no calculation is needed to justify a penalty duty. Since Chinese subsidies are often opaque, this is convenient. As US practice has shown, under Section 301 of the Trade Act of 1974, a penalty duty of any magnitude can be imposed against unfair trade practices, and the target importer has no effective recourse to the dysfunctional WTO dispute system.
US trade remedies under Section 301 were invoked long before Chinese overcapacity became an issue. Section 301 tariffs against China respond both to opaque subsidies and technology theft. Legal engineering has made current declarations of overcapacity equally immune to challenge as a finding of national security threat. The saga of penalty duties against Chinese exports of solar panels and electric vehicles illustrates the new landscape of trade remedies.
In December 2012, the US Department of Commerce (DOC) found subsidy rates for Chinese solar firms of around 15 per cent and assessed CVDs accordingly. In the same month, Commerce found dumping margins ranging between 18 and 29 per cent, depending on the Chinese solar firm, and assessed anti-dumping duties accordingly. While this combination of CVDs and ADDs curtailed solar imports from China, renewable energy demand was strong and China still remained the main supplier of solar panels. In fact, by 2023, China commanded 80 per cent of global solar capacity, and plant additions in 2024 were sufficient to satisfy all global demand through to 2032.
In June 2018, former president Donald Trump invoked Section 301 to impose 25 per cent tariffs on a large swath of Chinese exports, including solar panels. The new 25 per cent penalty tariff came on top of existing CVDs and ADDs. In May 2024, again invoking Section 301, US President Joseph Biden doubled the 25 per cent tariff on solar panels to 50 per cent. A predictable consequence of the overcapacity duties was the circumvention of Chinese solar exports through Cambodia, Malaysia, Thailand and Vietnam. US imports from those countries were in turn subject to high CVDs and ADDs.
The overcapacity charge went into overdrive for Chinese production of electric vehicles (EVs). In 2009, China surpassed the United States in auto production and became the world’s largest producer and within a few years the dominant maker of EVs. The European Union has long imposed a tariff of 10 per cent on imported cars. Nonetheless, fearing that good quality Chinese EVs would swamp the European auto market, the European Union investigated Chinese subsidies, finding a range between 17 per cent for Chinese manufacturer BYD up to 38 per cent for state-owned manufacturer SAIC. Corresponding CVDs were imposed in July 2024, on top of the standard 10 per cent tariff.
Across the Atlantic, in June 2018, US imports of Chinese autos were subject to Trump’s 25 per cent trade-war tariff. Rather than fuss with a subsidy inquiry, in May 2024 Biden deployed Section 301 to quadruple the auto tariff to 100 per cent. Biden also imposed a 25 per cent Section 301 tariff on EV battery imports, effective in August 2024. Trump immediately promised a 200 per cent tariff on EVs, whether made in China or Mexico.
If trade policy centred on consumer welfare, the United States and European Union would thank China for its inexpensive EV, battery and solar exports and their contribution to lowering carbon emissions. But trade policy has always offered a sympathetic ear to domestic firms. Not since the Great Depression of the 1930s has that sympathetic ear been more attuned than in today’s populist era.
Bringing discipline back into application of the global trade rules is an urgent but not an easy task.
Gary Clyde Hufbauer is a non-resident Senior Fellow at the Peterson Institute of International Economics. This article is part of a series from East Asia Forum (www.eastasiaforum.org) in the Crawford School of Public Policy in The Australian National University.