China's Industrial Overcapacity Puts It In 'Doom Loop,' Western Markets Are At Risk: Analysis

A production surplus in China threatens to flood Western global markets with cheaper Chinese products that can displace local competition.

According to an analysis by Foreign Affairs, Beijing's industrial policies have pushed the country to produce more than the world can take in. This puts China at risk of spiraling into "a doom loop of falling prices, insolvency, factory closures, and, ultimately, job losses."

U.S. Treasury Secretary Janet Yellen addressed the issue in April, stating: “We’re not the only country that’s concerned about a flood of Chinese exports wiping out important firms and industries within our country.”

Specific sectors, like the green energy industry, are particularly at risk, she said. Chinese state-subsidies are leading the country to an overproduction of products — a topic heavily discussed during a June G7 meeting in Italy.

China's exports continued to grow last month, though at a slower pace than before.

Output in July was 7% higher than the previous year, but below the 8.6% year-over-year growth registered in June. The slowdown was attributed to lower export prices, since export volumes remained at record levels.

China Overcomes Tough Tariffs

European powers and the U.S. are navigating a complicated period of economic decoupling from China. But, so far, China's export business appears to be surviving the trend.

Last month, the European Commission slapped tariffs of up to 37% on some Chinese EV makers, arguing that an oversupply in Chinese production is leading to unfair competition in the European electric vehicle market.

“Global markets are now flooded with cheaper electric cars. And their price is kept artificially low by huge state subsidies,” said the commission’s President Ursula von der Leyen when the bloc started analyzing whether to impose the tariffs back in 2023.

China’s overproduction surplus could be the reason behind the drop in export prices shown in July. Chinese factories now can produce twice as many solar panels as the world can put to use.

Read also: China-Related ETFs Take A Hit In Tuesday’s Premarket Despite Global Markets Showing Signs Of Recovery: What’s Going On?

US Response To China

Last week, the U.S. Trade Representative's office said it would take longer than expected to review all the comments on the proposed tariffs, leaving the measure stalled for the time being.

The U.S. already has high tariffs on Chinese EVs, which explains why Chinese car companies have not succeeded in the American market. In May, Biden announced that tariffs on Chinese EVs would rise from 25% to 100% in 2024.

The administration has also raised tariffs on other Chinese products including medical supplies.

Regardless of the recent tariffs and the negative environment, export from China to the U.S. and Europe actually grew between June and July, the WSJ reported.

China is still pushing to meet its 5% growth target set for 2024. An aging population and a severe real estate crisis are some of the barriers to recovering the growth that characterized its economy during recent decades, before the onset of the COVID-19 pandemic.

Yet it could be the country's industrialization policies that are plaguing its growth potential.

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