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China’s Industrial Overcapacity: Catalyst for Green Transition or Global Glut?
Context:
- China’s rise as a manufacturing leader has given it significant control over global supply chains, especially for in-demand goods.
- This dominance has raised concerns among other nations about China’s overcapacity in various industries.
Key Highlights
- At a press conference in Stresa, Italy, before the G7 meeting, the U.S. Treasury Secretary warned that industrial overcapacity jeopardises the survival of global companies(emerging markets) and also challenges China’s economic growth.
- China is implementing policies similar to those used by developed countries in their early stages, such as Protection for Infant Industries, Public Investment, Adoption of Foreign Technology, and Strategically Directed Credit.
- The US has adopted a similar approach through the Inflation Reduction Act (IRA), offering substantial tax credits to boost green manufacturing.
Understanding Overcapacity:
- It occurs when an industry’s production capacity exceeds the demand for its products, resulting in underutilised capacity.
- While temporary overcapacity can be part of market cycles, “structural overcapacity” is more concerning.
- It signifies a persistent mismatch between product demand and production capacity, often influenced by government policies and subsidies.
- China has faced overcapacity issues in sectors like iron, steel, cement, aluminium, and housing.
- Current Focus Areas: Automobile industry, solar panel manufacturing, and EV battery production.
- China’s planned solar equipment production capacity for 2024-2027 is expected to exceed global demand by more than double.
Impacts of Chinese Overcapacity:
- High-Carbon Sectors: China is also criticised for overcapacity in highly carbon-intensive sectors such as steel and aluminium production.
- Resource Demand: Excess manufacturing in China drives substantial global demand for natural resources. This impacts countries like Africa, which exports significant quantities of crude oil, refined copper, iron, and aluminium ores to China while importing manufactured goods. It has led to a growing trade deficit between Africa and China, currently at $64 billion, which represents 59% of Africa’s exports to China by value.
- The world faces a dilemma where the dominance of a single country (China) as a supplier of essential green technologies creates a new form of dependence.
Global Responses:
- US increased tariffs on Chinese imports, including steel, aluminium, semiconductors, and EVs. Imposed tariffs as high as 100% on certain EVs by 2024.
- EU raised tariffs on imported Chinese EVs to between 17.4% and 37.6%, in addition to a 10% duty on all EV imports.
- India imposed a 40% basic customs duty on imported solar modules and a 25% duty on solar cells.
- US Firms: Despite tariffs, US firms have engaged with Chinese technology and manufacturers, such as CATL, for EV battery production, reflecting the recognition of China’s technological contributions.
Challenges and Risks:
- Overcapacity can disrupt global supply chains by creating imbalances and affecting production capacities in other regions.
- Excessive supply from one country can impact global trade fairness and lead to job losses in other countries that struggle to compete with the influx of cheaper goods.
- Developing nations may find it difficult to invest in and scale up domestic clean technology manufacturing due to limited financial resources and lower readiness.
- There is an urgent need to balance the benefits of cheaper green technologies with the risks associated with over-reliance on one supplier.
Geopolitical and Economic Implications:
- Potential Responses: Wealthy nations can use tariffs, subsidies, and other protectionist measures to counteract the effects of Chinese overcapacity and support their domestic industries.
- Protectionist policies and trade conflicts could slow down the urgent global effort to transition to cleaner energy sources and achieve decarbonisation goals.