Commentary
The United States and the European Union (EU) have raised concerns about
China’s overcapacity in various industries, from steel and aluminum to lithium batteries, new energy products, electric vehicles, and solar panels.
To alleviate this surplus, China often resorts to “dumping”—exporting excess goods at prices below their domestic sale prices or production costs. This practice undermines industries in other countries striving to compete in global markets by selling products at fair prices that ensure reasonable profits.
Some argue that
dumping doesn’t exist, attributing China’s cheaper products to reduced labor costs and improved efficiency. Another perspective suggests that dumping benefits consumers in other countries by providing discounted products. However, opponents argue that dumping can severely harm domestic industries, driving companies to bankruptcy and increasing dependence on China for production.
Regarding free markets, it is true that companies have the right to sell products cheaply or even to sell them below cost. However, in a free market economy, a company cannot survive by earning negative revenues. And this is where the government subsidies come in. The EU and the United States have
launched investigations into China’s manufacturing sector to determine if Beijing is providing
industries with subsidies, allowing them to sell products at below cost. Unfair subsidies are a violation of
World Trade Organization rules. Countries have the right to levy tariffs against products subsidized by a foreign government. Subsidies were one of the many reasons the Trump administration enacted so many tariffs
against Chinese imports, sparking the trade war.
Chinese Communist Party (CCP) leader Xi Jinping has several options if he wants to remedy the overcapacity situation and trade fairly with the world. However, most of the options
would be painful in the short run. Beijing could address overcapacity by allowing struggling industries to consolidate or shift production to meet actual demand. This will lead to a more efficient economy in the long run. In the short term, however, the restructuring would likely result in the loss of jobs. Changes in industrial policies that result in job loss will not come as welcome news to a country already struggling with youth unemployment. The problem is compounded by the fact that
11.7 million students will graduate from university next month and enter the job market.
To mitigate overcapacity and prevent a recurrence of the current situation, China must
restructure its industries, eliminate government subsidies, and empower companies to innovate. Xi advocates for a shift toward innovation and higher-value production, yet he continues to manage the country like a chessboard. He overlooks the necessity of withdrawing the government’s influence from the market, enabling profit-driven entrepreneurs to address the competitiveness issue.
Allowing market forces to operate unhampered by government controls is essential. Currently, companies are producing more goods than are demanded, leading to the misallocation of resources. State-owned enterprises typically receive priority access to resources, while deserving private sector firms with efficient, profit-making ideas often lag behind in resource allocation. Equalizing access to the private sector necessitates comprehensive market reforms, diminishing the dominance of state-owned enterprises in the economy, and embracing global competition by opening China’s economy. This would entail loosening restrictions on foreign investment, including in “sensitive” sectors. While all countries impose some restrictions on foreign investment because of national security concerns, China’s expansive definition of “sensitive” excessively restricts foreign investment, closing off significant portions of the economy.
In the long term, subsidies will hurt the Chinese economy. The most recent trade data demonstrates that while volumes are up,
revenues are down, owing to the low prices of exports. Another issue with the subsidies is that they transfer taxpayer money or government revenue to companies that lack the ability to compete globally. They also remove the incentives for companies to improve. Research has shown that Beijing’s subsidies have not
fostered productivity.
Relating China’s economy to a family, in the United States, many conservative parents believe their children should take on part-time jobs. They worry that if children rely too much on their parents for cash, they won’t learn to compete effectively in the real world. Similarly, firms from a socialist country, even one with Chinese characteristics, face a different reality than firms from capitalist countries, where competition is fierce. Competing on price compels companies to enhance efficiency, thus reducing costs. Conversely, relying on government handouts diminishes the drive to improve products or manufacturing processes.
It’s a bit like economic Darwinism. Companies that survive the harsh realities of a market economy tend to emerge stronger and more innovative than those sheltered by a socialist government. The latter often produce inferior products at higher costs and rely on government subsidies to turn a profit.
Some countries may implement boycotts or quotas in reaction to Chinese dumping. The United States and the EU should move forward with tariffs designed to bring the price of Chinese imports up to the same price as corresponding domestic products. This approach will not only reduce Beijing’s sales but also enable the West to further develop its industrial base while gradually reducing dependence on a China-dominated supply chain.
In response to the U.S. and EU dumping allegations, Chinese state-run media China Daily wrote, “China denounces EU’s
pretext for anti-dumping practices.” As is typical of the CCP, it cries foul as the United States and EU react defensively to China’s trade cheating and accuses the world of unfairly conspiring against it, ignoring the fact that it is guilty.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
