US Needs Stronger Measures to Combat China’s Subsidized Overcapacity, Treasury Official Says

Electric cars for export waiting to be loaded on the "BYD Explorer NO.1," a domestically manufactured vessel intended to export Chinese automobiles, at Yantai port, in eastern China's Shandong Province, on Jan. 10, 2024. (STR/AFP via Getty Images)

The United States needs to take “more creative approaches” to protect its markets, workers, and manufacturing base against China’s heavily subsidized industrial capacity, said Jay Shambaugh, Treasury under secretary for international affairs.

Mr. Shambaugh said traditional measures to counter unfair trade practices, such as tariffs under Section 301, are insufficient to address industrial overcapacity from the Chinese communist regime.

“More creative approaches may be necessary to mitigate the impacts of China’s overcapacity,” he said at a recent event at the Council on Foreign Relations.

“We should be clear: defense against overcapacity or dumping is not protectionist or anti-trade, it is an attempt to safeguard firms and workers from distortions in another economy.”

Mr. Shambaugh said China’s industrial overcapacity, a result of substantial government subsidies, leads to Chinese production exceeding both its domestic and global demand. This overcapacity can shift global prices, leaving the rest of the world to deal with the consequences, as it cannot absorb China’s increased manufacturing production without being forced to adjust.

“These conditions would not appear in a normal, market economy. What we are seeing is a fundamental distortion, driven by government policy,” he said.

According to the Center for Strategic and International Studies, in 2019, Beijing spent more than $248 billion on industrial subsidies. This number exceeds China’s 2019 defense budget of $240 billion.

“We are growing concerned that China’s enduring macroeconomic imbalances and non-market policies and practices pose a significant risk to workers and business in the United States and rest of the world,” Mr. Shambaugh said.

“We are worried these features of China’s economy can lead to industrial overcapacity that has significant spillovers around the world and can compromise our collective supply chain resilience given the resulting over-concentration in some manufacturing sectors.”

Global Concerns

Mr. Shambaugh’s remarks echoed the concerns raised by Treasury Secretary Janet Yellen when she discussed the overcapacity issue with Chinese officials during her visit to China in April.

“I think the Chinese realize how concerned we are about the implications of their industrial strategy for the United States, for the potential to flood our markets with exports that make it difficult for American firms to compete, and that other countries have the same concern,” she said at the time.

In May, Ms. Yellen raised the issue with Group of Seven (G7) finance ministers, stating that China’s industrial overcapacity threatens their businesses as she discussed how to respond to this threat with her G7 counterparts. Last month, she also expressed the same concerns at the Economic Club of New York.

In his speech, Mr. Shambaugh said China’s production capacity in some industries far exceeds global demand projections, including for solar panels, lithium-ion batteries, and electric vehicles (EV).

He noted that China’s production capacity in lithium-ion batteries and solar modules is set to exceed projected global demand by two to three times over the next few years. Similarly, China’s planned production capacity for EVs in 2030 is expected to reach more than 70 million vehicles, while global EV sales are estimated to only reach 44 million in that year.

Mr. Shambaugh added that China’s factory utilization rates are falling while the share of money-losing firms was rising, reaching 28 percent of publicly traded Chinese automakers.

In May, the Biden administration quadrupled tariffs on Chinese imported EVs from 25 percent to 100 percent, doubled the import tax on Chinese solar cells from 25 percent to 50 percent, and more than tripled tariffs on some Chinese steel and aluminum from 7.5 percent to 25 percent.

Imported Chinese EVs also face up to 37.6 percent tariffs starting from this month in the European Union market.

Last month, the Alliance for American Manufacturing released a report, indicating that “Overcapacity is a feature, not a bug, of China’s model of state capitalism.” The report warned that this strategy could “again close tens of thousands of U.S. factories and lay off millions of U.S. manufacturing workers.”

Mr. Shambaugh recommends that Washington work with its allies and partners to address China’s overcapacity.

“We will take defensive action if needed, but we would prefer for China to take action itself to address the macroeconomic and structural forces that are generating the potential for a second ‘China shock’ for its major trading partners,” Mr. Shambaugh said.

Reuters contributed to this report.