Claims of Chinese Overcapacity Undermine America's Own Strengths

The Biden administration’s major hike of tariffs on Chinese electric vehicles (EV) will undoubtedly trigger a new wave of tit-for-tat trade disputes with China, as Beijing vowed to take “all necessary measures” in response.

Tensions with China over trade may be a useful election gimmick for the Biden administration to boost its popularity among blue-collar workers, critical in its race against former President Donald Trump.

To protect the American auto industry from a potential collapse, addressing Chinese auto imports will be a compelling argument for the American autoworkers who endorsed the president earlier this year.

The administration repeatedly cites concerns over China’s “overcapacity” of green products, especially EVs, echoing a longtime fear that cheap Chinese products will flood the U.S. market and eliminate U.S. jobs.

Besides justifying disruptive protectionist policies, Washington’s consistent emphasis on Chinese overcapacity, which does not align with the facts, will also derail genuine efforts to revive U.S. industrial capacity.

The soundbite “overcapacity” is misleading about where China’s EV competitiveness truly lies. U.S. Treasury Secretary Janet Yellen claims that China’s overcapacity in the EV industry is due to Beijing’s overinvestment in factory capacity building, which has vastly exceeded its domestic demand and is becoming “too large for the rest of the world to absorb.”

Is that truly the case?

In 2023, the world’s second-largest economy produced 9.58 million new energy vehicles (primarily EVs) and consumed 9.49 million of them. The math is simple: Over 99.06 percent of China’s EV production was consumed domestically, leaving only a surplus of 90,000 vehicles.

U.S. consumers purchased 1.2 million EVs in 2023. Even if all Chinese EV surplus went to the United States, which is highly unlikely, they would account for a mere 7.5 percent of total U.S. EV sales.

China’s EV production neither drastically exceeds its domestic demand nor produces a surplus too large to be absorbed by the United States, let alone the rest of the world.

Of course, Chinese EV companies are opening factories abroad to supply overseas markets. However, those factories are not funded by the Chinese government, which means there is no government investment, let alone overinvestment. The fact that Chinese EV companies are building capacities abroad is a testament to the growing demand in the global market.

From a competitive perspective, the U.S. automobile industry should worry about Chinese EV imports. Chinese EVs are incredibly cheap compared to their American competitors, offering equal or superior quality. However, the competitiveness of Chinese EVs stems not from overcapacity but from economies of scale.

China’s domestic EV market is much larger than that of the U.S. The industry has been under development for over a decade through early economic planning and supportive policies encouraging EV consumption since the 2010s.

In contrast, the Biden administration has only recently begun implementing similar measures, such as tax credits, R&D funding, investments in EV charger installations and government procurement of EVs.

In 2023, Chinese buyers purchased much more EVs than their American counterparts. The rapidly growing demand for EVs in China stimulates increased production, consequently driving down costs. This phenomenon is not due to overcapacity resulting from unfair trade practices or government overinvestment.

That being said, China is far from dominating the global EV market. Furthermore, the United States has strengths that can level the playing field and fairly compete with China if it takes the proper steps. Fair competition should focus on leveraging U.S. strengths rather than undermining China.

From an economic perspective, should the United States target Chinese EVs? China’s strength lies in its market scale, which fosters high efficiency in EV manufacturing. Meanwhile, the United States leads in innovative ideas such as autonomous driving. The two countries should leverage their strengths in different parts of the global EV supply chain to offer cleaner and more convenient commuting options to the world.

This article was originally published by Xinhua on May 18, 2024