Does the so-called 'overcapacity' debate really matter?

Editor's note: Li Zhi is the assistant dean of the China Institute of Development Planning, Tsinghua University. The article reflects the author's opinion, and not necessarily the views of CGTN.

Recently, some politicians and media outlets have thrown out an opinion attacking China, claiming that China's excess production capacity is impacting the world market. This point of view targets China's new energy vehicle (NEV) sector, although China's current production capacity is far from meeting market demand.

At present, the potential demand for new energy products is huge in many developing countries. By hyping up the so-called "overcapacity," is the U.S. continuing to "encircle" China in the economic and trade field and essentially promote "de-Sinicization"?

Talking about overcapacity in isolation from the relationship between supply and demand is itself an irrational and unscientific view.

Overcapacity essentially happens because there is not enough market demand for the products being produced. 

However, China's emerging production capacity such as electric vehicles (EVs) is not without market demand. Due to the restrictions in the U.S. and Europe, the market demand cannot be released normally, which is forming market restrictions and distortions. This is the real reason that this so-called overcapacity is happening for China's EV industry. 

Therefore, in essence, the problem of overcapacity is a problem of capacity competition.

From the perspective of industrial investment, any business person would aim to pursue profit maximization, and the investment and production of NEVs follow the classical theories of economics. 

However, today, our American friends are telling us to distort our market and reduce our production capacity because Americans are afraid of competition, which sounds pretty funny. 

If there is overcapacity, the U.S. has always had an overcapacity of agricultural products, and the Middle East has always had an overcapacity of oil. If there is no overcapacity, there will be no export.

From the perspective of a country, it is easy to have an overcapacity of products, but from the perspective of the global market, the so-called overcapacity of products is easy to solve.

What we need to do is just to follow the principle of comparative advantage and give consumers their right of choice. The Pacific Ocean is large enough to accommodate the supply and demand of two major economies. 

It is logically absurd to simply transfer the lack of demand in one country's market to the problem of overcapacity in another, while our American friends are using this logic to teach us. 

Blaming others at every turn shows not only the naivete of the U.S. in its economic theory in the face of new economic challenges, but also its incompetence and lack of policy tools. As the saying goes, explanations are necessary only for those who can listen to them. This is the biggest frustration we meet when facing our American friends.

There are complex economic reasons and political considerations behind the so-called overcapacity in China. The lack of new supply cannot create new demand, and the new demand needs to be met by the supply of high-quality products as well. Arguing over who has excess capacity will only lead to recriminations, tariff barriers and trade wars.

Instead of arguing about the problem, trying to solve it may be a better idea. 

We suggest that our U.S. counterparts focus on addressing the issue of insufficient domestic demand instead. In fact, the problem of insufficient effective demand has been a chronic problem that has plagued successive U.S. administrations. Behind this is the solidification of social class in the U.S., and the excessive concentration of wealth in the hands of the powerful and the digital elite, which has led to the downgrade of consumption by ordinary people. It also hides the risk of continued and periodic outbreaks of potential financial crises in the future. Unchecked capitalism has led to an increase in wealth inequality and relative excess production, and insufficient effective demand has always been among the fundamental contradictions faced by capitalism.

In fact, both China and the U.S. are facing the common dilemma of how to address the lack of effective demand. The rapid growth of the global economy in the first decade of the 21st century was based on a circular pattern of consumption in the U.S. and supply in China. In the future, the change in China's domestic demand and the weakening of U.S. domestic demand will become the new trend. Therefore, the vicious circle of bipartisan politics in the U.S. should be ended as soon as possible, and the focus should be on improving effective domestic demand. Otherwise, the U.S. will lose its important role as an engine of global demand and its rightful place in the world economy.

In the face of the lack of effective demand in the U.S., China can actually make a contribution. China can not only reduce the hardship caused by the income shortage of the American people by providing cheap consumer goods, but also through cooperation between Chinese and American entrepreneurs and investors expand the demand for American products, expand investment in the U.S., create new jobs, and help the U.S. restore its energy demand vitality.

Of course, the premise of this is that China and the U.S. should cooperate to create an atmosphere of mutually beneficial and friendly economic cooperation, and not take a discriminatory attitude toward Chinese enterprises, which will hurt the confidence of Chinese entrepreneurs in investing in the U.S. 

China has already taken the lead in this regard. China has put forward a positive policy of unilateral opening-up and encouraged entrepreneurs from all over the world, including the U.S., to invest in China. It has also expanded the scope of foreign investment and imported goods, and procured global goods through its import expos. China's opening-up is helping the country steadily recover from the shock of the COVID-19 pandemic, while the U.S. is increasingly locked in its ways, biased and overly wary of external competition.

The supply-side reform in China and the industrial transformation in the U.S. are, in essence, issues of seeking balance and coordination between the supply and demand sides. 

China is experimenting with expanding demand, supply-side reform and high-quality development, using policy tools such as demand management and strategic planning to promote poverty eradication, protect the environment and expand basic consumption. If China's effective demand falls short, it will not be good for the U.S. either. China's expansion of domestic demand is also good for American companies and investors. Therefore, it is more important for the two countries to cooperate on the strategy of expanding domestic demand than to compete on production capacity.

We are in an era of such profound changes in globalization. 

Artificial intelligence and the digital economy pose challenges to all countries. We hope that people of vision from both countries can seek solutions to these problems by seeking common ground while reserving differences, conducting in-depth research on the similarities and differences as well as advantages and disadvantages of the development models of the two countries, and jointly exploring a new mode of economic cooperation from both supply and demand aspects. And that, to be honest, will be an "over-better capacity" for Sino-U.S. relations.