China’s ‘Overcapacity’? Why Is Economics Guru Yellen ‘Subverting’ Economic Principles?

Overcapacity, or excess capacity, came to the fore during U.S. Treasury Secretary Janet Yellen’s visit to China.

On April 5 ,she mentioned “overcapacity” five times at an event. On April 6, she mentioned it three more times in a statement. Why did she keep talking about “overcapacity”? Yellen explained: China’s production capacity far exceeds its domestic demand as well as what the global market can handle. Overcapacity could lead to a flood of low-priced exports, harming companies and workers in the United States and other countries.

In response, Bloomberg.com commented that Yellen, an outstanding economist, was going against one of the most basic principles of economics for more than 200 years: the theory of comparative advantage.

According to this theory, if a country can produce a certain product at a lower cost, other countries should not erect tariff barriers but should import that product while exporting the products in which they have a comparative advantage.

Yellen should be very familiar with this theory. On April 3, The Wall Street Journal quoted Yellen as saying, “People like me grew up with the view: If people send you cheap goods, you should send a thank-you note. That’s what standard economics basically says.” But Yellen has changed her tune, saying, “I would never ever again say, ‘Send a thank-you note’.”

What changed Yellen's mind? I think it's because of a change in the roles played by nations. After meeting domestic demand, it is only natural that surplus products seek other markets. This is common practice for Western countries.

Microsoft and Apple dominate the world’s operating systems, while NVIDIA is the world’s chip giant. One-fifth of U.S. agricultural products are sold to China; 75% of the cars produced in Germany last year were sold overseas.

So can we say that the U.S. and the West have been suffering from overcapacity for years?

Furthermore, I would like to ask whether U.S. military industries also have “overcapacity”? There are enough nuclear and conventional weapons to destroy Earth. Why do we need so many? Isn't that also “overcapacity”?

Or, to put it another way, why weren’t we said to have overcapacity in the past when we were exporting cheap textiles and small items? Why wasn’t there talk of overcapacity when we were trading “800 million shirts to buy one plane"?*

Ultimately it’s because the products we export today are different.

Yellen’s “overcapacity” is mainly a reference to three industries: electric vehicles, photovoltaics and new energy sources. The rise of Chinese manufacturing threatens their dominant position in advanced manufacturing. In other words, in the eyes of some Americans, China should stick to “specializing” in low-end goods.

According to the 2024 Government Work Report, China’s exports of “the new three” of electric vehicles, lithium batteries and photovoltaic products increased by nearly 30% last year.

In the future, we will continue to “vigorously promote the construction of a modern industrial system and accelerate the development of new productivity,” with new energy and other industries as important engines for cultivating these new productive forces.

What a coincidence! The capacity that the U.S. wants us to cut is exactly what we want to actively develop.

Moreover, at the global level, there isn’t a surplus of high-quality production capacity but a shortage. The dynamic developments in China’s new energy industry can help other countries achieve their carbon reduction goals and speed up their green transformation.

The claim that China is exporting large quantities of goods at low prices is also a false proposition. Fair prices are the result of full market competition. The increased upgrading of China’s manufacturing relies on technological strength and excellent quality, not low-price dumping or industry protections.

Instead, talk of “overcapacity” may just be an excuse for the U.S. to introduce more trade protection policies.

For example, Chinese electric cars entering the U.S. are subject to a high tariff of 27.5% and the U.S. Department of Commerce is launching an investigation with a view to further hindering the import of Chinese electric vehicles. The results of the U.S. investigation are due to be released at the end of April. Let's see if the report uses the term “overcapacity.”

Finally, returning to the Bloomberg editorial mentioned earlier, the piece is quite an interesting one.

It asks us to magine that a Chinese company announces plans to build the world's largest electric vehicle battery factory.

The factory, with an investment of $5 billion, plans to produce more batteries in the next 12 months than last year’s entire global output. The factory intends to employ 6,500 people and reduce costs by 30%, beating all competitors.
Does this plan sound like “overcapacity”? Is the United States going to be intimidated by such an aggressive move?

Fortunately, it was Elon Musk who announced this plan in 2015 to build a “gigafactory” in Nevada. People in the U.S. are very excited about this.

In the future, the U.S. and the West may continue to talk about “overcapacity” but it is just another new variation on the “China threat theory.”

*Editor’s Note: This iremark refers to a statement by a Chinese minister in 2005 that the low profit margins of Chinese textiles meant that China needed to export 800 million shirts to buy a single Airbus A380.