American Workers Hit by China’s Overcapacity: Industry Lobby

American Workers Hit by China’s Overcapacity: Industry Lobby
A worker produces engineering equipment for export at a factory in Nantong, Jiangsu Province, China, on March 30, 2021. (STR/AFP via Getty Images)
Indrajit Basu

With concerns growing among the U.S. administration and its allies about the effects of Chinese overcapacity on manufacturing and local businesses, U.S. policy groups are rallying as well for U.S. lawmakers to implement stronger trade barriers against Chinese imports.

In a hard-hitting report released on June 14, the Alliance for American Manufacturing (AAM) highlighted these concerns by warning that the surge of subsidized and cheap exports by China threatens U.S. jobs and urged immediate action to address the issue.

“Overcapacity is a feature, not a bug, of China’s model of state capitalism,” the report reads, noting that as the Chinese government maneuvers to maintain social stability, it is intensifying its state-led manufacturing efforts and sending “shockwaves through American manufacturing and factory workers.”

China aims to fuel its growth by creating export surpluses, even using other markets as indirect channels to funnel its excess capacity into the United States, according to the report. Moreover, nations such as Vietnam and Mexico have become conduits for Chinese manufacturers to inundate the U.S. market with products that face direct export challenges.

This tactic is heightening legitimate fears in the United States of a “China Shock 2.0”—a wave of low-cost imports that could once again shutter tens of thousands of U.S. factories and put millions of the country’s manufacturing workers out of jobs.

According to the AAM, Chinese industrial sectors are swiftly capturing market share in strategic industries in the United States and have particularly affected the paper, glass, steel, and tire industries, which have experienced significant job losses and plant closures because of Chinese imports.

The lobby also urged the enforcement of Section 421 (China Safeguard) of the Trade Act of 1974, which permits the United States to impose temporary tariffs to mitigate market disruptions caused by surges of low-cost imports from China’s manufacturing sector.

Global Backlash

The AAM report follows pushback from countries around the world against China’s overcapacity, especially in high-tech and clean energy sectors such as electric vehicles (EVs), lithium batteries, and solar panels, because of concerns about unfair trade practices and economic impacts.

For example, on June 12, the European Union announced additional tariffs of up to 38.1 percent on EVs imported from China, effective next month. This move is in response to what the EU describes as unfair subsidies by the Chinese government that are flooding the region’s EV market.

Similarly, in mid-May, the United States quadrupled tariffs on Chinese EVs to 100 percent and imposed new levies on computer chips, solar cells, and lithium-ion batteries. This action aims to prevent a surge of low-cost Chinese products from undermining the resurgence of domestic manufacturing.

In April, during meetings with senior Chinese officials, U.S. Treasury Secretary Janet Yellen also highlighted the adverse effects of Chinese trade practices on U.S. businesses and workers, emphasizing the global economic repercussions of China’s industrial overcapacity.

On June 13, Ms. Yellen said Chinese overcapacity threatens industries vital to long-term U.S. growth.

“China’s overcapacity risks our supply chains being artificially overconcentrated, posing additional security and economic concerns. China also pursues a variety of unfair trade practices—from restrictive investment policies to economic coercion—that further undermine fair competition,” she said in her address to the Economic Club of New York.

In addition, major world powers, including Italy, Brazil, Mexico, and Japan, are working to slow the influx of cheap Chinese-made clean-tech products to protect their domestic industries.

Developing countries such as Brazil, Mexico, and Chile have also begun to resist the surge of Chinese goods. These actions represent a growing global backlash against China’s heavily subsidized manufacturing sector, which produces more goods than its economy can absorb, leading to a surplus exported at low prices.

Exploiting Other Routes

“Recent research has shown that China has exploited several other countries in its mission to circumvent U.S. tariffs as it seeks to offload its excess industrial capacity into foreign markets,” Scott Paul, president of AAM, said in a note on June 11.

For instance, according to the lobby, Chinese companies are investing in Mexican manufacturing plants, leveraging the favorable tariffs under the U.S.–Mexico–Canada Agreement to access the U.S. market.

This strategy effectively provides a backdoor for Chinese products to reach U.S. consumers, circumventing policies designed to keep Chinese products such as automobiles out of the U.S. market, according to the AAM, which noted that, over the past year, China also has increased its exports to Vietnam, where products can be reprocessed and then shipped to the United States or Europe with minimal or zero tariffs.

In May, the value of China’s exports surged by 7.6 percent, marking the fastest growth in more than a year, despite falling prices for many of its manufactured goods.

The trade surplus—representing the gap between China’s export earnings and its import expenditures—also soared to $82.6 billion, a 25.6 percent increase from the previous year.

According to China’s customs statistics, this rise is the largest ever for May and one of the highest on record, excluding the COVID-19 pandemic period, when China exported vast amounts of medical supplies, exercise equipment, and other manufactured products.

Consequently, “China’s overcapacity is exporting deflation to the rest of the world,” Lynn Song, chief economist at ING, said in a note in May. “This argument is that China’s excess capacity ends up being exported at lower prices than similar goods in other markets, which in theory causes a deflationary impact.”

No Time to Lose

The lobby stated that Chinese industrial overcapacity is deeply ingrained in the country’s state capitalism system that directs funds into its manufacturing sectors to maintain domestic economic stability and will continue to be a significant issue in 2024.

This poses a challenge for the United States, which has recently made substantial investments in federal infrastructure and clean energy manufacturing programs.

The U.S. policies are designed to support domestic industries, but the glut of Chinese production threatens to undermine these U.S. industries before they can establish themselves, according to the AAM. Despite substantial tariff barriers, heavily subsidized Chinese goods are still penetrating the U.S. market.

“If U.S. policymakers sit idly by, this shock could be American manufacturing’s last stand,” the report reads.