A glut of cheap Chinese goods is flooding the world and stoking trade tensions

China’s factories are churning out more steel, cars and solar panels than its slowing economy can use, forcing a flood of cheap exports into foreign markets.

The oversupply of Chinese goods in key industries is stoking tensions between the world’s biggest manufacturer and its major trading partners, including the United States and the European Union. Its global trade surplus in goods has soared and is now approaching $1 trillion.

The United States and the EU are fretting over potential “dumping” by China — that is, exporting goods at artificially low prices — with electric vehicles among the products caught in the crosshairs.

“Europe cannot just accept that strategically viable industries constituting the European industrial base are being priced out of the market,” Jens Eskelund, president of the European Union Chamber of Commerce in China, told reporters earlier this month.

But China needs to increase exports as a key measure to revive its economy, which is grappling with a protracted property slump, weak household spending and a shrinking population among other problems.

Beijing is now focusing on higher-value exports, after investing billions into advanced manufacturing. But the move is badly timed, coming amid slower economic growth globally and a shift by Western consumers from pandemic-era spending on goods to travel and leisure.

It is also coming up against a push by Europe and the United States to reduce their dependence on China and boost local manufacturing, creating jobs — including through the Net-Zero Industry Act and the Inflation Reduction Act respectively.

“It is hard for me to imagine that Europe would just sit by and quietly witness (its own) accelerated de-industrialization… because of the externalization of low domestic demand in China,” Eskelund said.

According to China’s National Bureau of Statistics, prices of Chinese exports are at their lowest level since 2009, when the West was reeling from the global financial crisis.

And China’s surplus in goods trade has more than doubled since the pandemic, according to Brad W. Setser, a senior fellow at the Council on Foreign Relations. In 2019, the country exported an estimated $400 billion more in goods than it imported — a surplus that ballooned to $900 billion last year.

From clothes to cars

China’s exports of low-priced goods got a boost after it joined the World Trade Organization (WTO) in 2001. Its economy and heft as a manufacturer have also grown substantially since then.

Having conquered the production of clothing and consumer electronics, China has come to dominate electric vehicles, solar panels and wind turbines — industries viewed as strategically important in Europe and the United States as they seek to green their economies and reduce planet-heating pollution.

Europe’s solar panel producers have been all but wiped out by Chinese competition, and the same fate threatens its wind industry.

“European companies could fall behind (Chinese manufacturer) Goldwind, which already offers its turbines well below the price of the established (European) manufacturers,” Markus W. Voigt, CEO of the Aream Group, an asset manager specializing in renewable energy, said in a statement this month.

In the last three months of 2023, China’s BYD overtook Tesla (TSLA) as the top seller of EVs worldwide, capping an extraordinary rise for the Warren Buffett-backed carmaker. Compared with Tesla, BYD’s cars are more affordable, which has helped it attract a wider range of buyers. Its entry-level model sells in China for the equivalent of just under $10,000. The cheapest Tesla car, a Model 3, costs almost $39,000.

Alongside “surging EV exports,” China manufactures 80% of the world’s solar panels and makes more wind turbines than any other country, Setser wrote in a recent note. “Chinese policy continues to emphasize upgrading China’s capacity in advanced manufacturing as a major driver of future growth,” he added.

Earlier this month, Premier Li Qiang, Xi’s number two, told China’s parliament that the government would focus on exporting more of the country’s “new trio” of products, namely EVs, lithium batteries and solar panels.

Eskelund of the European Union Chamber of Commerce says the organization is seeing “overcapacity across the board” in China, whether in the production of chemicals, metals or EVs.

“We haven’t seen all that capacity coming online just yet. This is something that’s going to hit markets over the next few years,” he added.

Trade tensions mount

Beijing is aware of China’s overcapacity problem, acknowledging it as an issue for the first time in almost a decade at an annual meeting of senior officials in December.

But on the eve of this week’s China Development Forum, several Chinese state-owned media outlets published editorials challenging the notion that China’s supply glut poses a threat to other economies.

“What China exports is advanced production capacity that meets the needs of foreign customers,” Xinhua News Agency wrote.

Washington and Brussels have a different view, however. US President Joe Biden recently pledged to investigate whether imports of Chinese vehicles pose a national security threat.

“A dynamic auto industry is vital to the US economy,” he said in a statement last month. “China is determined to dominate the future of the auto market, including by using unfair practices. China’s policies could flood our market with its vehicles, posing risks to our national security.”

The EU, meanwhile, is looking into China’s state support for EV makers, which it suspects may be enabling these firms to keep prices super-low, creating unfair competition with European rivals.

European officials are also considering whether existing measures to safeguard the EU steel industry should be extended or adjusted, as well as investigating allegations of biodiesel dumping by China following a complaint by European producers. Biodiesel is a renewable alternative to fossil fuels used in the EU’s transport sector.

The European Commission, the EU’s executive arm, said in December that it might impose tariffs on Chinese biodiesel imports if dumping was confirmed.

China, for its part, is fighting back. It said this week that it had filed a complaint with the WTO to contest “discriminatory subsidy policies” for EVs under Biden’s Inflation Reduction Act. Earlier this year, Beijing opened an anti-dumping investigation into brandy imported from the EU.

If there is a silver lining to China’s influence in global trade, it’s that it should help keep goods prices and overall inflation in check in advanced economies this year, according to Jennifer McKeown, chief global economist at Capital Economics.

“But perhaps more importantly, persistent oversupply and low prices of Chinese goods will add to geopolitical tensions and keep the threat of tariffs and counter-tariffs alive,” she wrote in a recent note. And these could ultimately raise inflation in the years ahead, she said.

Shawn Deng contributed reporting.

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