The news about trade disputes, punitive and countervailing duties just keeps pouring in. So what is the World Trade Organisation doing? It is simply not prepared for state capitalism with Chinese characteristics. When China was admitted to the WTO in 2001, it was the world’s workbench and many believed the country would liberalize – a hope that never became reality. In our first piece, Julia Fiedler describes how the EU and the USA are trying to deal with this and why China is threatening the EU before the WTO while not doing the same with the USA.
Our second analysis looks at the security of research and science. NATO science experts are concerned that researchers could inadvertently provide geopolitical adversaries with information about sensitive technological advances. They ponder ways to prevent this – for example, by researchers defining the vulnerabilities and “crown jewels” of their own research. Marcel Grzanna has written down what other ideas are circulating and why Denmark, of all countries, could serve as a blueprint.
In today’s opinion piece, Chinese professor Huang Yiping explains why a “Chinese Green Marshall Plan” would be a good idea. According to Huang, developing countries need money for green growth. China not only has capital and technology, but it also has an overcapacity of key green technologies. If China helped developing countries, it could boost its economy while strengthening its international leadership role.
Have a good read and a pleasant day.
The countervailing duties on Chinese EVs could enter into force in November. It is up to the EU Commission to decide whether this actually happens. Brussels is still giving Beijing the opportunity to campaign for a solution at the negotiating table. This cannot be ruled out. China enjoys high-profile support. The German automotive industry in particular favors a negotiated solution, as it fears retaliatory measures that could affect them.
From a tactical perspective, the EU is in a better position than before the provisional tariffs were imposed on October 4. The Commission rejected the Chinese proposal for a minimum price of 30,000 euros per vehicle. According to media reports, however, a minimum price of 35,000 to 40,000 euros could be successful. It is clear that the EU would make a negotiated solution very costly for China.
The countervailing duties can be easily revoked as they are not obligatory. Minimum vehicle prices are also compatible with WTO law, says Professor Christoph Herrmann from the University of Passau, who holds a chair in constitutional and administrative law, European law, European and international economic law. Instead of tariffs, a countervailing measure could also mean minimum import prices or a price commitment for manufacturers.
However, Herrmann warns: “A minimum import price is a common instrument that was also used for solar panels in 2017, for example. However, from the EU’s point of view, the risk of circumvention is quite high. Many legal proceedings are ongoing for solar panels.” An abstract minimum price on the other hand, such as the 30.000 Euros, makes little sense. Countervailing duties are more accurate because they are tailored to the transaction value of each individual vehicle, said Herrmann.
“With its approach, the EU demonstrates that it deals with its trading partner China in a fundamentally different way to the US,” says Max Zenglein, Chief Economist at Merics. He considers the approach sensible, even if there are different arguments in the debate about a negotiated solution. “The EU is signaling to China: We understand your economic system, but we are in a situation where we are under increasing economic pressure. This does not mean we want to cut all ties and damage economic relations.”
In late September, the United States introduced tariffs of 100 percent on EVs from China. The reason: Extensive subsidies and non-market-compliant practices by China lead to considerable risks of overcapacity and therefore harm the American industry. The Biden administration thus quadrupled the existing tariffs of 25 percent previously imposed by Donald Trump in 2018 based on Section 301 of the US Trade Act of 1974. The instrument enables the USA to take unilateral and indefinite measures against another state. China protested that the measure was not WTO-compliant, which is true.
Nevertheless, Beijing made no threats towards the United States – in stark contrast to the current tariff debate with the EU. Max Zenglein concludes from the different reactions that this reflects China’s view of the USA and Europe. “The debate about EV tariffs shows that China sees Europe as a weak player that can easily be spooked and threatened. The process has been debated in Europe for months, in public, and China has tried in every way to exert its influence – quite successfully.” In contrast, China has taken note of the US’s actions, albeit in protest.
For Europe, however, the WTO rules are relevant. “Regarding the countervailing duties on Chinese electric cars, the EU also ensures that the measures are WTO-compliant in the broadest sense. China has also utilized the mechanisms in this case and filed a complaint via the WTO,” says Zenglein. A look at the list of current WTO complaints shows that the mechanism is being actively used between the parties China, the EU, and the USA. China currently has six complaints against the EU and 18 against the USA. And vice versa, the EU has twelve cases against China, and the US has 23 cases.
However, upholding WTO principles has become selective and the WTO’s steering power has declined. This is not only due to the Appellate Body crisis, says Herrmann. The USA in particular wanted to regulate its trade relations with China outside the rules-based system, and so did China. In addition, the USA is also violating WTO principles with the Inflation Reduction Act, for example, as it favors the domestic economy.
While China was a cheap workbench for many American and European companies at the turn of the millennium, it now manufactures its own high-quality industrial goods and sells them on the global market. But this is not the only reason why the situation has changed. The political landscape has also changed significantly since 2001, when China was admitted to the WTO. China was admitted to the WTO at that time because it was believed the Chinese system was developing towards a liberal market economy. In reality, however, it now shows planned economy tendencies under an increasingly authoritarian regime.
However, China’s admission to the WTO was not a purely political decision, argues Julian Hinz, Professor of International Economics at Bielefeld University and Head of the Trade Policy Research Center at the Kiel Institute for the World Economy. After all, other authoritarian regimes have also become part of the WTO. “The WTO wants to put trade on a rule-based foundation. It is clear that China is intervening massively in the economy, so from an economic perspective the countervailing duties are justified, because it is about balancing out unfair competition.”
However, there are no rules in WTO law for the kind of state capitalism that China practices. “The question of what industrial policy is permitted is not sufficiently regulated. This is why countries invoke national security, such as imposing tariffs,” says Herrmann. The consequence of coercive trade policy measures, as can currently be observed in the dispute over EV tariffs, is correspondingly problematic. “You have to expect that more tariffs will be imposed and countermeasures will also affect innocent industries, such as the spirits industry.”
One way out could be reforming the system to account for the changed circumstances. However, Max Zenglein from Merics does not consider this to be realistic at present. “In order to discuss a new system, the big economic blocs would have to come together and agree on certain points. Now is not the right time for that.”
Julian Hinz points to the possibility of multilateral agreements that are not binding for everyone. “Countries or blocs of countries, such as the EU, could agree on certain topics and further liberalize them or impose certain rules on themselves. There could be groups or clubs that open up further within this framework.”
NATO is increasingly interested in export control in research and science. The concern of unintentionally granting geopolitical adversaries access to information on technological advances is not only a concern of nation states, but also the defense alliance.
As a traditional NATO adversary, Russia is one of the main countries that should not get their hands on sensitive data and knowledge. However, China – although far removed from NATO territory – is also increasingly coming into focus. In September, the NATO Science and Technology Board (STB) members met in Stockholm. The meeting aimed to take the first steps towards developing a new science and technology strategy.
The current white paper is now six years old and is less and less suited to the new geopolitical challenges. “A lot has happened since the old strategy was adopted in 2018. We have seen major technological advances, such as so-called new and disruptive technologies. We are also faced with new security threats and an ongoing war in Europe,” said Jens Mattsson from Sweden, responsible for developing the new strategy. Disruptive technologies are innovations that displace existing technology from the market. He considers a technologically advanced NATO to be essential for a strong alliance.
Especially as potential armed conflicts no longer only occur on land, at sea and in the air, but also cyberspace. Attacks on an opponent’s critical infrastructure can cut off important communication channels and affect response times to military maneuvers. One example is Taiwan: According to US security authorities, China is working to significantly slow down the United States’ ability to act on the day of a possible invasion of the island.
NATO invests twelve million euros yearly in the Science for Peace and Security Program (SPS), which aims to promote dialogue and cooperation between member states and partner countries. Research and innovation form the basis for the exchange. The SPS “offers funding, expert advice and support to tailor-made, civil security-relevant activities that respond to NATO’s strategic objectives,” its website states.
Alicia Hennig from IHI Zittau at TU Dresden also attended the conference in Stockholm. Hennig was there specifically to inform the representatives of the alliance states about the dangers posed to international research security by the People’s Republic in particular. German scientists have been concerned about these risks for some time now. Competence on China when collaborating with Chinese partners is considered essential to prevent German sensitive information and innovations from reaching the People’s Republic.
NATO has also recognized that China expertise is of growing importance for its own research program. The scientific integration of the alliance creates another potential gateway for unauthorized information gathering.
The list of risks that Hennig presented to the member states was long. Among other things, she drew attention to:
Like Germany, NATO members also ask themselves what future cooperation with China could look like under these circumstances. But even NATO does not yet have the answer. Hennig brought up the idea of a “cooperation case for research” – in other words, a kind of guideline that must be used to justify why a research project with China should be carried out – despite all the risks. In the past, there was usually no scrutiny and no need to justify the reasons for cooperating with China.
Hennig also recommended defining the vulnerability of one’s own work. Scientists must be clear about which research China is interested in to ensure particular caution in these fields. Avarice will not help, either. She added that EU universities require solid financing and their access to funding must be improved to prevent talent poaching through lucrative parallel affiliations.
However, research is not a one-way street. China is also making advancements that are of interest to NATO members. Last year, outgoing NATO chief Jens Stoltenberg warned that member states should not become dependent on Chinese technology. “We have seen the results of relying on Russia for our energy supply. We should not repeat this mistake by relying on China to provide the technology for our critical networks,” Stoltenberg said at the time.
In fact, China’s export controls on its own technologies and innovations could significantly impact international research cooperation. The same goes for data processing and data transfer laws. Access to and use of data for NATO research could be substantially hampered under these conditions.
Perhaps NATO will find the Danish approach interesting for its own research. After the outbreak of the war in Ukraine, Denmark tried to integrate its science more closely with its defense capabilities – a strategy that is common practice in China. Corporate research could also provide interesting military approaches. However, the scientists themselves would also have to play their part, some of whom would certainly have ethical concerns about such integration. China’s advantage: Its scientists must keep possible ethical reservations to themselves.
At an international symposium on “80 Years after Bretton Woods” in Hangzhou this past May, I proposed a “Global South Green Development Plan,” which some media later dubbed the Chinese Green Marshall Plan. The proposal includes three goals: assisting developing countries’ green development, expanding China’s aggregate demand, and enhancing China’s global leadership. Like the original Marshall Plan, the plan would provide large volumes of commercial credit and investment, policy loans, and government aid.
I was inspired by recent discussions about China’s overcapacity in key green industries: electric vehicles (EVs), lithium batteries, and solar panels. During a discussion with Peking University professors in April, US Secretary of the Treasury Janet Yellen raised this issue and voiced two concerns: that Chinese overcapacity looked like the result of state subsidies, and that it had reached a scale that was disrupting international markets. A month later, the United States announced a 100 percent tariff on EVs from China.
Defining “overcapacity” can be controversial. As some Chinese experts have pointed out, if Chinese companies can sell their products, whether at home or abroad, there is no “overcapacity.” So, if we understand overcapacity as a case of supply exceeding demand, it may be useful to distinguish between the domestic and the global context.
Three sets of factors are relevant here: macroeconomic imbalances, explicit and implicit subsidization, and the size of the industry in question. “Domestic” overcapacity has characterized China’s entire post-1970s reform period, because the country has produced more than it consumes, as evidenced by a large current-account surplus. The first step to addressing overcapacity, then, is to balance the current account. In fact, Chinese authorities have been working toward this goal ever since the 2008 global financial crisis, by boosting domestic consumption.
Americans and Europeans are more concerned about explicit and implicit state subsidies, which they claim give Chinese manufacturers an unfair advantage in international markets. But China’s explicit subsidies for EVs – including direct subsidies, tax reductions, and exclusive licenses – are about average among a dozen countries surveyed in a 2022 working paper, and they are less than those provided by the Norwegian, US, French, and German governments.
Implicit subsidies – reduced factor costs – are less transparent. In a July speech on “Chinese overcapacity and the global economy,” US Under Secretary of the Treasury for International Affairs Jay Shambaugh cited an analysis by the Center for Strategic and International Studies that estimated China’s implicit subsidies to be about 5 percent of GDP – ten times the level of the US, Japan, and some other countries.
While these figures are similar to what I found in my own research about 15 years ago, Shambaugh and the CSIS researchers’ interpretation is flawed. China’s factor-cost distortion was devised not as part of an industrial strategy, but as a transition policy, and most of the support went to state-owned enterprises. If anything, privately owned Chinese green-tech companies competing internationally were significantly disadvantaged by this policy.
That said, various “investment-promotion programs” introduced by local governments have provided implicit subsidies – for example, reduced land-use fees – to private green-tech companies. Hence, the European Union’s recent investigation suggests that subsidies permit Chinese EVs to be sold for 20 percent less than models produced in the EU. But the support from local governments is rapidly declining, partly because many are facing fiscal difficulties, and partly because the central government has begun prohibiting such irregular and illegal subsidies.
Another issue is that the perceived impact of Chinese overcapacity is exaggerated by the sheer size of the Chinese economy. China is a massive country, and its economic policies tend to concentrate investment in certain sectors and industries. This can create difficulties for China’s trading partners. The point, though, is that the size of China’s green-tech sectors is probably a larger problem than subsidies.
China does need to reduce the influence of state direction on resource allocation, and it needs to work with other countries to ensure mutual prosperity through cooperation. This was the rationale behind my proposal for a green development plan for the Global South. China has already built substantial production capacity in green-tech sectors, but it faces rising barriers in developed markets.
At the same time, developing countries are struggling to advance their own green development agendas. According to the United Nations, “Developing countries need renewable energy investments of about 1.7 trillion US dollars annually but attracted foreign direct investment in clean energy worth only 544 billion US dollars in 2022.” Fortunately, China has the technology, production capacity, and capital (commercial financing, policy financing, and government aid) to help fill this gap. It can drive global green development, boost its own economy, and strengthen its international leadership all at the same time.
Interestingly, in late August, Brian Deese, the director of the White House National Economic Council from 2021 to 2023, made the “case for a clean energy Marshall Plan” and alluded to the fact that China is considering the same idea. Ideally, the two countries would collaborate on this initiative. But even if they each pursued separate green Marshall Plans, they would accelerate the global green transition dramatically.
Huang Yiping, Dean of the National School of Development and a distinguished professor at Peking University, is a member of the Monetary Policy Committee of the People’s Bank of China.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
Editorial note: Now more than ever, discussing China means controversial debates. At China.Table we want to reflect the diversity of opinions to give you an insight into the breadth of the debate. Opinions do not reflect the views of the editorial team.
October gives the grassland a pink glow – at least in Zishan Park in Handan in the south of Hebei province. The city’s tourism office has long recognized the appeal of the color. The paths through the grass are conveniently paved for pedestrians, and a pink Legoland-style train chugs through the landscape.
The news about trade disputes, punitive and countervailing duties just keeps pouring in. So what is the World Trade Organisation doing? It is simply not prepared for state capitalism with Chinese characteristics. When China was admitted to the WTO in 2001, it was the world’s workbench and many believed the country would liberalize – a hope that never became reality. In our first piece, Julia Fiedler describes how the EU and the USA are trying to deal with this and why China is threatening the EU before the WTO while not doing the same with the USA.
Our second analysis looks at the security of research and science. NATO science experts are concerned that researchers could inadvertently provide geopolitical adversaries with information about sensitive technological advances. They ponder ways to prevent this – for example, by researchers defining the vulnerabilities and “crown jewels” of their own research. Marcel Grzanna has written down what other ideas are circulating and why Denmark, of all countries, could serve as a blueprint.
In today’s opinion piece, Chinese professor Huang Yiping explains why a “Chinese Green Marshall Plan” would be a good idea. According to Huang, developing countries need money for green growth. China not only has capital and technology, but it also has an overcapacity of key green technologies. If China helped developing countries, it could boost its economy while strengthening its international leadership role.
Have a good read and a pleasant day.
The countervailing duties on Chinese EVs could enter into force in November. It is up to the EU Commission to decide whether this actually happens. Brussels is still giving Beijing the opportunity to campaign for a solution at the negotiating table. This cannot be ruled out. China enjoys high-profile support. The German automotive industry in particular favors a negotiated solution, as it fears retaliatory measures that could affect them.
From a tactical perspective, the EU is in a better position than before the provisional tariffs were imposed on October 4. The Commission rejected the Chinese proposal for a minimum price of 30,000 euros per vehicle. According to media reports, however, a minimum price of 35,000 to 40,000 euros could be successful. It is clear that the EU would make a negotiated solution very costly for China.
The countervailing duties can be easily revoked as they are not obligatory. Minimum vehicle prices are also compatible with WTO law, says Professor Christoph Herrmann from the University of Passau, who holds a chair in constitutional and administrative law, European law, European and international economic law. Instead of tariffs, a countervailing measure could also mean minimum import prices or a price commitment for manufacturers.
However, Herrmann warns: “A minimum import price is a common instrument that was also used for solar panels in 2017, for example. However, from the EU’s point of view, the risk of circumvention is quite high. Many legal proceedings are ongoing for solar panels.” An abstract minimum price on the other hand, such as the 30.000 Euros, makes little sense. Countervailing duties are more accurate because they are tailored to the transaction value of each individual vehicle, said Herrmann.
“With its approach, the EU demonstrates that it deals with its trading partner China in a fundamentally different way to the US,” says Max Zenglein, Chief Economist at Merics. He considers the approach sensible, even if there are different arguments in the debate about a negotiated solution. “The EU is signaling to China: We understand your economic system, but we are in a situation where we are under increasing economic pressure. This does not mean we want to cut all ties and damage economic relations.”
In late September, the United States introduced tariffs of 100 percent on EVs from China. The reason: Extensive subsidies and non-market-compliant practices by China lead to considerable risks of overcapacity and therefore harm the American industry. The Biden administration thus quadrupled the existing tariffs of 25 percent previously imposed by Donald Trump in 2018 based on Section 301 of the US Trade Act of 1974. The instrument enables the USA to take unilateral and indefinite measures against another state. China protested that the measure was not WTO-compliant, which is true.
Nevertheless, Beijing made no threats towards the United States – in stark contrast to the current tariff debate with the EU. Max Zenglein concludes from the different reactions that this reflects China’s view of the USA and Europe. “The debate about EV tariffs shows that China sees Europe as a weak player that can easily be spooked and threatened. The process has been debated in Europe for months, in public, and China has tried in every way to exert its influence – quite successfully.” In contrast, China has taken note of the US’s actions, albeit in protest.
For Europe, however, the WTO rules are relevant. “Regarding the countervailing duties on Chinese electric cars, the EU also ensures that the measures are WTO-compliant in the broadest sense. China has also utilized the mechanisms in this case and filed a complaint via the WTO,” says Zenglein. A look at the list of current WTO complaints shows that the mechanism is being actively used between the parties China, the EU, and the USA. China currently has six complaints against the EU and 18 against the USA. And vice versa, the EU has twelve cases against China, and the US has 23 cases.
However, upholding WTO principles has become selective and the WTO’s steering power has declined. This is not only due to the Appellate Body crisis, says Herrmann. The USA in particular wanted to regulate its trade relations with China outside the rules-based system, and so did China. In addition, the USA is also violating WTO principles with the Inflation Reduction Act, for example, as it favors the domestic economy.
While China was a cheap workbench for many American and European companies at the turn of the millennium, it now manufactures its own high-quality industrial goods and sells them on the global market. But this is not the only reason why the situation has changed. The political landscape has also changed significantly since 2001, when China was admitted to the WTO. China was admitted to the WTO at that time because it was believed the Chinese system was developing towards a liberal market economy. In reality, however, it now shows planned economy tendencies under an increasingly authoritarian regime.
However, China’s admission to the WTO was not a purely political decision, argues Julian Hinz, Professor of International Economics at Bielefeld University and Head of the Trade Policy Research Center at the Kiel Institute for the World Economy. After all, other authoritarian regimes have also become part of the WTO. “The WTO wants to put trade on a rule-based foundation. It is clear that China is intervening massively in the economy, so from an economic perspective the countervailing duties are justified, because it is about balancing out unfair competition.”
However, there are no rules in WTO law for the kind of state capitalism that China practices. “The question of what industrial policy is permitted is not sufficiently regulated. This is why countries invoke national security, such as imposing tariffs,” says Herrmann. The consequence of coercive trade policy measures, as can currently be observed in the dispute over EV tariffs, is correspondingly problematic. “You have to expect that more tariffs will be imposed and countermeasures will also affect innocent industries, such as the spirits industry.”
One way out could be reforming the system to account for the changed circumstances. However, Max Zenglein from Merics does not consider this to be realistic at present. “In order to discuss a new system, the big economic blocs would have to come together and agree on certain points. Now is not the right time for that.”
Julian Hinz points to the possibility of multilateral agreements that are not binding for everyone. “Countries or blocs of countries, such as the EU, could agree on certain topics and further liberalize them or impose certain rules on themselves. There could be groups or clubs that open up further within this framework.”
NATO is increasingly interested in export control in research and science. The concern of unintentionally granting geopolitical adversaries access to information on technological advances is not only a concern of nation states, but also the defense alliance.
As a traditional NATO adversary, Russia is one of the main countries that should not get their hands on sensitive data and knowledge. However, China – although far removed from NATO territory – is also increasingly coming into focus. In September, the NATO Science and Technology Board (STB) members met in Stockholm. The meeting aimed to take the first steps towards developing a new science and technology strategy.
The current white paper is now six years old and is less and less suited to the new geopolitical challenges. “A lot has happened since the old strategy was adopted in 2018. We have seen major technological advances, such as so-called new and disruptive technologies. We are also faced with new security threats and an ongoing war in Europe,” said Jens Mattsson from Sweden, responsible for developing the new strategy. Disruptive technologies are innovations that displace existing technology from the market. He considers a technologically advanced NATO to be essential for a strong alliance.
Especially as potential armed conflicts no longer only occur on land, at sea and in the air, but also cyberspace. Attacks on an opponent’s critical infrastructure can cut off important communication channels and affect response times to military maneuvers. One example is Taiwan: According to US security authorities, China is working to significantly slow down the United States’ ability to act on the day of a possible invasion of the island.
NATO invests twelve million euros yearly in the Science for Peace and Security Program (SPS), which aims to promote dialogue and cooperation between member states and partner countries. Research and innovation form the basis for the exchange. The SPS “offers funding, expert advice and support to tailor-made, civil security-relevant activities that respond to NATO’s strategic objectives,” its website states.
Alicia Hennig from IHI Zittau at TU Dresden also attended the conference in Stockholm. Hennig was there specifically to inform the representatives of the alliance states about the dangers posed to international research security by the People’s Republic in particular. German scientists have been concerned about these risks for some time now. Competence on China when collaborating with Chinese partners is considered essential to prevent German sensitive information and innovations from reaching the People’s Republic.
NATO has also recognized that China expertise is of growing importance for its own research program. The scientific integration of the alliance creates another potential gateway for unauthorized information gathering.
The list of risks that Hennig presented to the member states was long. Among other things, she drew attention to:
Like Germany, NATO members also ask themselves what future cooperation with China could look like under these circumstances. But even NATO does not yet have the answer. Hennig brought up the idea of a “cooperation case for research” – in other words, a kind of guideline that must be used to justify why a research project with China should be carried out – despite all the risks. In the past, there was usually no scrutiny and no need to justify the reasons for cooperating with China.
Hennig also recommended defining the vulnerability of one’s own work. Scientists must be clear about which research China is interested in to ensure particular caution in these fields. Avarice will not help, either. She added that EU universities require solid financing and their access to funding must be improved to prevent talent poaching through lucrative parallel affiliations.
However, research is not a one-way street. China is also making advancements that are of interest to NATO members. Last year, outgoing NATO chief Jens Stoltenberg warned that member states should not become dependent on Chinese technology. “We have seen the results of relying on Russia for our energy supply. We should not repeat this mistake by relying on China to provide the technology for our critical networks,” Stoltenberg said at the time.
In fact, China’s export controls on its own technologies and innovations could significantly impact international research cooperation. The same goes for data processing and data transfer laws. Access to and use of data for NATO research could be substantially hampered under these conditions.
Perhaps NATO will find the Danish approach interesting for its own research. After the outbreak of the war in Ukraine, Denmark tried to integrate its science more closely with its defense capabilities – a strategy that is common practice in China. Corporate research could also provide interesting military approaches. However, the scientists themselves would also have to play their part, some of whom would certainly have ethical concerns about such integration. China’s advantage: Its scientists must keep possible ethical reservations to themselves.
At an international symposium on “80 Years after Bretton Woods” in Hangzhou this past May, I proposed a “Global South Green Development Plan,” which some media later dubbed the Chinese Green Marshall Plan. The proposal includes three goals: assisting developing countries’ green development, expanding China’s aggregate demand, and enhancing China’s global leadership. Like the original Marshall Plan, the plan would provide large volumes of commercial credit and investment, policy loans, and government aid.
I was inspired by recent discussions about China’s overcapacity in key green industries: electric vehicles (EVs), lithium batteries, and solar panels. During a discussion with Peking University professors in April, US Secretary of the Treasury Janet Yellen raised this issue and voiced two concerns: that Chinese overcapacity looked like the result of state subsidies, and that it had reached a scale that was disrupting international markets. A month later, the United States announced a 100 percent tariff on EVs from China.
Defining “overcapacity” can be controversial. As some Chinese experts have pointed out, if Chinese companies can sell their products, whether at home or abroad, there is no “overcapacity.” So, if we understand overcapacity as a case of supply exceeding demand, it may be useful to distinguish between the domestic and the global context.
Three sets of factors are relevant here: macroeconomic imbalances, explicit and implicit subsidization, and the size of the industry in question. “Domestic” overcapacity has characterized China’s entire post-1970s reform period, because the country has produced more than it consumes, as evidenced by a large current-account surplus. The first step to addressing overcapacity, then, is to balance the current account. In fact, Chinese authorities have been working toward this goal ever since the 2008 global financial crisis, by boosting domestic consumption.
Americans and Europeans are more concerned about explicit and implicit state subsidies, which they claim give Chinese manufacturers an unfair advantage in international markets. But China’s explicit subsidies for EVs – including direct subsidies, tax reductions, and exclusive licenses – are about average among a dozen countries surveyed in a 2022 working paper, and they are less than those provided by the Norwegian, US, French, and German governments.
Implicit subsidies – reduced factor costs – are less transparent. In a July speech on “Chinese overcapacity and the global economy,” US Under Secretary of the Treasury for International Affairs Jay Shambaugh cited an analysis by the Center for Strategic and International Studies that estimated China’s implicit subsidies to be about 5 percent of GDP – ten times the level of the US, Japan, and some other countries.
While these figures are similar to what I found in my own research about 15 years ago, Shambaugh and the CSIS researchers’ interpretation is flawed. China’s factor-cost distortion was devised not as part of an industrial strategy, but as a transition policy, and most of the support went to state-owned enterprises. If anything, privately owned Chinese green-tech companies competing internationally were significantly disadvantaged by this policy.
That said, various “investment-promotion programs” introduced by local governments have provided implicit subsidies – for example, reduced land-use fees – to private green-tech companies. Hence, the European Union’s recent investigation suggests that subsidies permit Chinese EVs to be sold for 20 percent less than models produced in the EU. But the support from local governments is rapidly declining, partly because many are facing fiscal difficulties, and partly because the central government has begun prohibiting such irregular and illegal subsidies.
Another issue is that the perceived impact of Chinese overcapacity is exaggerated by the sheer size of the Chinese economy. China is a massive country, and its economic policies tend to concentrate investment in certain sectors and industries. This can create difficulties for China’s trading partners. The point, though, is that the size of China’s green-tech sectors is probably a larger problem than subsidies.
China does need to reduce the influence of state direction on resource allocation, and it needs to work with other countries to ensure mutual prosperity through cooperation. This was the rationale behind my proposal for a green development plan for the Global South. China has already built substantial production capacity in green-tech sectors, but it faces rising barriers in developed markets.
At the same time, developing countries are struggling to advance their own green development agendas. According to the United Nations, “Developing countries need renewable energy investments of about 1.7 trillion US dollars annually but attracted foreign direct investment in clean energy worth only 544 billion US dollars in 2022.” Fortunately, China has the technology, production capacity, and capital (commercial financing, policy financing, and government aid) to help fill this gap. It can drive global green development, boost its own economy, and strengthen its international leadership all at the same time.
Interestingly, in late August, Brian Deese, the director of the White House National Economic Council from 2021 to 2023, made the “case for a clean energy Marshall Plan” and alluded to the fact that China is considering the same idea. Ideally, the two countries would collaborate on this initiative. But even if they each pursued separate green Marshall Plans, they would accelerate the global green transition dramatically.
Huang Yiping, Dean of the National School of Development and a distinguished professor at Peking University, is a member of the Monetary Policy Committee of the People’s Bank of China.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
Editorial note: Now more than ever, discussing China means controversial debates. At China.Table we want to reflect the diversity of opinions to give you an insight into the breadth of the debate. Opinions do not reflect the views of the editorial team.
October gives the grassland a pink glow – at least in Zishan Park in Handan in the south of Hebei province. The city’s tourism office has long recognized the appeal of the color. The paths through the grass are conveniently paved for pedestrians, and a pink Legoland-style train chugs through the landscape.
