The Guardian • Issue #2102

Don’t use ‘overcapacity’ to harm economic globalisation

World economic health (pulse)

For some time, China has been accused of “overcapacity” in new energy products. This kind of hype is unreasonable and just a carefully crafted distraction, an attempt to promote unilateralism and implement trade protection, which will seriously harm the world economy and trade growth. Worse it will drag down the pace of global economic green transformation. China firmly opposes it. We should approach production capacity issues objectively and dialectically, from a market and global perspective, starting from economic laws.

From a market perspective, whether there is overcapacity depends on the supply-demand relationship. Some argue that China’s new energy product capacity has exceeded global market demand, and that other countries in the world are unable to absorb this capacity.

In fact, according to the International Energy Agency, the global demand for new energy vehicles will reach 45 million by 2030, which is more than three times global sales in 2023 and nearly five times production in China this year.

The global demand for new energy batteries will reach 3500GWh by 2030, more than four times the global shipment volume in 2023 and over five times this year’s production volume in China. According to the International Renewable Energy Agency, in order to achieve the Paris Agreement goals, the global cumulative photovoltaic installed capacity needs to exceed 5400GW by 2030, which is nearly four times the global cumulative installed capacity in 2023 and about nine times the cumulative installed capacity in China in 2023.

The current global production capacity of new energy products cannot meet future market demand, China’s new energy products have made significant contributions to addressing global climate change and green low-carbon transformation.

From a global perspective, capacity cooperation means leveraging comparative advantages. Some argue that China’s excess production capacity of new energy products is difficult to digest domestically and can only be sold to the world at low prices. In fact, countries have formed comparative advantages in different industrial fields based on factor endowments, development paths, and other factors. The exchange of related products through cross-border trade is a reality of international economic division of labor and cooperation.

In 2023, Western Australia accounted for 39 per cent of the world’s iron ore exports, of which approximately 85 per cent were exported to China. Both sides fully leverage their comparative advantages and make significant contributions to global economic growth. United States exported 80 per cent of its high-end chips, and at the same time is the world’s largest exporter of liquefied natural gas. Yet the US has not been criticised for “excess capacity”. While China’s new energy products mainly meet domestic demand, new energy vehicle exports only accounted for 12.5 per cent of the total production in 2023.

From an economic perspective, comparative advantage is the result of continuous efforts by Chinese enterprises themselves. Some argue that the production capacity and price advantages of China’s new energy products are the result of large-scale subsidies from the Chinese government. In fact, the advantages of China’s new energy products are formed through market mechanisms, relying on a large domestic market and a complete industrial system, through full market competition and technological iteration and innovation.

At the same time, it should also be noted that supporting the development of the new energy industry and the green transformation of the economy is a common practice worldwide. Countries around the globe encourage and support the  industries through various means. Some countries provide significant subsidies to the new energy industry through legislation, such as the US Infrastructure and Employment Act, which spent US$7.5 billion to support the construction of car charging facilities, as well as the Inflation Reduction Act, which provides a maximum tax credit of US$7500 per electric vehicle ultimately assembled in North America.

History has shown that promoting trade protectionism on a large scale not only harms the world economy and trade growth, but also has more disadvantages than benefits for the countries that promote protectionism themselves.

One is that it is not conducive to the growth of world trade and economic recovery. The International Monetary Fund (IMF) predicts that the world economy will grow by 3.2 per cent in 2024, significantly lower than the average level of 3.8 per cent from 2000 to 2019; Recently, the World Trade Organization (WTO) has also lowered its forecast for global trade volume growth this year, from 3.3 per cent to 2.6 per cent. In this context, using “overcapacity” as an excuse to politicise economic and trade issues will not only fail to solve the problems faced by the accuser’s own industrial development, but also further drag down global trade growth and world economic recovery.

The second disadvantage of this protectionist argument is to drag down the global process of addressing climate change and promoting green and low-carbon transformation. In 2023, the global installed capacity of renewable energy reached 510 million kilowatts, with China contributing more than half. China has cooperated with more than 100 countries and regions in green energy projects, effectively solving problems of geography and high electricity consumption, making positive contributions to the global climate change response and achieving green and low-carbon development.

The kind of behaviour that on the one hand sees addressing global climate change as its “noble mission,” but on the other hand adopts protectionist measures under the pretext of “overcapacity,” to suppress the development of new energy industries in other countries and restrict the export of new energy products from other countries, seriously damages the global efforts to address climate change.

Thirdly, it leads to a mismatch between the supply and demand of global resources, further increasing domestic price pressure in affected countries and delaying the process of reducing inflation. Moody’s report shows that after the United States significantly increased tariffs on Chinese products, US importers bore over 90 per cent of the cost of those tariffs. Currently, some countries are attempting to build trade barriers against other countries’ new energy industries under the pretext of overcapacity, which may once again harm the interests of their domestic enterprises and the well-being of their people.

Today the countries of the world have become an interdependent and integrated community with a shared future. Openness, inclusiveness, and win-win cooperation are the only correct choice, and economic globalisation is the unchangeable general trend. China hopes that relevant countries can objectively, rationally, and comprehensively view the demands of the global new energy market and the development of China’s new energy industry, work together to practice true multilateralism, promote industrial cooperation, achieve mutual benefit, and jointly promote global green development.

Long Dingbin is the Chinese Consul-General to Western Australia

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