Brian Deese, an Innovation Fellow at MIT, was director of the National Economic Council from 2021 to 2023.
As its economy stagnates, China is doubling down on a policy agenda that threatens to destabilize global economic growth and the energy transition. In response, the United States should send a clear message that the world will not absorb the costs of these distortionary policies, and should work with our allies toward a more durable framework for global growth.
China confronts an economic dilemma of lagging growth, low consumption and an elevated savings rate. This is partly the result of its highly unequal economy, in which workers are paid a smaller share of what they produce than in most maturing economies. A shift toward policies that support domestic demand, such as expanding the social safety net or even direct payments to households alongside more progressive taxation, could reduce inequality, increase consumption and support more sustainable economic growth. But instead, Beijing announced at its National Party Congress last month that it would ramp up investment in advanced manufacturing to export products overseas.
China’s manufacturing surplus — the gap between the value of manufactured goods it exports and those it imports — already amounts to nearly 2 percent of global gross domestic product, far above that of Japan in the 1980s and Germany in the early 2000s. In some industries, including steel, aluminum and certain clean energy technologies, substantial government support has allowed for an outright flooding of the global market. For example, China’s capacity to manufacture electrolyzers, a technology needed to produce low-emission hydrogen, is four times the global demand. Its steel exports in 2024 are projected to top 100 million tons after increasing 36 percent in 2023, with another 100 million tons in new capacity planned. Now it wants to increase manufacturing even further.
This decision has three victims.
First, China’s agenda will limit its own growth prospects. After two decades of investment-led growth, additional investment, especially in industries with excess capacity, offers diminishing returns. It has already begun to distort and lower prices to the detriment of domestic firms. In recent months, the world’s largest solar company, China’s Longi Green Energy Technology, announced a 5 percent cut in its workforce in the face of what its chief executive described as “irrationally” low prices, leading to plunging profits and diminishing share values. And this strategy will do little to address pervasive issues such as high youth unemployment, a rapidly aging population and depressed home sales.
Second, China’s overcapacity targets and undermines other countries’ ability to maintain their own healthy industries. As Treasury Secretary Janet L. Yellen said in a recent visit to Beijing, “We’ve seen this story before.” Unmitigated trade shocks cause the U.S. economy to lose not just millions of jobs but also the powerful industrial ecosystems that enable us to operate at the cutting edge of global innovation. Since the days of Alexander Hamilton, the United States has recognized the importance of maintaining a strong industrial base to meet our core economic and national security needs. This value has been brought into stark relief in recent years as we have paid the price for our exposure to concentrated supply chains for critical goods such as semiconductors. Ultimately, we should not — and will not — accept a framework for global trade that is predicated on hollowing out our industrial base.
Third, while China’s strategy of overcapacity and underconsumption could at least temporarily lower the prices of certain clean energy technologies, it is inconsistent with a stable, long-term clean energy transition. Chinese manufacturing is more carbon-intensive than that of the United States and other nations. According to a 2021 study, solar panels manufactured in China produce 30 percent more emissions than those manufactured in the United States. And, as Matthew C. Klein recently explained, those who cheer the disparity between Chinese production and consumption of clean energy technologies tend to assume that “the green transition requires that Chinese workers be exploited.”
Moreover, the geographic concentration of supply chains increases the risk of disruptions. Thanks to decades of government support and hundreds of millions per year in state subsidies, China will soon produce nearly 95 percent of certain essential solar panel components — a virtual monopoly. A natural disaster or geopolitical conflict in the region would decimate the industry and threaten the energy transition. There can be trade-offs between costs and supply chain resilience, but no single country should hold a monopoly over the manufacture of an essential good.
To some, the answer to China’s overcapacity policy seems to be resignation. As the Financial Times’s Rana Foroohar recently wrote: “When it comes from China, protectionism is understood to be the status quo. The rest of the world seems to simply accept that this is the starting point of China’s state capitalism.” But resignation is not a strategy; it is neither economically nor politically sustainable.
Others, even more dangerously, advocate unilateral retreat. Former president Donald Trump’s call to end all essential imports from China within four years is a cynical fantasy playing on populist fears. In 2022, U.S. goods and services trade with China amounted to over $750 billion. It is not practically possible to decouple from any major economy, let alone our third-largest trading partner. There are important benefits from global trade, and unilateral, asymmetric escalation will leave the United States isolated and vulnerable.
Responding to China’s anti-market behavior strongly enough to discourage it — and yet not so strongly as to inadvertently replicate it — is challenging but essential to the well-being of our economy and that of our peers.
The right approach is for the United States to build an international coalition to send a clear message to China that its current policy choices are neither acceptable nor sustainable. Other countries are moving in this direction. In recent months, Brazil has launched several investigations into the alleged dumping of Chinese industrial products. Vietnam, Thailand, South Africa and Mexico have each taken steps to protect domestic industries from Chinese exports. The European Union has undertaken an anti-dumping investigation into Chinese EVs. And India already has more anti-dumping orders than any other country.
A global coalition could start with harmonized tariffs targeting Chinese exports.
These tariffs should focus on areas such as steel, where manufacturing capacity is already projected to meet global demand, and clean energy components, where China’s strategy to dominate the market is evident and the economic and planetary costs of concentration are especially acute. In some sectors, including steel and energy-intensive elements of the clean energy supply chain, such as polysilicon and battery chemicals, tariffs could reflect the carbon content of products to encourage decarbonization as we move toward more balanced trade. Eventually, this regime could replace the across-the-board tariffs the Trump administration imposed on China, which are too weak in industries with overcapacity and needlessly hit other sectors.
The United States and the E.U. have been working on an effort to harmonize external tariffs on steel and aluminum, but those talks stalled last fall. Washington should use the Group of Seven and Group of 20 meetings this year to seek broader support for this approach, including among key emerging economies such as Brazil and other industrialized economies such as Canada and Japan. The E.U. should reengage in these efforts and support a pragmatic framework that can accommodate a coalition broad enough to have real impact.
Ultimately, China alone will determine its growth trajectory. But in the meantime, these steps would give our industries a level playing field and send a clear signal to Beijing on the need to reform its economic policies. We and other concerned nations have the power — and the obligation — to act.
Bagikan Berita Ini
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