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WHY CALL IT OVERCAPACITY?

A Misunderstood Necessity and the Reality of Industrial Adjustment

 

Overcapacity as a Natural Stage in Industry Evolution:
Overcapacity often arises during the growth phase of emerging industries due to the challenge of predicting stable market demand. This phase, marked by experimentation and refinement, is an essential—albeit uncomfortable—step toward industrial maturity. Historical examples from the U.S., such as the expansion of railroads and the automobile sector, underscore its universality. However, in 99.99% of cases, any savvy entrepreneur bases production strictly on confirmed orders, minimizing risks and ensuring efficient allocation of resources.

 

Understanding Overcapacity: When Operators Self-Adjust:
Overcapacity is not simply a scenario where supply exceeds market demand. Instead, it reflects the realities of an industrial system with diverse operators. When demand falls below a certain threshold, the less competitive operators will naturally reduce or cease production of certain goods. This self-regulating mechanism ensures the system adapts, reallocating resources to areas with stronger market potential. Therefore, what is often labeled as “overcapacity” is better understood as a dynamic rebalancing of industrial output.

 

The Chinese Government’s Active Role in Managing Overcapacity:
Contrary to popular belief, the Chinese government does not favor overcapacity and has taken significant steps to address it. Historical interventions, such as the “cut overcapacity” campaign in 2016, demonstrate a proactive approach to reducing excess supply through administrative and market-based tools. While local government subsidies may contribute to overcapacity in some cases, the macroeconomic implications under China’s floating exchange rate are complex and do not inherently harm global competitiveness.

 

overcapacity in china

Overcapacity and U.S.-China Trade Tensions:
The competitive rise of Chinese exports has led to significant political and economic challenges for the U.S., particularly in industries like manufacturing and automotive. The first “China shock” following WTO accession deeply affected Rust Belt communities, and fears of a second wave—driven by advances in Chinese sectors such as electric vehicles—highlight growing concerns. Overcapacity disputes in these contexts are as much about politics and industrial strategy as they are about economics.

Overcapacity in a Cyclical Context:
China’s record trade surplus, fueled by weakened domestic demand due to a real estate downturn and pandemic aftershocks, has heightened global competitive pressures. This surplus has intensified disputes over overcapacity, particularly in sectors where global demand remains sluggish.

Strategic Responses for Sustainable Solutions:

For the U.S.:

  • Over-reliance on protectionist measures like tariffs risks perpetuating inefficiencies and raising consumer costs. While these measures provide temporary relief for domestic industries, they fail to address long-term structural issues.

For China:

    • Expand domestic consumption to absorb excess supply and stimulate growth.
    • Stabilize aggregate demand to mitigate economic fluctuations.
    • Gradually phase out support for highly competitive industries, encouraging international market integration.
    • Advocate for a rules-based international trade system centered on the WTO to ensure fair trade and rational dispute resolution.
    • Embrace flexibility and cooperation to navigate trade disputes while prioritizing market-driven solutions to address overcapacity sustainably.

In conclusion, overcapacity should not be viewed as an absolute problem but as a necessary adjustment phase for industries to evolve. With production overwhelmingly tied to confirmed orders, the market ensures that only the most competitive operators persist, while less efficient ones exit, driving innovation and efficiency in the global industrial landscape.

china overcapacity
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