Europe fears China will dump excess production

Mark O'Neill February 05, 2024 22:57

With weak domestic consumption, a faltering property sector, deflationary pressure and low investor confidence, China has one proven way to drive the economy and reach its 2024 growth target of five per cent – exports.

In 2023, China trade surplus reached US$823.2 billion, with exports of US$3.38 trillion, down 4.6 per cent on 2022, the first annual drop since 2016. The fastest growth in exports was in “the three new industries” – electric vehicles (EV), solar energy products and lithium batteries. Their exports grew 30 per cent year-on-year to US$139.3 billion.

This was good news for China – but not for its main trading partners, especially the European Union, a priority market for the three industries.

Such is the alarm among producers in Europe that last September the European Commission started an anti-subsidy investigation into Chinese electric vehicle (EV) production that is due to conclude this year. It could lead to higher tariffs for Chinese imports. It is also considering emergency support for European makers of solar panels.

“There is huge global overcapacity and European manufacturers cannot sell the products without making huge losses. We need to deal with the Chinese threat,” said Johan Lindahl, secretary-general of industry group the European Solar Manufacturing Council (ESMC).

The ESMC said manufacturers were “on the brink” and that the bulk of Europe’s production could be shut within three months. “Either [manufacturers] will be forced into bankruptcy or those that . . . have the resources will move to the US,” said Lindahl.

In response, the European Commission has said that “all options were on the table”, including an anti-dumping investigation against China that would lead to punitive tariffs.

Imports of low-cost, high-tech EVs pose an existential threat to German, French and Italian automakers.

Joerg Wuttke, President Emeritus of the European Union Chamber of Commerce, said that China’s EVs were following a path similar to other sectors favoured by Beijing. “Everyone has an endless supply of loans and support from the local government. Whenever China scales up, at the end it becomes very cheap and it has only one safety valve – exports.

“It is the Chinese taxpayer who ends up footing the bill. Beijing is very weak in making a decent bankruptcy process – as a result, everyone finances local champions and bankrupts local finances. The hot issues between EU and China now are EVs and solar panels. Without urgent action, the EU solar panel industry will close down in face of the Chinese competition,” he said.

China has an astonishing over-capacity in manufacturing. It has 60 per cent of global manufacturing capacity, 31 per cent of global production and 14 per cent of global consumption. It sells 23 million cars per year and in 2023 exported three million. But its annual capacity is 41-50 million -- that 27 million equals the entire production of US and Europe! It has 140 car companies and needs about 40.

CSIS, the U.S. think-tank, estimated Beijing’s cumulative state spending on the EV sector between 2009 and 2021 at more than US$125 billion.

Economists say that a conflict is worsening between two economic models. The Chinese one combines state policy and financial support, both subsidies and loans, into sectors considered strategic. The “three new industries” are a good example. The western model is market-oriented capitalism, with a limited role for state policy and funding.

Developed countries, especially those in the EU, want China to dilute its industrial policies and focus on the domestic economy.

In 2022, China posted a record trade surplus of nearly 400 billion euros with the EU, the best evidence of the imbalance between the two systems.

Foreign governments point to the “Made in China 2025” plan which outlines 10 strategic industries in which China must have a strong or dominant share in the world. They include IT, digital machine tools, robotics, aerospace and new energy vehicles.

To achieve a domestic market share of more than 75 per cent and world market share of 40-50 per cent, electric battery makers were offered subsidies that could account for more than 50 per cent of the cost of the product.

Wuttke said that China would have more and more stress with its trading partners, because this excess capacity had to go somewhere.

“This is already ensuring that companies make a lot of products but no profits. During my time as President of the EU Chamber in Beijing, I repeatedly criticized the overcapacity and commissioned studies to prove this. With its overcapacity, China is not only damaging its trade relationship with Europe, but also itself. China produces, but without profit. We have to learn to be clear with China and say that we can only accept it to a certain extent,” he said.

Mark O'Neill

A Hong Kong-based writer, teacher and speaker.