'Overcapacity' claim masks anxiety over China's green edge

The West's renewed warnings about Chinese "overcapacity" reflect a deeper concern: China's growing strength in clean energy and advanced manufacturing is challenging long-established Western advantages in some of the industries expected to shape the global economy.

In recent months, politicians and media commentators in the United States and other Western economies have increasingly portrayed the expansion of China's electric vehicle, lithium battery, solar and advanced manufacturing industries as a new "China shock". What began as a debate over industrial capacity has increasingly become an argument for higher tariffs, tighter investment restrictions and supply chains organized around geopolitical considerations.

China's Ministry of Commerce recently responded with a position paper, arguing that industrial capacity should be assessed against global supply and demand, growth potential and business performance rather than simply comparing production with domestic consumption in a single country.

This distinction matters. Major manufacturing economies routinely produce more of certain goods than their domestic markets consume. German automakers depend heavily on overseas sales, and Airbus and Boeing manufacture aircraft for customers worldwide. Few would describe their export-oriented production as evidence of overcapacity simply because output exceeds domestic demand.

Applying such a test selectively to China risks turning an economic concept into an instrument of trade policy. Genuine overcapacity can exist in individual sectors, but large exports or rapid production expansion alone do not establish that capacity is excessive.

Much of China's manufacturing strength has been built through years of intense domestic competition, investment and technological upgrading. This is particularly evident in EVs, lithium batteries and photovoltaic equipment, where companies compete fiercely on price, technology, quality and speed of commercialization.

China's EV industry, for example, rests on an extensive industrial ecosystem covering critical mineral processing, batteries, motors, electronic control systems, vehicle manufacturing and charging infrastructure. Close links between suppliers and manufacturers have shortened development cycles, lowered costs and enabled companies to respond quickly to changes in demand.

Technological progress has reinforced these advantages. Chinese battery producers have made advances in lithium iron phosphate batteries, battery integration and safety, and solar manufacturers have continuously improved photovoltaic technology and production efficiency. Large-scale manufacturing has further reduced unit costs and made new technologies more affordable.

These are characteristics of industrial competitiveness, and don't necessarily point to examples of market distortion.

Government policy has undoubtedly played a role in China's industrial development. But industrial policy is hardly unique to China. The US has committed hundreds of billions of dollars in incentives for clean energy, EVs, batteries and other strategic industries, including measures favoring production in the US or North America. European governments and institutions have similarly provided extensive support for renewable energy, batteries and advanced manufacturing.

It is therefore increasingly difficult to divide the world neatly between Chinese "State intervention" and Western "market competition". A more credible approach would examine whether specific policies create identifiable distortions and address them through transparent, proportionate and rules-based measures.

There is another weakness in the overcapacity argument: capacity cannot be assessed solely against today's demand, particularly in industries central to the global energy transition.

The world is still far from completing the shift to low-carbon energy. The International Energy Agency expects renewable energy deployment to expand substantially through the end of the decade. Electrification will require enormous quantities of solar panels, batteries, power equipment, EVs and support infrastructure.

Viewed against those requirements, the challenge may not be too much high-quality green manufacturing capacity, but whether enough affordable capacity can be supplied at the speed and scale required.

Chinese production has helped reduce the cost of solar panels, batteries and other clean-energy technologies. This matters particularly for developing economies, where affordability can determine whether large-scale energy transition projects are commercially viable. Cheaper machinery, components and technologies can also lower barriers to industrialization and help emerging economies develop manufacturing capacity of their own.

The intensity of the Western debate therefore points to a broader source of anxiety: the changing geography of industrial competitiveness.

For decades, advanced Western economies dominated many high-value manufacturing industries, while China's role in global value chains was largely concentrated in labor-intensive production and assembly for multinational companies. That division of labor has changed rapidly.

Chinese companies are increasingly competing in sectors with higher technological barriers and greater strategic importance. EVs, renewable energy equipment, batteries, industrial machinery and sophisticated electronics are becoming important parts of China's manufacturing and export base.

This creates genuine pressure on established producers. But competition from increasingly efficient rivals is not in and of itself evidence of unfair trade.

The lesson is not that governments should ignore unfair competition, but that restricting one competitor does not eliminate the economic forces reshaping an industry.

A similar pattern could emerge in clean technology. Barriers against Chinese EVs, lithium batteries and solar products may alter trade flows, and they can also increase costs for consumers and manufacturers, encourage production to move through third countries and make supply chains more complicated without addressing the underlying competitiveness gap.

The greater danger is that ordinary economic competition becomes increasingly treated as a national security issue. Once industrial capacity, exports and investment are routinely framed through the language of security, almost any competitive advantage can become grounds for tariffs, export controls, investment screening or exclusion from supply chains.

The result could be higher energy and production costs, slower technological progress and innovation, and greater risks of retaliation and supply-chain decoupling. Such fragmentation would ultimately undermine the broader interests of the global economy.

Industrial capacity should be assessed comprehensively, taking into account global supply and demand, growth potential and corporate performance, rather than simply comparing exports with domestic demand. China's manufacturing strengths should not be broadly characterized as "overcapacity" simply because its products are competitive in global markets.

Markets require rules, and governments have a legitimate responsibility to enforce them. But those rules should protect fair competition rather than particular competitors. Issues related to industrial capacity should not be politicized or turned into tools of geopolitical competition.

Allowing markets to play their role, maintaining transparent international rules and keeping trade and investment channels open offer a more sustainable path. The alternative is a cycle in which anxiety produces protectionism, protectionism accelerates fragmentation and fragmentation raises costs for everyone.

The debate over "overcapacity" is therefore about more than how much China produces. It is about how the global economy responds to a shift in industrial competitiveness. Adapting through innovation and competition may be difficult for established producers, but trying to hold back that shift through protectionism risks leaving everyone worse off.

The writer is a research fellow and deputy director of the Institute of American and European Studies at the China Center for International Economic Exchanges.

The views do not necessarily reflect those of China Daily.