Why China Is Starting a New Trade War
Wall Street Journal
By Lingling Wei and Jason DouglasFollow
Aug. 22, 2024 9:00 pm ET
China is cranking up its massive export machine again, and this time there’s nowhere for competitors to hide.
A Massachusetts startup called CubicPV bet on silicon wafers, a high-tech component in solar panels. Buoyed by President Biden’s climate legislation enacted two years ago, with billions of dollars in tax credits and government loans, CubicPV announced plans in late 2022 for a $1.4 billion wafer plant in Texas.
Since then, China has nearly doubled its output of silicon wafers, way more than it needs. The extra wafers had to go somewhere—and they went overseas, pushing prices down by 70%. CubicPV had to halt its production plan early this year, putting engineers and other employees out of work, citing “a distorted market as a result of China’s overcapacity.”
Thousands of miles away, in Chile, iron ore miner and steelmaker CAP is grappling with Beijing’s continued commitment to low-end commodity manufacturing, as an onslaught of cheap Chinese metal hits its shores. The firm said this month that it would shutter its giant Huachipato steel mill in central Chile indefinitely, with the loss of some 2,200 jobs. The company said it can’t compete with low-price Chinese metal even after the government raised tariffs on steel bars and other imported products.
Beijing’s solution to a weak Chinese economy—putting the country’s factory sector on steroids—is squeezing businesses around the world and raising the specter of a new global trade war.
The European Union’s recent decision to impose tariffs on imported Chinese electric vehicles is only the latest sign of deepening tensions. The U.S. earlier this year hiked levies on Chinese steel, aluminum, EVs, solar cells and other products. Turkey has jacked up duties on Chinese EVs, while Pakistan raised tariffs on Chinese stationery and rubber.
Other countries have opened antidumping investigations to see whether Chinese goods are being sold below fair value. India is examining Chinese pigments and chemicals. Japan is looking at electrodes. The U.K. is investigating imports of excavators and biodiesel, while Argentina and Vietnam are probing Chinese microwave ovens and wind towers.
Behind it all is a bold but risky calculation by Beijing that investing more in manufacturing can restore the country’s economic vitality and build up its industrial resilience without triggering so much international pushback that it threatens China’s future.
Interviews with policy advisers in Beijing and people who have consulted with Chinese officials show that China’s leadership faced a pivotal crossroads last year, as the country’s real-estate bust brought the economy to one of its weakest points in decades.
Some advisers argued that China’s economy needed a fundamental rethink, graduating from its traditional heavy reliance on manufacturing and construction and instead prioritizing more domestic consumption—a shift that would make China more like the U.S., and potentially put it on a more stable growth path.
Instead, Chinese leader Xi Jinping ordered officials to double down on the country’s state-led manufacturing model, with billions of dollars in fresh subsidies and credit. He used a slogan to make sure officials got the message: “Establish the new before breaking the old,” or xian li hou po in Chinese.
The “new” in Xi’s model doesn’t mean a pivot to a new growth model. Instead, it is the top leader’s way of refining his idea of what kind of manufacturing for the state to back. In essence, the phrase calls for building industries China wants to dominate for the future—such as EVs, semiconductors and green energy—while also maintaining the country’s traditional areas of strength in “old” sectors such as steel. Any overcapacity problems can be punted to the future.
The mantra appeared in an official account of a major government confab last December, when it mapped out its economic agenda for 2024. The readout acknowledged “overcapacity in some industries” and “insufficient effective demand,” yet Xi’s slogan still indicated an emphasis on expanding industrial production.
Xi repeated the slogan at an annual legislative session in March, just weeks before Treasury Secretary Janet Yellen traveled to Beijing to warn the leadership about the global consequences of China’s manufacturing overcapacity.
Two principles have guided Xi’s thinking, Chinese policy advisers say. The first is that China must build an all-encompassing industrial supply chain that can keep the domestic economy running in the event of severe sanctions by the U.S. and other Western countries. In the top leader’s views, advisers say, industrial security sits at the core of China’s stability as tensions with the developed world rise.
The second is a deep-rooted philosophical objection to U.S.-style consumption, which Xi sees as wasteful.
That leaves China with few options other than investing in exports to stabilize its weakened economy and create jobs to make up for losses in domestic construction.
The upshot: Rather than Chinese workers losing their jobs, steelworkers in Brazil, chemical engineers in Europe, and solar panel makers in the U.S. may lose theirs.
Chinese support kicks in
Official data show Xi’s priorities filtering through the economy.
Government subsidies, though long central to China’s economic playbook, have also ramped up significantly. Companies listed on the Shenzhen and Shanghai stock exchanges declared $33 billion in government subsidies in 2023, according to figures from data provider Wind—23% more than in 2019.
Chinese battery maker CATL received the equivalent of around $790 million, double the 2022 level. Other big recipients included PetroChina, China Mobile and Warren Buffett-backed carmaker BYD.
In all, 99% of publicly listed Chinese companies now disclose some form of subsidy, according to the Kiel Institute, a German think tank. China spends about 4.9% of its gross domestic product on nurturing industries—several times higher than the U.S., Germany and Japan, according to Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington.
Craig Allen, president of the U.S.-China Business Council, a lobbying group for American companies in China, said Xi’s manufacturing fixation was on display when he met recently with the governor of one of China’s poorest farm provinces.
When Allen asked the governor about his economic priorities, the governor listed semiconductors, software, biotechnology, robotics, aerospace, batteries, and EVs.
“I would have thought that addressing the immediate needs of his overwhelmingly rural constituents, such as improving agricultural harvests, might be at the top of his economic priorities list,” Allen said.
The fire hose of financial support looks set to keep spraying. The People’s Bank of China in April said it set up a new facility with roughly $70 billion to help bank lending to tech firms. In May, a national fund aimed at financing semiconductor production raised $48 billion from state-owned banks and other government-linked investment vehicles.
More cars and chemicals
In a series of articles published by the People’s Daily in May, Beijing defended its ability to manufacture and export as a positive for the world rather than a problem, saying the U.S. and its allies are “hyping” China’s overcapacity to gain competitive advantages for themselves.
“China’s production of advanced electric vehicles, lithium-ion batteries and photovoltaic products, first met our domestic demand, but also enrich global supply,” Chinese premier Li Qiang said in an address to the World Economic Forum’s June meeting in Dalian, China. The real source of China’s manufacturing edge isn’t government subsidies but its huge scale, which helps pin down costs, he added.
The impact, either way, is inescapable. Industrial production in the first quarter in China was 8% higher than it was when China’s real estate crunch got serious at the end of 2021, easily outstripping output growth in the U.S., Europe and Japan, according to data compiled by CPB Netherlands Bureau for Economic Policy Analysis, a Dutch research institute.
China has added capacity to produce some 40 million vehicles a year, even though it sells only around 22 million at home. It’s on track to make around 750 gigawatts of solar cells this year, despite only needing 220 gigawatts domestically in 2023. And it is expected to account for 80% of the world’s new supply this year in basic chemicals such as ethylene and propylene, used to make garbage bags, toys and cosmetics—even though prices in China have been falling for 19 months, a sign of oversupply.
At the same time, output of steel, one of China’s “old” industries, increased last year despite waning domestic demand due to the continuing property crisis. Industry executives say Beijing has been prodding them to invest more in upgrading steel production through clean technologies and other means.
Overall Chinese export volumes, stripping out the effect of exchange-rate movements, are up 10% since the end of 2021, versus 1.5% for world exports in total. China’s steel exports jumped 36% last year from a year earlier.
By doubling down on manufacturing when it already produces close to a third of global factory output, China is effectively asking the rest of the world not to expand its share of production, but to reduce it, said Michael Pettis, a professor of finance at Peking University who has written extensively on imbalances in global trade.
“The rest of the world wants the opposite. The world cannot accommodate it,” he said.
Pain spreads
The U.S. is in some ways one of the least-affected countries, because it has high tariffs on many Chinese goods that help shield U.S. workers. But Washington’s goal of expanding U.S. manufacturing can’t be achieved if overproduction in China continues, and some industries—especially renewable energy—are feeling pressure.
Loans to industry, including manufacturing firms, have increased 63% since the end of 2021, while Chinese banks have pulled back sharply on lending to real-estate developers.
Qcells, a global clean energy company owned by South Korean conglomerate Hanwha, which has a big presence in the U.S., recently said the company and its peers are losing millions of dollars a month.
The International Trade Commission, a federal agency that analyzes trade issues, in June gave its initial go-ahead to an antidumping petition backed by American solar manufacturers who allege solar cells and modules made by Chinese companies are sold in the U.S. for below market value and unfairly subsidized.
Other parts of the world are bearing more of the brunt. European automakers have axed more than 10,000 jobs as more Chinese EVs arrive. Antonello Ciotti, chairman of PET Europe, a trade association for European makers of chemicals used in polyester fibers for clothing and recyclable containers, said European PET producers shed hundreds of jobs as firms slashed costs and production to deal with Chinese imports. The EU late last year imposed antidumping duties on certain imports of Chinese PET.
The risk for Xi is that unlike the first “China Shock” in the early 2000s, when cheap Chinese manufacturing wiped out an estimated two million jobs in the U.S. but also benefited Western consumers, the latest push could trigger so many protectionist measures that China winds up with few sizable markets to sell to.
In the past, some countries didn’t mind China’s overcapacity as much, since many companies—such as Germany’s automakers—benefited from their access to cheap Chinese-made parts, notes Jacob Gunter, an analyst at the Mercator Institute for China Studies in Berlin.
“But now, China is aiming its industrial policy right at the heart of the Western economy,” Gunter said.
Policy reversal
Xi’s “establish the new before breaking the old” strategy marks a shift from previous years when Beijing, at times led by Xi himself, tried hard to reduce overcapacity, not add to it.
China has suffered from persistent overcapacity in the past, at times raising ire from its trading partners for depressing global prices for steel and other goods.
In 2015, Xi entrusted his economic czar at the time, Liu He, to implement reforms that led to closures of many small and privately owned steel mills and other businesses. For a while, it seemed as if Xi and his economic team were ready to finally tackle overproduction.
But as tensions with the U.S. escalated in recent years, and China’s economy weakened, Xi’s views changed, Chinese policy advisers say. He grew more concerned about ensuring China could produce everything it needed in the event of a conflict with the U.S., and became less sympathetic to Western complaints.
Chinese officials are now out in force denying the country has overcapacity because Beijing doesn’t want to give Washington, Brussels and others justification for tariffs or other retaliatory actions, policy advisers and people who consulted with Chinese officials say.
Still, some of Xi’s closest lieutenants have raised worries internally that government support was leading to extreme overcapacity in sectors such as EVs and batteries, making those sectors less commercially viable.
“Everybody makes stuff in China,” said Joerg Wuttke, former president of the European Chamber of Commerce in China and now a partner at Washington consulting firm DGA Group. “But nobody makes money.”
By Lingling Wei and Jason DouglasFollow
Aug. 22, 2024 9:00 pm ET
China is cranking up its massive export machine again, and this time there’s nowhere for competitors to hide.
A Massachusetts startup called CubicPV bet on silicon wafers, a high-tech component in solar panels. Buoyed by President Biden’s climate legislation enacted two years ago, with billions of dollars in tax credits and government loans, CubicPV announced plans in late 2022 for a $1.4 billion wafer plant in Texas.
Since then, China has nearly doubled its output of silicon wafers, way more than it needs. The extra wafers had to go somewhere—and they went overseas, pushing prices down by 70%. CubicPV had to halt its production plan early this year, putting engineers and other employees out of work, citing “a distorted market as a result of China’s overcapacity.”
Thousands of miles away, in Chile, iron ore miner and steelmaker CAP is grappling with Beijing’s continued commitment to low-end commodity manufacturing, as an onslaught of cheap Chinese metal hits its shores. The firm said this month that it would shutter its giant Huachipato steel mill in central Chile indefinitely, with the loss of some 2,200 jobs. The company said it can’t compete with low-price Chinese metal even after the government raised tariffs on steel bars and other imported products.
Beijing’s solution to a weak Chinese economy—putting the country’s factory sector on steroids—is squeezing businesses around the world and raising the specter of a new global trade war.
The European Union’s recent decision to impose tariffs on imported Chinese electric vehicles is only the latest sign of deepening tensions. The U.S. earlier this year hiked levies on Chinese steel, aluminum, EVs, solar cells and other products. Turkey has jacked up duties on Chinese EVs, while Pakistan raised tariffs on Chinese stationery and rubber.
Other countries have opened antidumping investigations to see whether Chinese goods are being sold below fair value. India is examining Chinese pigments and chemicals. Japan is looking at electrodes. The U.K. is investigating imports of excavators and biodiesel, while Argentina and Vietnam are probing Chinese microwave ovens and wind towers.
Behind it all is a bold but risky calculation by Beijing that investing more in manufacturing can restore the country’s economic vitality and build up its industrial resilience without triggering so much international pushback that it threatens China’s future.
Interviews with policy advisers in Beijing and people who have consulted with Chinese officials show that China’s leadership faced a pivotal crossroads last year, as the country’s real-estate bust brought the economy to one of its weakest points in decades.
Some advisers argued that China’s economy needed a fundamental rethink, graduating from its traditional heavy reliance on manufacturing and construction and instead prioritizing more domestic consumption—a shift that would make China more like the U.S., and potentially put it on a more stable growth path.
Instead, Chinese leader Xi Jinping ordered officials to double down on the country’s state-led manufacturing model, with billions of dollars in fresh subsidies and credit. He used a slogan to make sure officials got the message: “Establish the new before breaking the old,” or xian li hou po in Chinese.
The “new” in Xi’s model doesn’t mean a pivot to a new growth model. Instead, it is the top leader’s way of refining his idea of what kind of manufacturing for the state to back. In essence, the phrase calls for building industries China wants to dominate for the future—such as EVs, semiconductors and green energy—while also maintaining the country’s traditional areas of strength in “old” sectors such as steel. Any overcapacity problems can be punted to the future.
The mantra appeared in an official account of a major government confab last December, when it mapped out its economic agenda for 2024. The readout acknowledged “overcapacity in some industries” and “insufficient effective demand,” yet Xi’s slogan still indicated an emphasis on expanding industrial production.
Xi repeated the slogan at an annual legislative session in March, just weeks before Treasury Secretary Janet Yellen traveled to Beijing to warn the leadership about the global consequences of China’s manufacturing overcapacity.
Two principles have guided Xi’s thinking, Chinese policy advisers say. The first is that China must build an all-encompassing industrial supply chain that can keep the domestic economy running in the event of severe sanctions by the U.S. and other Western countries. In the top leader’s views, advisers say, industrial security sits at the core of China’s stability as tensions with the developed world rise.
The second is a deep-rooted philosophical objection to U.S.-style consumption, which Xi sees as wasteful.
That leaves China with few options other than investing in exports to stabilize its weakened economy and create jobs to make up for losses in domestic construction.
The upshot: Rather than Chinese workers losing their jobs, steelworkers in Brazil, chemical engineers in Europe, and solar panel makers in the U.S. may lose theirs.
Chinese support kicks in
Official data show Xi’s priorities filtering through the economy.
Government subsidies, though long central to China’s economic playbook, have also ramped up significantly. Companies listed on the Shenzhen and Shanghai stock exchanges declared $33 billion in government subsidies in 2023, according to figures from data provider Wind—23% more than in 2019.
Chinese battery maker CATL received the equivalent of around $790 million, double the 2022 level. Other big recipients included PetroChina, China Mobile and Warren Buffett-backed carmaker BYD.
In all, 99% of publicly listed Chinese companies now disclose some form of subsidy, according to the Kiel Institute, a German think tank. China spends about 4.9% of its gross domestic product on nurturing industries—several times higher than the U.S., Germany and Japan, according to Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington.
Craig Allen, president of the U.S.-China Business Council, a lobbying group for American companies in China, said Xi’s manufacturing fixation was on display when he met recently with the governor of one of China’s poorest farm provinces.
When Allen asked the governor about his economic priorities, the governor listed semiconductors, software, biotechnology, robotics, aerospace, batteries, and EVs.
“I would have thought that addressing the immediate needs of his overwhelmingly rural constituents, such as improving agricultural harvests, might be at the top of his economic priorities list,” Allen said.
The fire hose of financial support looks set to keep spraying. The People’s Bank of China in April said it set up a new facility with roughly $70 billion to help bank lending to tech firms. In May, a national fund aimed at financing semiconductor production raised $48 billion from state-owned banks and other government-linked investment vehicles.
More cars and chemicals
In a series of articles published by the People’s Daily in May, Beijing defended its ability to manufacture and export as a positive for the world rather than a problem, saying the U.S. and its allies are “hyping” China’s overcapacity to gain competitive advantages for themselves.
“China’s production of advanced electric vehicles, lithium-ion batteries and photovoltaic products, first met our domestic demand, but also enrich global supply,” Chinese premier Li Qiang said in an address to the World Economic Forum’s June meeting in Dalian, China. The real source of China’s manufacturing edge isn’t government subsidies but its huge scale, which helps pin down costs, he added.
The impact, either way, is inescapable. Industrial production in the first quarter in China was 8% higher than it was when China’s real estate crunch got serious at the end of 2021, easily outstripping output growth in the U.S., Europe and Japan, according to data compiled by CPB Netherlands Bureau for Economic Policy Analysis, a Dutch research institute.
China has added capacity to produce some 40 million vehicles a year, even though it sells only around 22 million at home. It’s on track to make around 750 gigawatts of solar cells this year, despite only needing 220 gigawatts domestically in 2023. And it is expected to account for 80% of the world’s new supply this year in basic chemicals such as ethylene and propylene, used to make garbage bags, toys and cosmetics—even though prices in China have been falling for 19 months, a sign of oversupply.
At the same time, output of steel, one of China’s “old” industries, increased last year despite waning domestic demand due to the continuing property crisis. Industry executives say Beijing has been prodding them to invest more in upgrading steel production through clean technologies and other means.
Overall Chinese export volumes, stripping out the effect of exchange-rate movements, are up 10% since the end of 2021, versus 1.5% for world exports in total. China’s steel exports jumped 36% last year from a year earlier.
By doubling down on manufacturing when it already produces close to a third of global factory output, China is effectively asking the rest of the world not to expand its share of production, but to reduce it, said Michael Pettis, a professor of finance at Peking University who has written extensively on imbalances in global trade.
“The rest of the world wants the opposite. The world cannot accommodate it,” he said.
Pain spreads
The U.S. is in some ways one of the least-affected countries, because it has high tariffs on many Chinese goods that help shield U.S. workers. But Washington’s goal of expanding U.S. manufacturing can’t be achieved if overproduction in China continues, and some industries—especially renewable energy—are feeling pressure.
Loans to industry, including manufacturing firms, have increased 63% since the end of 2021, while Chinese banks have pulled back sharply on lending to real-estate developers.
Qcells, a global clean energy company owned by South Korean conglomerate Hanwha, which has a big presence in the U.S., recently said the company and its peers are losing millions of dollars a month.
The International Trade Commission, a federal agency that analyzes trade issues, in June gave its initial go-ahead to an antidumping petition backed by American solar manufacturers who allege solar cells and modules made by Chinese companies are sold in the U.S. for below market value and unfairly subsidized.
Other parts of the world are bearing more of the brunt. European automakers have axed more than 10,000 jobs as more Chinese EVs arrive. Antonello Ciotti, chairman of PET Europe, a trade association for European makers of chemicals used in polyester fibers for clothing and recyclable containers, said European PET producers shed hundreds of jobs as firms slashed costs and production to deal with Chinese imports. The EU late last year imposed antidumping duties on certain imports of Chinese PET.
The risk for Xi is that unlike the first “China Shock” in the early 2000s, when cheap Chinese manufacturing wiped out an estimated two million jobs in the U.S. but also benefited Western consumers, the latest push could trigger so many protectionist measures that China winds up with few sizable markets to sell to.
In the past, some countries didn’t mind China’s overcapacity as much, since many companies—such as Germany’s automakers—benefited from their access to cheap Chinese-made parts, notes Jacob Gunter, an analyst at the Mercator Institute for China Studies in Berlin.
“But now, China is aiming its industrial policy right at the heart of the Western economy,” Gunter said.
Policy reversal
Xi’s “establish the new before breaking the old” strategy marks a shift from previous years when Beijing, at times led by Xi himself, tried hard to reduce overcapacity, not add to it.
China has suffered from persistent overcapacity in the past, at times raising ire from its trading partners for depressing global prices for steel and other goods.
In 2015, Xi entrusted his economic czar at the time, Liu He, to implement reforms that led to closures of many small and privately owned steel mills and other businesses. For a while, it seemed as if Xi and his economic team were ready to finally tackle overproduction.
But as tensions with the U.S. escalated in recent years, and China’s economy weakened, Xi’s views changed, Chinese policy advisers say. He grew more concerned about ensuring China could produce everything it needed in the event of a conflict with the U.S., and became less sympathetic to Western complaints.
Chinese officials are now out in force denying the country has overcapacity because Beijing doesn’t want to give Washington, Brussels and others justification for tariffs or other retaliatory actions, policy advisers and people who consulted with Chinese officials say.
Still, some of Xi’s closest lieutenants have raised worries internally that government support was leading to extreme overcapacity in sectors such as EVs and batteries, making those sectors less commercially viable.
“Everybody makes stuff in China,” said Joerg Wuttke, former president of the European Chamber of Commerce in China and now a partner at Washington consulting firm DGA Group. “But nobody makes money.”
