SUN Yanhong: Hyping up China's 'overcapacity' does not help the EU improve its industrial competitiveness

Inside an EV manufacturing factory in Nanchang, the capital of Jiangxi Province, China, April 9, 2024. /CFP 

Editor's note: Recently, some Westerners have been making noises about China's "overcapacity," accusing the country of "flooding" the global market with cheap products and "distorting" the market rules. Is there overcapacity in China? Is the export of Chinese products an attempt to digest obsolete capacity or to revive the global economy? Will anti-China policies protect or harm Western industries? CGTN has introduced a six-part series "Debunk China's overcapacity fallacy" to analyze these matters. The third essay focuses on how the cooperation between China and the EU helps the EU boost its industrial competitiveness. Sun Yanhong, a special commentator on current affairs for CGTN, is a Senior Research Fellow and Head of the Division of European Economic Studies at the Institute of European Studies (IES), Chinese Academy of Social Sciences (CASS). The article reflects the author's opinions and not necessarily those of CGTN.   

Recently, the U.S. and the EU have been criticizing China for having "overcapacity" in green industries. During an April 9 press conference, European Commission President Ursula von der Leyen emphasized the necessity of the EU to take a tough stance in its dialogue with China over what the union perceived as unfair trade practices, echoing the "overcapacity" accusation against China by the U.S.   

In fact, the West's paranoia about China's "overcapacity" is a false proposition. The U.S. and the EU taking protectionist measures against Chinese exports under the pretext of "overcapacity" will not help improve their own industrial competitiveness but cause their domestic enterprises to lose the drive for innovation. It will also endanger the stability of global supply chains, dragging down the green transformation of the global economy.   

For the EU, prioritizing concerns about China's "overcapacity" over addressing its own economic structure will inflict greater harm on its industrial competitiveness. From the 1980s to the outbreak of the 2008 financial crisis, many EU member states tended to underestimate manufacturing, thus leading to an accelerated process of "de-industrialization." In 2007, roughly speaking, the EU's manufacturing value added accounted for 16 percent of its GDP. In 2012, the EU launched its "re-industrialization" strategy, "aimed at increasing the share of manufacturing in the European economy from 15 percent to 20 percent of GDP by 2020." However, due to the European sovereign debt crisis and Brexit, the organization failed to reach the goal, with the number standing still at 15 percent.  

Then the Russia-Ukraine conflict in 2022 led to a new round of "de-industrialization" in Europe. High energy prices and high inflation have significantly increased the costs of enterprises, and many of them were forced to reduce or shut down production. According to a report released by Creditreform Wirtschaftsforschung, in Germany, the number of corporate insolvencies increased by 23.5 percent year-on-year in 2023. Many companies are planning or have already begun to transfer their businesses to countries with relatively low energy prices, and dozens of German companies, including Siemens, are boosting their investment in the U.S. The high costs and the ongoing trend of de-industrialization have made it difficult for the EU's green industries to improve their competitiveness. Besides, due to various factors, the EU is trailing behind in crucial areas of the digital economy, including artificial intelligence, big data and semiconductors. The lag is detrimental to the development of the EU's green industries. For example, the limited innovation capability in smart driving systems among European automakers is a significant reason for their disadvantage in the electric vehicle (EV) sector.   

As green transformation has become a global trend, China appears capable of offsetting the EU's shortcomings, and is willing to work with the EU to promote the development of green industries. 

Inside a lithium-ion batteries manufacturing factory in Ji'an, Jiangxi Province, China, April 22, 2024. /CFP 

After over 40 years of development since the reform and opening up, China has formed a manufacturing sector with the most complete industrial categories and globally leading supply chain support system. In 2023, China's manufacturing sector contributed to nearly 30 percent of the global total added value, maintaining its position at the top of global rankings for 14 consecutive years. Of the manufacturing sector, the "new three" industries of solar panels, lithium-ion batteries and EVs stand out as strong drivers of China's economic performance. The advantages of Chinese companies stem from various factors, including active technological innovations, high-quality infrastructures and a sufficient pool of skilled labor, compensating the deficiencies seen in EU automakers.   

Given the economic scales of China and the EU, the cooperation between the two is vital to addressing global climate, energy and environmental challenges. China exporting green products to the EU not only helps enrich the supply in the European market, and alleviate inflation pressure in Europe, but also makes a positive contribution to Europe's response to climate change. At present, the EU is following the U.S. in hyping up China's "overcapacity," successively introducing a series of protectionist economic policies against China in recent years and launching an anti-subsidy probe into EVs imported from China last October. 

Nevertheless, considering China's substantial advantages in the global green industry chain and the deep integration of interests between China and the EU in the green sectors, the EU's protectionist measures will undoubtedly compress the space for European enterprises to engage in the global green innovation system, undermine their motivation to face global competition and further exacerbate the "de-industrialization" trend in Europe.   

In a March interview, Mercedes-Benz CEO Ola Kaellenius called the EU's protectionism against Chinese EVs "the wrong way," and argued that increased competition from China would help Europe's car manufacturers produce better vehicles in the long run. The European Commission should listen more to the voices of the European companies, and not be obsessive about the groundless "overcapacity" paranoia.   

Sun Yanhong, Senior Research Fellow at the Institute of European Studies, Chinese Academy of Social Sciences (CASS).             

The article was originally published in CGTN on April 24, 2024.