Published: 23:51, May 27, 2024
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‘Overcapacity’ claim a fig leaf for protectionism
By Sophia Hui

The notion of “overcapacity” in China’s new energy industry has raised some eyebrows in the international community as it not only contradicts the international division of labor theory based on the “theorem of comparative cost advantages” and the “factor proportion theorem” but also does not at all reflect the reality of global demand.

The development of new energy promotes the transformation of the global energy structure, reduces reliance on fossil fuels such as oil and coal, creates new paths to achieving international energy security, strengthens the resilience of global economic development, and mitigates climate change.

The development of China’s new energy industry contributes in multiple ways to the global drive of transitioning to new energy from traditional energy in the fight against climate change. The success of China’s new energy industry also shows what can be achieved in global sustainable development.

In promoting the notion of “overcapacity” in China’s new energy industry, the United States and the European Union ignore altogether the dynamic process of market mechanisms, actual global market demand, and technological development. The market economy emphasizes a supply-demand balance and free competition. Overcapacity should be naturally adjusted by market forces, rather than be artificially defined and curbed. If there is real overcapacity in a certain industry, market forces will facilitate the necessary correction through price adjustments. The claim of “overcapacity” does not accord with current global market conditions: Overall demand for new energy products is far from being sufficiently met.

In recent years, China has gained significant advantages in new energy technologies, allowing the country to produce new energy products that are highly competitive in the international market.

Industrial competitiveness stems from efficient market mechanisms and continuous innovation. It is natural that emerging industries like the new energy vehicles and solar energy sectors significantly expand production capacity to meet the anticipated strong growth in future market demand. Preemptive deployment is a response of enterprises to anticipated future market demand. Meanwhile, technological progress and industrial upgrading also tend to boost capacity expansion.

Protectionist practices that ignore the international division of labor underpinned by the “comparative cost advantages” and “factor proportion” theorems will undermine the efficiency of the global industrial chain, delay the energy transformation process, and are tantamount to severing economic connections, harming the world economy

The attempt to curb the development of China’s new energy sectors for the benefit of their overseas competitors — the real reason behind the accusation of “overcapacity” — is an unfair trade practice that is not in the interests of global consumers. China produces high-quality new energy vehicles at lower cost, which is not only beneficial to the Chinese economy but also provides more choice for global consumers. Such high cost-effectiveness stems from the comparative advantages brought by market competition, technological innovation, economy of scale, and industrial cluster effects.

The “overcapacity” notion merely serves as an excuse for implementing trade protection measures. US officials and media have accused China’s new energy industry of sustaining “overcapacity”, while the European Union has initiated an “anti-subsidy probe” into electric vehicle imports from China. Both moves are in essence an excuse and attempt to curb China’s industrial development through protectionist measures. The US’ Inflation Reduction Act stipulates high tax exemptions for electric vehicles assembled in North America, and Europe is implementing similar protectionist measures. By hyping “overcapacity”, the US is trying to weaken international competition and protect its monopoly position in high-end industries.

Protectionist measures protect domestic industries in the short term. However, in the long run, they lead to inefficiency, increased costs, and slowed technological progress. Historically, US restrictions imposed on the Japanese automotive industry and tariffs on the steel and aluminum industries have shown that protectionism not only undermines international trade rules but also disrupts the stability of the global supply chain. The US’ and the EU’s attempts to curb China’s new energy industry are repeating the same protectionist mistakes.

The global economy is an integral whole. China’s new energy industry not only brings growth momentum to its own economy but also provides a large number of efficient and low-cost green energy products to the world, promoting the green transformation of the global economy. Protectionist practices that ignore the international division of labor underpinned by the “comparative cost advantages” and “factor proportion” theorems will undermine the efficiency of the global industrial chain, delay the energy transformation process, and are tantamount to severing economic connections, harming the world economy.

The author is a member of the Chongqing Municipal Committee of the Chinese People’s Political Consultative Conference.

The views do not necessarily reflect those of China Daily.