Why the EU, US are concerned about China’s overcapacity
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You're listening to a podcast from the South China Morning Post. German Chancellor Olaf Scholz has just wrapped up a three-day visit to China. On the first leg of his trip, he visited a hydrogen fuel cell plant in Chongqing, operated by German auto supplier Bosch. Then he arrived in Shanghai and visited an innovation center of German company Covestro. And on his third day, he spoke in front of the press, saying that the German market welcomes China-made cars.

In his remarks, however, he said Europe will not tolerate overcapacity. It is very clear that we need to talk about the issue of overcapacity, that we need to talk about subsidy competitions. Overcapacity.

It is a core criticism coming from Brussels as well as Washington, saying that China's state-led support for manufacturers, along with the country's lower domestic demand, is pushing excessive Chinese supply onto global markets. This means cheap Chinese exports for the rest of the world. Why is that such a bad thing? And how would the EU's concern about overcapacity affect its relation with China?

This is Inside China. I'm Jasmin Tse. And I'm joined by Finbar Birmingham, a Europe correspondent who has been writing extensively about this issue from his base in Brussels.

Finbar, we've been seeing this term overcapacity appear over and over again. How did we get here? Yeah, Jasmine, I think the word overcapacity, the term itself has become a bit of a buzzword for anybody who follows the Europe-China relationship over the last few months. My sense would be that along with the Sino-Russian relationship, the issue of overcapacity is probably the most common

certainly the most talked about element in that bilateral relationship right now. And I would predict that it will continue to be a defining element going forward, simply because I'm not sure anybody's that confident that China wants to, or even materially could, change its economic model in order to address the concerns of the Europeans in the near future. And so how did we get here? Well, from the European perspective, I think overcapacity is like a bomb

almost like a natural byproduct of what they see as a combination of factors. First of all, you have China's economic model and system combined with the global geopolitics over the last few years. So the Europeans would point at years and years of heavy state subsidies pumped into important industries such as electric vehicles, solar panels, steel wind turbines, leading to a ramping up of manufacturing of these goods.

And then they would point to the weak levels of consumption in the Chinese economy. People and businesses are not spending and the world's second largest economy is struggling to revive demand. Most developed countries... So you've had an abundance of production in all of these sectors over the last few years, and the market simply isn't there domestically to absorb them, which sounds kind of crazy because you've got 1.4 billion people in China, but we know that

Galvanizing consumption has been a perennial challenge for economic policymakers in China. So where do these goods go? They go out, they have to be exported.

which is fine, but where do they go exactly? And I think this is where the Europeans feel like they are inevitably going to be the destination of a lot of these goods, because by global standards, the European Union market is relatively open. Although I spend a lot of my time writing about trade conflicts and sort of probes and grievances and everything, by and large, Europe still

comparably open to Chinese goods. If you look at the example of electric vehicles in the United States, any automotive imported from China is 27.5% tariff. So that's the duty that the importer has to pay. For the EU, it's 10%. So if you have this excess of EVs, which many claim that there is, it's more likely that because of the...

how much cheaper it is to import them in Europe, given the difference of, what's that, 17.5% in an import tariff, that they'll end up here rather than the United States. So this is seen to be the case across the board, thanks to Donald Trump and Joe Biden and the continuation of tariffs. But they're destroying...

the consumer, and they're destroying the other workers. The other workers will not have any jobs, Christian, because all of these cars are going to be made in China. The electric cars automatically are going to be made in China. The European Union is broadly seen as a more logical destination. You have the same in, say, Japan, in India, in Turkey. There are heavier duties there than there are in the European Union. And so governments here are under pressure to ensure that this export of Chinese overcapacity

doesn't end up affecting negatively the local industry here in Europe. So that's broadly why we've ended up where we are. I think that the debate will continue and I think that the market won't remain as open as it is forever. We'll touch on this again, I'm sure, but we have these probes going on that could make things more expensive to import.

And I would put money on, you know, later this year, I think in July is when provisional duties, for example, on electric vehicles could be announced. I think we'll probably see the European Union on that sector at least. The duties applied on Chinese-made imports closer to the United States level than where they are now. And where do those cars go then? That's the sort of the $64,000 question. Nobody really knows where it ends up.

Is Chinese overcapacity a real issue? Is there a legitimate cause for concern? Or is it actually just Western protectionism? Well, I'm not an economist, but I have been covering this stuff for most of the last 10 years. And it's been something we've written about forever, really. Like subsidies is not a new accusation to be leveled at the Chinese government. And, you know, I think it is something that exists. My sense is that there are legitimate concerns. Last week, the European Commission's put out a 700-page report

document that outlined what they saw as distortions in the Chinese market and this was based entirely on Chinese government materials so it wasn't like the EU was like investigating this itself the report was entirely based on public information in the Chinese system outlining exactly what these subsidies are where they come from and they joined the dots then and they sort of

point out that this is where the overcapacity is coming from. So I do think that it's a real problem. I think that people may disagree with what you do about this problem, but I think it's quite real and it's probably not going to go away anytime soon. And the frustration in Brussels and in other parts of Europe is that they have been raising this for a long time with their counterparts in Beijing, and they don't feel like they're being taken seriously. China denies

that there is an overcapacity problem, which says it's a natural sort of market phenomenon and that the Chinese companies are highly competitive, which is also true. You asked whether this is just protectionism. And I think it's important to point out that taking a measure to protect an economy that is in reaction to protectionism elsewhere, I don't know whether that counts as protectionism, because if you're reacting to protectionism,

protectionism elsewhere, which in this case would be the heavy presence of subsidies in the Chinese economy, then I'm not sure that would qualify as protectionism, although that would be something for the WTO courts to decide, I guess. So from a European point of view, their measures are not protectionist in the classic economic sense. These tools that they're using are designed to fit with WTO rules.

You know, the Europeans would say, OK, China says we're protectionist, but China's market is not fully open to European firms. So there's obviously a dichotomy between where they both see this. Both sides are on really different pages and it's difficult to see a resolution. There was a piece in our newspaper in SMP a couple of weeks ago, an interview with the EU Chamber of Commerce in China, their chairman Jens Eskeland, and he described it very much in these terms. He said you have what he saw as stubbornness on the Chinese side,

and an unwillingness to change their policy and more determination on the European side to do something about it. And when you have that sort of determination on both sides, he described it as watching a slow motion train crash, that this is inevitably going to end up in conflict. And I would struggle to disagree with that. I think he sort of suggested, but why is this a bad thing? And a lot of people would say it's not a bad thing.

why not everybody have cheap goods? But if a country relies on a lot of manufacturing jobs, for example, and those are in danger of being undercut by the floods of imports, then it would be seen to be a bad thing in those economies. And does that end up in job losses? Does that end up in political blowback? And one of the dangers it is here, I think, down the road, is that if this problem continues, then we will start to see a bit of a political backlash against China that you don't really get.

But it's not just about cheaper Chinese goods. The EU's probes into Chinese manufacturing are focused on China's green energy sector. We're talking about EVs, wind turbines, solar panels. And it's not just about Chinese goods.

In a way, shouldn't overcapacity in these sectors be beneficial not only for the EU, but for the rest of the world? They can afford to transition to a greener economy, right? I think that a lot of people would again say that that is a good thing, that we should all be working together and sort of our number one priority should be, as a planet, I suppose, should be to have more renewable energy, more green goods on the market.

But look, I mean, in an ideal world, I think that's fair. But industrially, I don't think the Europeans would necessarily agree. You know, when it comes back to politicians here having to be elected and reelected, jobs are always a hot button issue. The EU economy is struggling. Germany is in recession. Policymakers have to balance all of these issues.

competing issues so you know it's not as straightforward as we might like to believe and yeah I think that there are these various considerations I mean there are also lots of stories about how there's such oversupply of lots of these things so like

You know, there was a story in the Financial Times last week about people in the Netherlands and Germany using solar panels to make fences because they're in such abundance. I went to Zeebrugge Port, which is in North Belgium. It's the busiest roll-on, roll-off automotive port in the world. And there was rows upon rows of electric vehicles that were being imported but not being sold. And so there is all this capacity going in.

But even though we sort of say, yes, we should all have more of these green goods, it doesn't actually even seem like there's enough demand for them, which is another weird element to this. We presume that everybody wants electric vehicles and solar panels, but the deployment and the take-up isn't quite what we would expect. The EU is made up of 27 member states.

Do all 27 of them share the same concern on Chinese overcapacity? Or are there differing views within the bloc? I think probably some member states think about it more deeply than others. There's an awful lot of other stuff going on here in Europe at the moment that's distraction. And so the issue of overcapacity is there and it's a debate, but it's by no means the sort of top priority agenda for, well, for any of the member states really. But I

But I think those who have looked at it deeply would say that objectively, there's an overcapacity issue. There's a sort of imbalance in the trade relationship between Europe and China. For example, you will have business groups who really hate trade barriers, but they would point to this and say, OK, this is something that's probably going to affect us negatively down the road. So maybe we should do something about it.

Where the disparity would come, I guess, would be in what to do about it. And you have like lots of different schools of thought there. Europe's divided on everything these days and on economic policy and China policy is no different.

You have, like, blocks of free trade supporters, such as, like, in the Nordic countries, who typically don't like anything that interrupts the flow of commerce. I mean, I'm from Ireland as well, which is sort of... The government there is very laissez-faire in terms of how it views, you know, ideally, the world of trade. But within those countries, you would also have more hawkish factions that want actions to be taken. And then, like...

You'll also have Hungary. You know, it is a sort of an extreme example of a country in Europe, which is very close to Beijing, has become an emerging hub for Chinese high-tech goods and would, you know, BYD, the electric vehicle company, has set up there. Chinese automaker BYD says it will build a new electric car factory in Hungary, becoming the first Chinese company to make cars in Europe. CATL, the battery maker. Officials in Hungary hope the 8

billion-dollar project will help the nation become a global hub for lithium-ion battery manufacturing. You know, so they would be opposed to any disruption in that.

It's not a uniform picture at all. The French helped instigate the electric vehicle probe and were mulling lodging a complaint over solar energy, but they don't depend on solar energy for their energy mixing. The Germans do, so they were against a solar probe. French car companies are less exposed to China than Germany, so there's discrepancy there too. So as a union, if it could be described, you know, there is a sort of position on China, but it's very nuanced and varied from member state to member state.

I do think that most European governments would say that they have problems with Chinese economic policies. How they will align on policy moves to sort of counter that, I think it would be harder to find a common position. You mentioned how China has denied claims about overcapacity and said that it's just a natural market phenomenon. But beyond rhetoric, has China done anything in response to the EU's probes? Well, in response to the electric vehicle probe, we saw China launch its own investigation into China.

what it says was subsidies are dumping in the brandy and cognac sector. And that was very clearly aimed at the French because the French had been the one who made an unofficial complaint to the European Commission about electric vehicles and led to the investigation there.

So that's a sort of example of a lever that China can pull because, you know, there are sectors in the European Union that are heavily reliant on China. And, you know, we saw this last year when they first brought in restrictions on the exports of gallium and germanium. These are two critical minerals used in the production of semiconductors and other high-tech goods. What was broadly seen in response to the United States, the Netherlands and Japan trying to curb China's access to microchips, we saw

So as you've been reporting extensively, the EU has launched many probes into China's subsidies for various industries.

What happens next? Like, what can we expect when these probes are finished? Yeah, well, I think the first thing to say is that I think that there's going to be more and more of these probes. These investigations are... It sort of feels to me like we're moving into a different moment and that this is just the start of it.

the European Union has for a few years now been quietly building up this sort of like suite of trade and economic weapons and they're starting to get a bit trigger happy and they're starting to use them because of the frustration that we mentioned earlier where they don't see any material change in the Chinese economy. So I think the natural result of that is that there's a bit more tension in the relationship, that there are more trade disputes, not less, that there are fewer sort of like areas for collaboration

You know, and in terms of actual material impact, in the case of some of these instruments, like the foreign subsidies regulation, you could have Chinese firms who have been found to be receiving subsidies and not declaring them, having reduced market access in Europe. We're expecting this week the first probe under the international procurement instrument, another one of these quite arcane tours that the European Commission has been building up in recent years. We have the anti-subsidies investigation into Chinese companies

electric vehicles, which is a trade instrument. And the result of that is that there will be probably higher duties slapped on electric vehicles made in China. So, you know, I think that these things will roll and roll back to what the European Chamber of Commerce chairman said in Beijing. He said that this is a slow motion train crash. And I think that seems to be the way things are unfolding. Unless China changes, Europe will continue to do these investigations and probes.

there will be more points of dispute than agreement. And I think that that seems to be the direction of travel. So with this slow-moving train crash, are the EU and China heading towards a trade war? I think when we think about a trade war, we think about Donald Trump. We think about these sort of late-night tweets about tariffs going on Chinese imports, about quite sort of unpredictable policy and, you know,

chaotic war. I don't think we're heading for anything like that. But I do think that we're heading to something a bit more structured. The European Union has all these tools, they want to use them, they will continue to investigate and sort of curb market access and put duties and tariffs on more Chinese goods in a structured way, a lot more predictable than what we used to under Trump.

But I guess the natural course of that is that China will respond. There will be retaliation. We don't know exactly what it will look like, but there are many levers which China can pull. We've discussed the example of the gallium and germanium, the brandy investigation. I mean, there's lots of areas in which they could respond.

I don't know if there is a sort of official definition for a trade war, but I do think we often associate it with the chaos of Trump. And I don't think we're heading for anything like that. But we are moving into an era of more Europe-China trade disputes. Whether that constitutes a war, broadly speaking, I don't know. But I think that the direction of travel is quite clear, at least from where I'm sitting here in Brussels.

That was Finbar Birmingham. You can read his articles, including his latest on the EU's first ever procurement probe into China's medical devices sector at scmp.com. Thanks for listening. Bye for now. So good, so good, so good. Just in and so good. Thousands of winter deals are in Nordstrom Rack stores now. And that means thousands of fresh reasons to rack. Because we get the latest trends for way less. Because I've been looking for these.

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