Prepare for another ‘China shock’
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices.
The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and its local government debt problem by increasing support for the “three new industries” of electric vehicles, solar cells and lithium-ion batteries. The outcome could be a global market flooded by underpriced Chinese products, which would affect not only the US, but also its allies, including European countries and Japan, as well as emerging markets, such as Mexico and India, Yellen said.
Chinese overcapacity, which Beijing has repeatedly denied, has policymakers worldwide worried about another round of the so-called “China shock.” Massachusetts Institute of Technology economists David Autor, David Dorn and Gordon Hanson coined that term in a 2016 paper about China’s economic rise and its effects on global trade and labor markets. The authors concluded that huge swaths of workers worldwide lost jobs to China’s rapid industrialization in the early 2000s after the country supplied numerous low-priced and essential items to the world, despite the benefit of global low inflation.
Unlike the previous shock, the influx of Chinese goods into global markets this time includes electric vehicles, chips, machinery, solar energy products and electronics. Economists have warned that if advanced economies do not fight hard against China this time, they would not only see cheaper Chinese goods overwhelm their market, but might also lose their technological leadership in industries Beijing seeks to dominate.
An example of a growing global backlash against China’s practice of flooding international markets with cheap goods is that governments worldwide have announced more than 70 import-related measures targeting China since the start of last year, up from about 50 in the previous two years, the Wall Street Journal reported earlier this month, citing Global Trade Alert data.
However, the overcapacity problem is difficult to solve in the short term, as China’s economic weakness is likely to continue for an extended period, while Beijing’s main goals this year are stability, developing critical sectors and stimulating the economy, according to the conclusions of China’s National People’s Congress meeting early last month. Moreover, Beijing is unlikely to take the lead in suppressing excess production, as it would stifle the private sector’s economic activity and harm people’s livelihood, potentially endangering the Chinese Communist Party’s legitimacy.
No one should underestimate China’s manufacturing capacity. The price of any product that is produced there is likely to drop due to the country’s new wave of industrialization and its scale of mass production. Moreover, there is almost no floor as the price falls, given past examples across numerous sectors, from steel and petrochemicals to flat panels and LED modules, as well as in new industries such as electric vehicles, solar panels and solar cell modules.
Taiwan should prepare to meet this challenge, as it stands on the front line of China’s emerging dominance in new industries. Taiwanese companies must avoid entering industries where China is best positioned to set standards and ready the goods for mass production. Instead, local firms should strive to develop high-end products and position themselves in niche markets.