The Ongoing Journey of Negotiating with Beijing
In a recent visit to Beijing, U.S. Treasury Secretary Janet Yellen announced an agreement with China to initiate intensive exchanges on balanced growth in the domestic and global economies. However, history has shown that such agreements are merely empty promises that delay the inevitable. The focal point of Yellen’s discussions was China’s overcapacity in key industries, such as solar panels and automobiles. While Chinese economists have acknowledged the need to address this issue, their efforts have been largely ineffective.
Chinese overcapacity is driven by a combination of low consumption rates and high investment rates. This leads to rapid growth in manufacturing capacity and infrastructure, while suppressing domestic consumption. Despite the simplicity of the problem, China has continuously avoided addressing overcapacity throughout the century.
The issue of Chinese overcapacity has been a persistent concern across multiple U.S. administrations. Beijing has been willing to engage in discussions, form working groups, and make pledges to address the problem as long as no concrete action is taken. As a result, the issue has only worsened over time.
One might question whether the recent agreement to “launch intensive exchanges” with China holds any significance. The reality is that Chinese consumer demand remains sluggish, particularly in the automobile sector. Despite the construction of more capacity, demand for automobiles in China has remained stagnant since around 2015. This lack of demand contributes to the flood of Chinese auto exports, which further exacerbates the overcapacity issue.
The primary hurdle in addressing overcapacity lies in China’s lack of interest in limiting its capacity. The Chinese leadership is focused on creating 10 million jobs annually, decoupling from the United States, and controlling future industries. These goals can only be achieved through high levels of investment from Chinese savers. Consequently, Beijing has no incentive to reduce overcapacity and take a deflationary market share on a global scale.
The Chinese model of state-directed finance plays a significant role in driving the overcapacity problem. With Beijing favoring certain sectors, local governments compete with state-owned banks to attract these favored sectors to their regions. This leads to an influx of subsidies and state-controlled investment in output capacity. The consequences of this approach can be seen in low-profit margins, sluggish profit growth, and the growth of bad loans. Despite running trade surpluses and boasting high savings rates, China has misused its capital, resulting in a stagnant stock market and fragile banks.
While Yellen’s press release may paint a positive picture, U.S. negotiators have been attempting to address China’s overcapacity issues for years. However, meetings and negotiations have consistently yielded no change. This predicament leaves the United States, Europe, and Japan in an uncomfortable position. If China refuses to make necessary changes, these regions must consider unilateral measures to counteract the impact of Chinese subsidies on global markets through overcapacity.
Various options are available, including anti-dumping measures, legal filings with the World Trade Organization, and tariffs. However, it is crucial to acknowledge that relying on China to solve the problem is not a viable solution. In fact, China’s actions only promote the issue rather than restrain it.
In conclusion, the ongoing journey of negotiating with Beijing regarding overcapacity remains an arduous task. Despite diplomatic efforts and agreements, little progress has been made in addressing China’s overcapacity problem. As the United States and other regions grapple with the consequences of Chinese subsidies impacting global markets, unilateral measures may be necessary to safeguard their interests. It is imperative to recognize that relying on China alone will not solve this issue, and alternative strategies must be pursued to ensure fair and balanced global trade.
