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May 27, 2024

Chart of the Week: China overcapacity raises fresh concerns

by Fathom Consulting.

The theory of comparative advantage states that economies should specialise in those goods and services that they are relatively more efficient at producing. If they do this, and trade for the goods and services in which other countries have a comparative advantage, then both sides will achieve the most efficient outcome possible. This is the world that proponents of globalisation have long argued for. However, a number of people would argue that we are not in that world. Various highly ranked officials in the US and Europe have recently voiced concern that Chinese government support (including subsidies and artificially low borrowing costs) are distorting the patterns of global trade. Analysis by the OECD appears to lend further support to these claims, finding that in some sectors Chinese manufacturers are receiving nine times more support than their western counterparts.

China’s continued support for its external sector stands in contrast to, and is intertwined with, the lacklustre domestic demand in the PRC, where the weak social safety net arguably encourages high rates of saving. The massive trade surpluses that this situation generates mean that other countries are running trade deficits — notably the US, the only country big enough to absorb such a high surplus. Against this backdrop, the US has already taken action, announcing this month that it will sharply increase tariffs on some Chinese goods including EVs, solar cells and semiconductors. Looking ahead, China is likely to continue to support strategic industries, exacerbating overcapacity in some sectors, and leading to higher geopolitical tensions and protectionist policies. Whether this heralds a new era of deglobalisation or just a redrawing of supply chains remains to be seen.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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