TIOL - COB( WEB) - 923
JUNE 06, 2024

By Shailendra Kumar, Founder Editor

THE tale of global economy is seemingly a chilling parable of hapless global supply chain which has, in the recent years, been subjected too often to palpable existential dangers by bouts of geopolitical hubbub! In fact, it all began with 'decoupling' and 'de-risking'! And the latest buzzword, which has amped up cat-and-mouse tensions between the US and China, is 'overcapacity'! Their bilateral diplomatic ties which were in statis for some time, have taken a pirouette for the worse! In fact, the expression 'overcapacity' has been vilified so much that even UK and EU have boarded the American-piloted bandwagon to skewer China on the issue of overdose of state subsidies and tax incentives to certain chosen sectors like new energy products, semiconductors, chemicals and steel. The festering inflammation recently veered into hysteria when the G7 Finance Ministers and central bank governors at their Italy summit last week, confabulated over excess production and accused China of under-pricing exports, having negative bearings on the global economy. The G7 has taken a view that China has been dumping underpriced goods in global markets by implementing unfair industrial policies and, in the process, dismantling industrial capacities of other economies.

The first policy arrow which was shot by the Biden Administration was to impose a barrage of restrictions on exports of high-tech goods to China. The second arrow from Biden's quiver was released recently when the US spiked import tariff on a range of new energy goods which were in direct competition with the sectors being subsidised by the Biden government to speed up greening of the US economy. Taking a leaf from subsidy-sprinkling industrial policy of China, the Biden Administration has also stitched a new industrial policy which aims at reviving manufacturing jobs besides greening the economy. The Inflation Reduction Act offers eye-popping subsidies to chosen sectors like semiconductor, electric vehicles, wind power and solar panel modules. To protect the domestic industry, America has hiked tariff on EVs up to 100% and some items up to 25% and 50%. Chinese goods worth USD 18 bn will be adversely affected by the new tariff rates. In fact, former US President Donald Trump had up-ticked tariff on a large basket of goods worth USD 300 billion in 2018. That measure is due for review this year before the Presidential polls and the Biden Administration is in no mood to exempt any goods even if such a spurt in tariff war directly pinches the pockets of American consumers and also the inputs for certain local industries.

Taking a cue from the US, the EU has also initiated anti-subsidy investigations against many Chinese goods like EVs, solar panels, railway goods, wind turbines, tinplate steel and medical devices. EU is China's one of the key export markets. Incidentally, EU producers are feeling bruised on their home turf in certain sectors where they had an edge earlier. For instance, it was a leading manufacturer of cars but the Chinese carmaker BYD has eroded the market share of local players. Its share of EVs has jumped from 0.4% in 2019 to 8% in 2023 and is projected to be one-fourth of EU market this year! Import of EV batteries from China accounts for 80% of the EU market. Similarly, solar panels have captured 90% of European market. Japanese MNCs constitute another flock of victims of overdose of Chinese subsidies. Being caught between two of their major markets - they need both the US and China for the revival of their corporate prowess, a large number of Japanese companies have been hastily shifting their manufacturing out of China to South-East Asia. A few months back, Mitsubishi Motors announced downing of its shutters in China and has now set up factories in Indonesia and Thailand. This is also to soothe the frayed nerves of customers fretting over geopolitical risks. In response to American state governors visiting Japan and wooing investments, many Japanese MNCs have tilted towards the US. Panasonic and Toyota are two prominent manufacturers who have been granted green subsidy of USD one billion each. Toyota is pumping in eye-watering quantum of investment - about USD 8 bn, in battery production and the State of North Carolina has not shied away from raining tax sops and infrastructure spigots. And thanks to strong economic growth, Japanese companies are raking in huge profits. As per one study, 29% of their total sales comes from their overseas subsidiaries. However, what seems to have given Japan jitters is the Biden Administration's opposition to Nippon Steel taking over US Steel. An unmistakable sign of protectionism on ascendency in the West.

Let's now parse into the oft-talked-about phraseology - 'Oversupply', which has punched a damaging blow to the global trade. In simple terms, oversupply means production of goods in excess of domestic consumption. Ouch, this is what results in comparative cost advantage which is the key driver for international trade. So, what is the problem? Why is this fuss between China and the West? The key finding of Western studies is that China's oversupply or excess production is immensely subsidised not only by Beijing but also local governments which extend concessional funds, lands and local tax benefits. Overdose of subsidies to certain sectors like steel, aluminum, electric vehicles, solar panels, wind turbine, medical devices and many more inevitably leads to under-pricing which renders a body blow to manufacturers from the West in the global market and countervails positive forces of competition. In other words, hugely subsidised goods tend to kill industrial capacities of importing countries and eliminates existing jobs. One live example of pernicious impact of China's cheap exports is well demonstrated by the Chile's dying largest steel plant - Cap SA. The company decided to down its shutters in March, attributing it to import competition from China. In April,  Chile imposed anti-dumping duty and the company deferred its decision to close down the plant. But for how long? Given the error of the government to enter into FTA with China, it would be difficult to hold on to high anti-dumping duty for long and the local industry cannot expect a better fate than a slow death!

Another example of how subsidy-propelled EV sector has not only outcompeted Western EV manufacturers in China but has also grabbed significant market share in Europe. Interestingly, the Chinese companies have also done the damage to the long-term production strategies of American manufacturers who later turned towards hybrid vehicles. Piqued by the brazen export policy, the Biden Administration imposed 100% tariff over and above the existing tariff under Section 301 of the Trade Act of 1974. On her recent visit to Beijing, US Treasury Secretary Janet Yellen told senior Chinese officials: "You are producing too much of everything, especially clean energy goods, and the world can't absorb it". In view of the shrinking demand at home, China has been dumping EVs in global markets. As per China Passenger Car Association, it had the capacity to manufacture 43 million vehicles by 2022-end but its plant utilisation was merely 55% - a good indicator of overcapacity. Though many Western countries are setting up lithium-ion vehicle batteries plants but China is soon going to meet all global demand on its own! Similarly, in case of solar panels, China's over-production tamped down market prices by 42% in 2023 and now, below 60% the cost of comparable products in the West. By 2023-end, China had installed capacity of 861 GW of solar modules per year - more than the global total capacity of 391 GW. It is projected to add another 600 GW in 2024 - enough to meet all global demand projections till 2032. Given the deflation at the home turf, exports is the lynchpin of China's economic growth strategy. And it logged runaway success in 2021 and 2022 - from USD 2.7 trillion in 2020, it rose to USD 3.55 trillion in 2021 and USD 3.7 trillion in 2022. Only after the West imposed sanctions and other non-tariff barriers, its exports marginally dipped to USD 3.38 trillion in 2023. Another tell-tale indicator of excess capacity is the 10% dip in the prices of its manufactured exports from 2022 to 2023 albeit volumes have peaked to new record-levels.

In view of China's stubbornness to rebut all charges of excess production and the West resorting to tariff-stick to wall off imports, there are higher possibilities of China turning towards emerging economies in the Global South for access to their markets. Some of the economies have indeed assessed the devilish design behind China's export policy and have begun raising their tariff walls. For instance, Mexico did it in April when it up-ticked tariffs on 544 products, including 80% levy on steel products. Given the surge in the market-share of Chinese EVs from zero to 20%, it is likely that the newly elected President Claudia Sheinbaum may go the Biden way soon! Looking for greater market access, Mercosur, a Customs Union of Latin American Countries, has overlooked China and has inked trade deals with Japan, Singapore and South Korea. They do see an element of 'Potemkin' in any trade deal with China! Although India has generally been extra cautious and keeps imposing anti-dumping duty on Chinese goods - highest in the world but in view of the Sino-American tariff war, it needs to take additional measures to protect its domestic manufacturing capacity. Oh, shucks, China would certainly roll its sleeves and hit back in terms of blocking India's access to certain essential raw materials! The bickering may also spill into a fresh bout of either border skirmishes or geopolitical backbiting! Hence, India needs to brace up for unsavoury eventualities of all sorts! Let's keep our 'cavalry' on standby for any hair-on-fire situations! I clearly see China is heading in the direction of becoming a global pariah for a large part of the planet! Voila!