The Myth Of Chinese Overcapacity

Through methods fair and foul, the US had long since dismantled Japan's export growth model and is now desperately targeting China.

The acid-tongued venture capitalist Eric Li recently quipped that China's biggest economic problem is that it can't go out and get itself a bunch of colonies. Imperialism is the other development model that has worked spectacularly well. But like the East Asian export model, it too has left lasting scars. On balance, overworked salarymen is probably less objectionable than colonial ills.

Economists twist themselves into pretzels trying to figure out the cause of the Lucas paradox. But is it all that mysterious?

C'mon, folks, America is a giant landmass with a temperate climate, coasts on both the Atlantic and the Pacific Oceans. America is beautiful with spacious skies, amber waves of grain, purple mountain majesties above the fruited plains.

America, America, God shed his grace on thee, it's a fat bird of a country from sea to shining sea! America has always exchanged assets for labor, whether through settler colonialism, slavery, immigration or trade.

Classical economic theory will not function correctly when there is this America thing (you're included Canada, Australia and New Zealand) – barely extant for a single Sinic dynasty – hoovering up people and capital from all over the world.

In this environment, not only is the East Asia development model the least bad one available – it is the only one possible. And it works not because busting one's hump to lend to rich customers is such an easy way to accumulate capital but because East Asians (insert racist theory here) are able to pull it off.

In a world under perfect laboratory conditions, where natural resource endowments are evenly distributed and giant landmasses had not just been opened up for economic exploitation, capital would follow the rules of classical economics – flowing from rich to poor.

The Lucas paradox exists because perfect laboratory conditions are not possible given the realities of history. We, however, may be at a point where theoretical outcomes will start to assert themselves in the real world.

The imperial development model is defunct in modern times and the export model is not replicable outside East Asia (insert racist reason here) but, with China taking its place as the world's largest economy, we are at a point where development economics can follow classical economic precepts.

US Treasury Secretary Janet Yellen's recent trip through China kicked off a round of hand-wringing in the Anglo press over industrial overcapacity in China.

Without a single Chinese electric vehicle (EV) sold in the US, Senator Sherrod Brown has already called for their ban, declaring,“Chinese electric vehicles are an existential threat to the American auto industry.”

Western progressives are mired in cognitive dissonance over long-trumpeted climate commitments when the solution presented to them is low-cost, made-in-China solar panels.

This entire overcapacity issue is another tiresome demonstration of Western solipsism. As Asia Times' David Goldman likes to say,“China's just not that into you.”

When the US imposed“voluntary” export quotas on Japan in the 1990s, it constituted 40% of the world's car market. That has fallen to 13% in 2023.

China does not export cars to the US and, given geopolitical realities, will likely tip-toe around the US by building factories in Mexico for regional markets. Around 35 million cars were sold in developed markets (North America, EU, Japan, South Korea, Australia) in 2023, unchanged since 1990.

Eighty million cars were sold in developing economies in 2023, up from 10 million in 1990. China has been and will likely continue to direct its export capacity to developing economies – ASEAN, Gulf States, Russia, Central Asia, LATAM, the Indian Subcontinent and Africa.

China's car exports map larger trends. China's exports to developing countries doubled in the past five years and now exceed exports to developed economies. Not only are China's exports not a threat to industries in the Global South, but“overcapacity” in China is entirely necessary for their development.

The Global South cannot accumulate capital through imperialism and it should not accumulate capital through the backbreaking East Asian export model. They are in luck because China's“overcapacity” is exactly how development should work under classical economics.

Excess capital in China should flow to developing economies in the form of loans and investments along with capital goods – 5G base stations, railroad equipment, electrical systems, commercial trucks and, yes, cars. This is the entire theoretical basis of President Xi Jinping's Belt and Road Initiative (BRI).

Without“overcapacity” in China, the Global South would have access to neither capital nor capital goods. Given its current account deficit and capital account surplus, it is mathematically impossible for the West to provide development assistance to the Global South on an appreciable scale.

Long-forgotten initiatives like Build Back Better World (B3W) and the Blue Dot Network die on the vine because the US does not suffer from“overcapacity.”

Sign up for one of our free newsletters

• The Daily ReportStart your day right with Asia Times' top stories
• AT Weekly ReportA weekly roundup of Asia Times' most-read stories

Sanctimonious concern over China inundating developing markets with manufactured goods is confused thinking. A development model based on capital inflows requires developing countries to run trade deficits by definition. The inflow will be used to purchase capital goods required for industrialization. This is the Lucas paradox resolved.

The Communist Party of China appears to have embraced its Industrial Party faction. The Industrial Party is an ambitious political identity that dispenses with the hoary left-right divide and believes that industry, science and technology will determine China's future.

While not necessarily an economic ideology, Industrial Party precepts have an intuitive understanding of the necessity of China's“overcapacity” and that it is up to China to reverse the Lucas paradox.

Wang Xiaodong, a vocal Industrial Party champion recognized the trends as far back as 2011, exhorting China to globalize its industrialization:

China's Commerce Minister Wang Wentao has dismissed Secretary Yellen's accusations of overcapacity as groundless, insisting that China's industries are just more competitive. Both the US and EU are likely to erect trade barriers as China appears unlikely to compromise.

When all is said and done, the squabble between China and developed economies is ultimately a sideshow. The real action will be the flow of Chinese capital and goods to the Global South.