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Washington has warned Beijing that the US and its allies will take action if China tries to ease its industrial overcapacity problem by dumping goods on international markets, according to American officials.
Two senior Treasury officials told the Financial Times that a US delegation made its concerns clear in a recent visit to China, including in conversations with He Lifeng, the vice-premier responsible for China’s economy.
“We are worried that Chinese industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from are both careening towards a situation where overcapacity in China . . . is going to wind up hitting world markets,” said Jay Shambaugh, the under-secretary for international affairs, who recently led an economic team to Beijing.
The US is most concerned about advanced manufacturing, and particularly clean energy sectors such as electric vehicles, solar panels and lithium-ion batteries.
Shambaugh said he had stressed it was not just the US that was concerned and that China should not see any US or other responses as being “out of the blue”.
The under-secretary heads the US side of one of two working groups that Washington and Beijing created after Yellen’s visit to provide a forum to discuss tough issues such as overcapacity in an effort to ease tensions.
“The rest of the world is going to respond, and they’re not doing it in a new anti-China way, they’re responding to Chinese policy,” said Shambaugh in an interview with the FT. He was joined by his colleague Brent Neiman, deputy under-secretary for international finance, who also recently led a team to China.
The EU last year launched an anti-subsidy probe into China’s EV industry. EU competition commissioner Margrethe Vestager on Saturday said the bloc was prepared to use trade tools to tackle unfair Chinese trade practices.
One official said Washington wanted to make sure Beijing was taking the issue seriously. The topic would be a “major part” of the agenda when Treasury secretary Janet Yellen visits Beijing later this year, he added. Yellen is also expected to raise Chinese overcapacity with her G20 counterparts when they meet in São Paulo later this month.
Chinese officials point to the fact that the US Inflation Reduction Act makes it cost-prohibitive to import Chinese lithium batteries and EVs. Some experts also point out that nearly one-third of Chinese EV exports last year were cars that Tesla, a US company, produced at its factory in Shanghai.
Scott Kennedy, a Chinese economy expert at the CSIS think-tank, said the US should press China to boost internal demand. “Assuming all of that fails to change things, Washington will have no choice but to follow the EU and launch investigations that likely would result in substantially expanded restrictions on Chinese imports.”
China has acknowledged the risks from overcapacity, which has been a feature of its industrial development for decades, but has not outlined a clear plan to tackle the issue. President Xi Jinping last December said overcapacity in some industries was one of the “challenges” that must be tackled to safeguard future economic growth.
China’s commerce ministry this month announced plans to support the “healthy development” of overseas EV expansion, including enhanced co-operation with foreign partners.
Some experts saw that as a sign that it wanted to allay international concerns about EV exports. But Beijing has also been critical of what it says are rising protectionist behaviour and abuse of trade dispute mechanisms by the west. It responded to the EU probe by launching an investigation into French cognac sales to China.
While the US and China discuss thorny issues such as overcapacity, they are also stepping up co-ordination on mechanisms to reduce risk in the global financial system and respond to future crisis.
Neiman said the sides had started holding technical exercises — similar to those the US does with other countries — to think through how to handle crises.
“We stood up a technical exercise to discuss how we would handle potential stresses at global systemically important banks, either in China or the US, and essentially make sure that we know if something goes wrong, who do we pick up the phone to call,” he said, citing one example.
