Manufacturing a problem: How will the world respond to Chinese overcapacity?
Written by Joe Hicketts
Any views and opinions expressed in this article are those of the author and do not reflect the views or positions of any entities they are associated with or represent.
How China’s economic system came to be
There is an old joke among economists that there are four types of economies: high income countries, low income countries, Japan and Argentina. While they have a point, I think China has a pretty good case to become a fifth candidate for that list. The Chinese economy and its geopolitical ambitions cannot be looked at with a Western lens, not because they are inherently unfathomable to a Westerner, but because drivers of both are so different to those in the West.
As such, before we pick up the looking glass and try to predict how the China of the future will interact with the rest of the world, one must look at the drivers of how the China of today has moulded its economy: an economy that is one both simultaneously insulated from and yet intrinsically linked to the rest of the world.
The word “control” comes up repeatedly when assessing the Chinese economy. Under Xi Jinping, control in one way or another shapes the core policies of the nation, from state-owned businesses, to the drive to break away from foreign technology, to the high levels of social control the party has over its people through systems such as the Hukou (internal immigration system). Control is one that is both inherent to a communist regime but, in this case, also one with a distinct Chinese flavour via its history as a walled off kingdom.
The sense that China is the most central nation, and one that has all of the resources needed to prosper on its own, is an idea that is both historic and current with Xi Jinping stating himself, “China is an ocean not a pond”. As such, much of what drives it is strengthening the homeland rather than a more outward looking approach, such as that of the US after the Second World War. In recent years, strengthening the homeland has entailed a decade-long focus on high-tech manufacturing, both as a seemingly straightforward extension of its existing lower value manufacturing, and as a result of lessons from its past. China was humiliated by the UK in the Opium Wars and Japan in World War II largely because of inferior technology. This is in contrast to the US and Europe, where technology is often seen as a conduit for manufacturing decline given their own histories. In China, like in much of Asia, technology is seen as a core driver of improved living conditions and the rise of the country on the world stage.
As such, the combination of high-tech manufacturing combined with extreme levels of control within a tightly defined system have become the hallmarks of China’s economic model. This economic system is coming under ever-increasing scrutiny from the rest of the world due to its ferocious success in scale.
Why China faces criticism
The economic model of export-led growth coming at the expense of domestic demand is one that is fundamental to the Chinese system. The fact that goods are produced within an economy that far outpaces domestic demand is a feature, not a bug. This has been fuelled by a combination of state interventions worth approximately 4.5 percent of GDP including direct state investment, cheap land for businesses, provincial investment as well as currency manipulation. What this has meant is that the Chinese stranglehold on a number of technologies such as EVs, rare earth processing, solar panels and even pharmaceuticals is one that is a growing problem not only for the West, but for the rest of the world, as domestic firms are unable to compete with state-subsidised Chinese competitors.
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How the world will respond to this is up for debate. The US has its current tariff based policy that is unlikely to remain unchanged in a post-Trump era. The EU has its Made in Europe scheme but it is one that is moving at a glacial pace. Then, there is the rest of the world…and BRICS in particular.
Impact on BRICS
Whether BRICS is a problem for a solution or a solution without a problem is an ongoing debate, but what cannot be argued with is the fundamental split between its members. On the one hand, India and Brazil wish for the group to be simply non-aligned, whereas China, Russia and Iran want a BRICS that is explicitly anti-Western. From an economic standpoint, the members of the anti-Western group are much more of a sideshow to China, given the inability of Russia and Iran to compete with China’s economic heft. As such, it is unlikely in the future that these countries will complain about Chinese overcapacity, partly due to the lack of their own domestic manufacturing base but mostly because they simply have no alternatives. For instance, in 2024, China accounted for 34 percent of Russian total trade compared to just 4 percent vice versa. India and Brazil, however, do have options. Both countries have modelled themselves on maintaining relations with all sides, exemplified by the recent relaxation of restrictions allowing Chinese companies to acquire a 10 percent stake in Indian companies and the increase in purchases of Brazilian soya beans following the Chinese-American trade spat.
China likes to portray itself as a can-do business partner that puts politics aside for the business of trade. This can often be seen in its responses to Western economic sanctions. Following widening US sanctions on Iran, Chinese Foreign spokesperson Lin Jian stated that the measures were “illegal unilateral sanctions” and China would take “all necessary measures” to maintain trade with Iran. Despite this, however, China increasingly uses economic means to pursue its own security aims and is doing so increasingly aggressively. For instance, the adoption of the Chinese Anti-Foreign Sanctions Law made it illegal to comply with sanctions that are deemed to discriminate against Chinese entities, putting multinational companies in a bind regarding which laws to abide by.
Repercussions on the Global South
As the green and AI transitions gather pace, the sense that other Global South countries want to add value rather than simply produce raw material will only increase. Countries such as Nigeria, Brazil, Vietnam and Indonesia all have high tech ambitions. For instance, Indonesia holds a long-term position of banning raw nickel ore exports to promote domestic processing. Countries therefore may look to put up their own protectionist barriers in the face of Chinese overcapacity, which will likely be met forcefully by China citing unfair trade practices despite the previous Chinese flagrance for WTO rules.
Effective resistance has been tough to manage thus far as there has been an inability for countries to work together in a coordinated effort, especially given Chinese influence in multilateral forums combined with the scale of its economy. This has meant that any brave single countries are firmly in China’s economic crosshairs.
Whether you think that protectionist barriers against China will proliferate or even whether a global consensus will form against overcapacity will largely depend on two things. The first is whether countries will continue to try and re-establish their own manufacturing and tech base, rather than simply importing the products from overseas. The second factor is how much sway China will have in bilateral trade talks and within multilateral organisations such as the UN.
The most likely scenario
Personally, I think the answer lies somewhere in the more globalised scenario. Among the Global South, China, for all its flaws, is still seen more favourably than the US, with 26 of 36 major countries citing a more favourable view of China. The sense that China is at least a reliable partner compared to the US is one that is a huge advantage in today’s world, something I don’t see significantly changing in the years ahead, even if the US’s isolationist tendencies were to change. Traditionally, the CCP has wielded its supply chain leverage lightly, but the combination of a US retreat and China’s ever tightening grip on emerging industries has meant that situations such as the 2025 banning of rare earth exports to Japan following remarks on Taiwan, and the 2024 restrictions of German pork following its role in EU anti-dumping talks have become ever more frequent, and will be increasingly frequent in the future. As such, the likely outcome is a series of bilateral and regional agreements where China largely has the upper hand while using its leading positions in BRICS and other organisations to further cement its position, thus attempting to position itself as the de-facto leader of the Global South.
The only caveat to this would be the incredible amount of debt that China has built up during its industrial transition. The US debt to GDP figure of 123 percent is often stated, and while the Chinese figure of 88 percent is indeed far lower, if all Chinese state-owned company and provincial debt is included, the Chinese non financial debt figure stands at over 300 percent. As such, the debt situation and the proliferation of white elephant and vanity projects within programmes such as the Belt and Road Initiative is one that should be monitored closely, especially given the lack of transparency on Chinese financial information generally.
Conclusion
In short, China is unlikely to change its economic policy any time soon. The country is wedded to the idea of supply chain dominance as a proxy for national security. As a developing country, China doubled down on its economic model 20 years ago despite international pressure. I struggle to see why it would fold when it is holding most of the cards now. I don’t think countries will turn its back on Chinese goods in a meaningful way any time soon, and so it is now up to the rest of the world to choose how to respond, as difficult as it may be.
