Long treated as a photo opportunity for the leaders of Western democracies, the G7 has had a new lease of life ever since the Russian invasion of Ukraine. With so many G20 members at each other’s throats, the G7 has proved to be a useful vehicle to align against military aggression and the economic threats to Western business and technological primacy.
Most observers won’t be surprised if another round of sanctions against Russia is announced at the close of the G7 summit today. What will raise eyebrows, however, is the first round of coruscating rhetoric against Chinese trade practices. Last year’s G7 summit communiqué took 50 paragraphs before China was mentioned in restrained language. Not this time.
This year, the United States and its English-speaking allies have drawn France and Germany into their camp of China hawks. Earlier this week, after meeting President Macron, the U.S. President said, “On the economic front, we are both concerned about China’s unfair trade practices, which bring about overcapacity.” Germany and Japan are unlikely to refuse their national security guarantor – especially since China’s support for Russia has been unwavering.
The stage was set for very tough language, with China accused of exporting itself out of its current economic malaise. However, the G7’s bark is almost certainly worse than its bite. Germany and Japan have much more at stake commercially in China than the rest of the G7. Both have been cautious about antagonising Beijing – witness Germany’s last-minute bid to stop the European Commission from imposing heavy import duties on Chinese-branded electric vehicles (EVs) on Wednesday.
“China has slashed the cost of goods ranging from EVs to solar panels and dumped them on the European and North American markets.”
A degree of resistance to Anglo hawkishness would be prudent because their claims about China’s trading behavior do not always stand up to scrutiny. The hawks’ argument is clear: Faced with faltering economic growth and industrial overcapacity amid low domestic demand, China has slashed the cost of goods ranging from EVs to solar panels and dumped them on the European and North American markets. G7 leaders complain that this is damaging Western businesses and inhibiting the transition to a low-carbon economy.
The problem with this narrative is that the facts do not support it. China’s capacity-utilization rate – the extent to which it is using its resources to generate output – currently stands at 73.6% in manufacturing. That’s below the five G7 economies where comparable data is available but not enough to support a tough critique at the macro level.
Mismatches between production and local demand arise in certain Chinese industries – and are often branded as overcapacity problems by the hawks. Chinese steel production exceeded domestic purchases by 14% in 2023 – but Japan’s excess was 63%, and there is no Anglo critique of that. It turns out that Chinese steel is being shipped increasingly to Belt and Road developing countries, not the G7.
The strongest case for overcapacity is probably in the Chinese photovoltaic (PV) panel sector, where a remarkable industrial policy overshoot occurred last year. As is often the case for most narratives that go too far, a kernel of truth sustains them. Germany, with its large trade surplus in manufactured goods, is well aware how incongruous it is to criticize China for producing more than domestic buyers’ needs.
It is true that Chinese export prices have fallen sharply since mid-2022 – in some industries, markedly so. In a curious twist, G7 governments may have inadvertently triggered part of this. Western businesses have been implored to derisk their supply chains through diversification – for example, via the “China plus one” strategy – moving sourcing away from China. Emerging market destinations in East Asia were beneficiaries – lifting their export volumes. China’s lower export prices are a natural response to this loss of market share to regional rivals.
The history of trade disputes between China and the West is an unhappy tale of tit-for-tat retaliation. In this ongoing period of anemic global growth, a return to this dynamic is the last thing anyone needs. A cool-headed look at the data points to an alternative approach. Occasional cycles of sectoral over-investment and retrenchment are inherent features of all dynamic capitalist economies.
Since we don’t want to prevent executives from scaling up legitimate businesses – G7 governments should focus on the obstacles to capacity reduction and elimination when that becomes necessary. A productive discussion with China on this critical matter is preferable to the G7 ganging up on Beijing.
13 February 2025 • by Howard H. Yu, Jialu Shan, Lawrence Tempel, Alexandre Sonderegger in Competitiveness
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