The United States-China Economic and Security Review Commission holds a hearing on supply chain concerns in the face of a Chinese export surge.
From time to time on the Alliance for American Manufacturing blog, we highlight the work of the United States–China Economic and Security Review Commission, an independent arm of the federal legislative branch that looks at – you guessed it – big-picture economic and security issues between the two countries. It was established in 2000, partly as a concession to critics of the decision to grant Beijing permanent normal trade relations and help ease its ascension into the World Trade Organization.
If the rapid deindustrialization of the U.S. economy is the measure, the critics were right and that decision was a big mistake. But forming this commission was not; it regularly releases well-reasoned analyses regarding the consequential U.S.-China relationship and holds many thoughtful hearings on that topic too. The one held last week, titled “Dominance by Design: China Shock 2.0 and the Supply Chain Chokepoints Eroding U.S. Security,” was similarly thoughtful.
These hearings are public, broadcast online and typically include a handful of subject matter experts offering testimony across several panels. They are also often very long; last week’s went for more than five hours.
So, in the interest of time, here’s an extended excerpt; a question, posed by commissioner Leland Miller, a cofounder of China Beige Book, to Adam Wolfe, an economist with Absolute Strategy Research, about the reality of Chinese industrial excess capacity, which has affected the industrial sectors of its trading partners. AAM produced an entire report on this topic last year. Wolfe’s response is hard to argue with.
Miller asked:
“A lot of skeptics have continued to hammer away at this idea of overcapacity. They might grant that China is producing a lot. They might grant that China is subsidizing a lot. They might grant that China is a manufacturing powerhouse and is on a linear path to dominate further. But they question the idea that this is overcapacity. One of the focuses of your testimony is on this issue of defining overcapacity. For policymakers who aren’t economists, can you boil down in layman’s terms why this problem is overcapacity and it’s not just good, smart business practices by Chinese firms?”
Wolfe responded:
“I suppose overcapacity can be in the eye of the beholder in many ways. One argument against saying China’s problem is excess capacity is the idea that, well, the world actually needs a lot more green technology so by definition we can’t have excess capacity in green technology because we need so much more of it and it would be great if China could produce more. For certain industries, maybe that’s true. …
“But I think it’s hard to argue that China doesn’t have a structural excess capacity issue when you look at China’s own industrial data. Chinese state-owned firms always produce a loss, and that loss is socialized by the state. So it’s not surprising that we see losses (there), but what’s changed is the private firms. Before 2019 you never saw a year where more than more than 13% of (China’s) large private industrial firms posted an annual loss, but that has happened every single year since. Twenty-one percent of private large industrial firms in China posted a loss last year.
“The problem is that, when demand for these sectors declined, there was no market mechanism to clear up that excess capacity. These companies are being kept alive by local government subsidies. And I think it’s this loss of market discipline that’s really contributed to the excess capacity problem in China and into this surge of ever-cheaper exports coming out of China. The best firms in those markets now have an even larger incentive to look abroad for sales, and I think it’s probably that metric that really highlights the issue of excess capacity; that firms can no longer make a profit in the domestic market in China.”
In AAM’s own overcapacity report we lay out a number of policy responses to Chinese excess industrial capacity, including reinstating and modernizing the Section 421 import surge protection safeguard to address domestic market disruptions caused by China’s role in global overcapacity across a range of sectors; modernizing and strengthening U.S. antidumping and countervailing duty tools; and utilizing Section 232 and Section 301 tools when traditional trade remedy tools are not sufficient to address U.S. economic and national security threats raised by global overcapacity in key sectors. You can read the entire report here.
And you can find a video recording of the entire hearing, as well as copies of the panelists’ written testimonies, on the commission’s website.