China’s Overcapacity Poses a Grave Threat to the U.S. Auto Industry

By Elizabeth Brotherton-Bunch
Feb 06 2024 |
Workers at an automobile factory in Beijing. Getty Images

It’s not hyperbole to say that if the United States allows a surge of artificially cheap Chinese-made autos into the American market, our own automakers just may go out of business.

Time after time, and in industry after industry, China’s government runs the same plays from the same old playbook. It would be laughable, except that time after time, and in industry after industry, the United States fails to put up a meaningful defense.

I’m talking about Chinese industrial overcapacity, and here’s how it works: China’s government pumps absolutely massive amounts of government subsidies to prop up its own industries. In turn, China’s companies — who aren’t particularly worried about things like “consumer demand” or “the free market” — just keep pumping out product, until they’ve made far more than China needs for its own use. So, to get rid of all that extra product, China dumps its goods into the global market at absolute rock-bottom prices.

Whether it be in steel or solar panels, chemicals or even furniture, the outcome is often the same for American companies and workers. Layoffs and factory closures. Loss of market share. In some cases, the U.S. becomes totally reliant on China for its needs.

Now the U.S. auto industry — which built the Arsenal of Democracy that defeated Nazi Germany, that has provided millions upon millions of Americans with good middle-class union work for nearly a century, that continues to have outsized importance in the entire U.S. economy — is facing the threat of China’s overcapacity.

And the United States needs to get ready.

A new piece from writer Yanmei Xie in the Financial Times outlines how China developed its overcapacity in autos really well:

The Chinese government designated EVs a “strategic emerging industry” in 2009, and began flooding the sector with subsidies, sheltering the infant industry behind a protectionist wall. At the peak, one EV attracted up to $19,000 of consumer purchase subsidies, in addition to tax breaks, cheap land, energy and bank credits for manufacturers. Foreign carmakers and battery producers were mostly excluded by eligibility requirements. 

Government largesse and protectionism created fertile ground for abuse. Myriad companies emerged, churning out low-cost, low-tech vehicles with little appeal to consumers. Many sold their EVs to oversized municipal bus and taxi fleets, which often sat idle.

A bloated industry was the result. In 2014 alone, more than 80,000 companies registered in China to enter the EV sector, more than doubling the previous year’s number of new registrants. The strategic emerging industry appeared to be a textbook cautionary tale of waste, corruption, overcapacity, vicious price wars and low profitability. 

In the United States or another free market economy, producing too much product and having to sell it for low profitability would likely result in a company going out of business. But as Xie explains, it’s actually been a massive success for China:

China’s well-rehearsed industrial policy can be staggeringly wasteful but still produce stunning results. This same pattern of fattening up companies with subsidies and protection and then cutting support and introducing market discipline to weed out the weak has already produced domestic and export juggernauts in steel, shipbuilding and solar panels.

To better understand how this could very well play out in the real world, take a look at this new electric sport utility vehicle from China’s Build Your Dreams (BYD), a company with ties to the Chinese government and military that has received billions upon billions of dollars in subsidies. That new SUV is expected to sell at $14,000 to $20,000, an absolutely rock-bottom price. The MSRP price for Ford’s Mustang Mach-E, for example, is around $42,000.

But don’t be fooled; BYD isn’t just being cost-competitive here. BYD’s SUVs are so cheap because of the massive amount of support it receives from China’s government. The goal isn’t even to make money; rather, it is part of China’s “Made in China 2025” plan to dominate global industries. Part of that strategy is to price out all competitors, even if Chinese brands lose money in the process.

BYD and other Chinese automakers already are gaining a massive foothold in Europe and other markets. The problem already has gotten so bad that the European Union has launched an investigation that may result in new trade duties.

The only thing stopping Chinese-made autos, both electric vehicles and traditional gas-powered cars, trucks and SUVs, is that the United States already has tariffs in place. And now there are (quite rightly) calls to increase tariffs, something the Biden administration is said to be considering.

But as Autoweek recently noted, these are “obstacles China’s auto giants are ready to overcome.” BYD and other Chinese companies already are doing solid business in Mexico, and it is likely “they’ll open a local plant. With local content, they can get around the 25% tariff.”

It is time for the United States to get serious about shoring up one of its most important industries. The first step is to keep those tariffs in place — and increase them if necessary. But policymakers also need to understand that China knows all too well how to drive the ball down the field, and is ready to run a play to dodge those tariffs.

Additional trade enforcement mechanisms, including new tools like those found in the Leveling the Playing Field Act 2.0, are another thing that must be put into place to stop China’s malfeasance. The U.S. also should reinstate Section 421 import surge protection on Chinese autos and take steps to shore up the United States Mexico Canada Agreement (USMCA) to ensure companies headquartered in a non-market economy like China cannot set up a factory in Mexico or Canada to gain preferential treatment. There are other things to do, too, including continuing to invest in our own EV and auto industries and fully enforcing content preference policies to ensure U.S. automakers have the tools they need to compete.

Above all, the United States must remember that China thrives at the long game. If we want to maintain and strengthen one of the most critical industries our country has ever seen, we need to keep our eye on the ball — and be prepared to compete until the last play. Otherwise, we risk losing it all.