Thinking Hard about the China Overproduction Narrative

By Garvin Jabusch.

Watch almost any financial news network recently, and you almost can’t help yourself assimilating a major new narrative: China’s industrial overcapacity has become a major global economic issue, particularly in the transition towards renewable energy and electric transportation. U.S. Treasury Secretary Janet Yellen warns against China flooding markets with cheap exports, President Joe Biden has slapped huge tariffs on Chinese electric cars and solar panels, and European Commission President Ursula von der Leyen worries about China’s protected industries harming the EU’s industrial base.

But what is the debate about? Does it reflect deep differences in how countries view the global economy, particularly in the context of renewable energy and electric vehicles (EVs), or is it something else?

There are two main perspectives.

  1. The first focuses on limited demand and fair competition. The idea is that while demand for goods like cars and solar panels is growing, it’s still finite. Every country should have a fair chance to produce these goods because jobs are tied to their production. If China produces more than its fair share by using state support to lower prices, it creates “overcapacity” and takes jobs away from other countries.
  2. The second perspective emphasizes global competition. When companies compete globally to create better and cheaper products, everyone benefits. Consumers get more affordable goods and businesses relying on these products thrive. Critically, if these goods also contribute to clean energy and reducing carbon emissions, it’s a win for global risk reduction as well. From this viewpoint, government support for domestic companies isn’t unfair, but a strategy to enhance competitiveness, and countries concerned about Chinese dominance should focus on improving their own industries. As investor Bill Gurley recently opined in response to a social media post from the Biden administration about new tariffs, “Don’t understand how “protecting/hiding” our companies from the global competitive reality helps America ‘lead.’ In contrast, it will make our companies weaker by limiting their fitness. It will also drive further inflation. Certainly the lobbyists in DC are happy w/ outcome.”

Philosophically, this feels to me like a debate between confrontational zero-sum thinking and collaborative positive-sum thinking. But what are some key points we can use to think clearly about this debate? I think there are a couple.

  1. First, China isn’t the only country using government policies to support domestic industries. The U.S., Germany, Japan, and India all have measures to protect their auto sectors and manufacturing jobs. Boeing and Airbus receive significant state aid. Policies like the U.S. Inflation Reduction Act and the EU Green Deal Industrial Plan give preferential treatment to domestic clean energy companies. China simply does industrial policy on a larger scale.
  2. Second, the assumption that countries should produce only as much as they consume (anything greater than that is “overcapacity” in zero-sum theory) has never obtained in practice. Saudi Arabia and Norway produce more oil than they use. Taiwan makes over half the world’s semiconductor chips. Heavily subsidized U.S. farmers export products valued at over $100 billion annually. Exporting goods that other countries want to buy isn’t a crime. When countries do what they do best, the world benefits from less expensive products; that’s been a core tenet of economics since Ricardo (1817). Everyone knows that, and no one is complaining about too-cheap Chinese toys or running shoes.

The core of this debate is really about jobs. Concerns about “overcapacity” arise primarily for goods linked to high-wage jobs, not for low-wage industries like clothing or toys. Rich countries are worried about losing advanced manufacturing jobs and perceive China’s state support as unfair. Meanwhile, China sees its success as a result of a system that blends state coordination with market forces.

To address overcapacity concerns, China could work with other nations to share advanced manufacturing jobs, encouraging its firms to set up plants abroad and partner with local companies (there are precious few examples of this already, see Tesla and CATL’s partnership, but far more will be needed). Understanding the perspectives of other countries is crucial as economic nationalism rises, sure, but creating good jobs globally as new technology proliferates will defuse a lot of anger, resentment, and, therefore, political, and economic risks, including the risk of war.

And especially the risks of the climate crisis. Despite the growth in renewable energy and EVs, total global efforts are still inadequate to significantly slow the climate crisis. With IEA warning that global renewable energy capacity must at least triple over the next 5 ½ years to bring any hope of limiting warming to 1.5 degrees, how can one reasonably argue that China–or anyone else–is overproducing solar panels? We need to think hard about exactly what we mean when we throw around accusations of overcapacity. Overcapacity relative to what?

Advanced EV manufacturing at China’s Zeekr Intelligent Technology Holding Ltd.

Ultimately, the debate over China’s industrial overcapacity should be reframed through an economic lens that prioritizes economic efficiency and global benefit. Rather than seeing state-supported manufacturing as a threat, we should recognize the potential for these practices to drive down costs and accelerate innovation in critical sectors like renewable energy and EVs. In other words, this need not be a zero-sum game; positive-sum collaboration could accelerate economic growth, and also provide the coordination (so far grievously lacking) to actually do something about the climate crisis.

By fostering a competitive yet cooperative international market, we can enhance economic resilience, create high-quality jobs, and address the urgent demands of the climate crisis more effectively. Embracing this perspective will lead to more sustainable growth, lowered global risks, and shared prosperity.


Green Alpha is a registered trademark of Green Alpha Advisors, LLC. Green Alpha Investments is a registered trade name of Green Alpha Advisors, LLC. Green Alpha also owns the trademarks to “Next Economy,” “Investing in the Next Economy,” “Investing for the Next Economy,” “Next Economy Portfolio Theory,” and “Next Economics.” Green Alpha Advisors, LLC is an investment advisor registered with the U.S. SEC Registration as an investment advisor does not imply any certain level of skill or training. Nothing in this post should be construed to be individual investment, tax, or other personalized financial advice. Please see additional important disclosures here:

At the time this article was written and published, no Green Alpha client portfolios held long positions in Zeekr Intelligent Technology (ticker ZK) or Contemporary Amperex Technology Co (aka: CATL, ticker CNY). At the time this article was written and published, some Green Alpha client portfolios held long positions in Tesla (ticker TSLA). These do not represent all of the securities purchased, sold, or recommended for advisory clients. You may request a list of all recommendations made by Green Alpha in the past year by emailing a request to any of us. It should not be assumed that the recommendations made in the past or future were or will be profitable or will equal the performance of the securities cited as examples in this article. Not all Green Alpha separate accounts or our sub-advised mutual fund held the stocks mentioned. To inquire whether a specific Green Alpha portfolio(s) holds stock in any particular company, please call or email us.