Overcapacity, dumping and unfair trade practices are not new terms in the history of trade politics. At the centre of the current US-China trade conflict is the claim of China’s overcapacity and its non-market policies in manufacturing the New Three products — New Energy Vehicles (or NEV including electric and hybrid vehicles), lithium batteries, and solar photovoltaic. The current spat between China and the US invokes a déjà vu of the US-Japan trade conflicts of the 1970s-1990s. Then, Washington accused Japan of unfair trade practices and even dumping.
Any rigorous analysis would demonstrate that overcapacity has neither a well-defined meaning in international trade law nor a straightforward definition. One of the many indicators of China’s overcapacity that have been used is the declining industrial capacity utilisation rate. This fell from a high of 77 per cent in the first quarter of 2021 to 73 per cent in the first quarter of 2024.
Washington has been resolute in accusing China of overcapacity. The focal point of contention in this debate is China’s anti-competitive behaviour. The US recently claimed that non-market policies such as China’s industrial subsidies had led to over-investment in old and new sectors and, consequently, “production capacity untethered from global demand”. This could spill over to other countries if it led to over-production and dumping, causing material injury to domestic industries elsewhere such as firm closures and job losses.
In response, China denies the overcapacity accusation and defends its industrial policies, including subsidies. From China’s perspective, the support the industries of the New Three products have received is common practice, similar to that of other countries, including the US. The overcapacity accusation and calls for punitive measures are, therefore, interpreted as attempts to sabotage China’s efforts for its industries to move up the value chain and to reduce dependence on foreign technology.
Nevertheless, Chinese policymakers and industry leaders do admit the existence of a gap between the supply and the demand of the New Three products in the domestic economy but not in the global economy as the US claims. This gap in the domestic market is seen as a typical market economy phenomenon and therefore calls for market-based measures to address the situation, e.g. the Chinese to consume more and/or China to export more. Confronted by weak domestic demand, an increasing number of Chinese enterprises have chosen to venture out and many came to Southeast Asia.
So, how does the issue at hand affect Southeast Asian economies? To start with, it is important to acknowledge the reality that Southeast Asian economies have become highly integrated into China’s supply chains in terms of their reliance on Chinese intermediate inputs to produce goods at home for export overseas. Indeed, for many manufacturing products, such as electronics, electrical machinery and automotive equipment, China and Southeast Asian countries are part of the same supply chains.
This high reliance poses a dilemma for Southeast Asian producers that export to the US and/or the EU and, therefore, may want to diversify and derisk their supply chains away from China. On the one hand, Southeast Asian businesses and multinational companies operating in Southeast Asia may find it costly, difficult and disruptive to diversify away from China’s supply chains. On the other hand, those which export to the US and/or the EU may become targets of anti-circumvention measures.
While many Southeast Asian governments are eager to roll out the red carpet to Chinese investment to beef up local production in New Three products, local producers in some Southeast Asian countries claim to have been hit hard by the head-to-head competition with cheaper Chinese products. In Thailand, incentives and subsidies given to Chinese companies to invest in local production of NEV and to sell imported NEV from China resulted in the closure of local auto parts manufacturers. A third of Thailand’s foreign direct investment comes from China.
Although widening bilateral trade deficits with China do not always indicate dumping, trade deficits of some Southeast Asian economies, such as Thailand’s with China, have also been on the rise. This may become a contentious issue in the region. Given Southeast Asian developing economies’ high reliance on Chinese industrial inputs, as well as access to the country’s market and investment, they may be hesitant to appeal to the WTO against China in cases of dumping. This is due to fear of retaliation.
The critical question for Southeast Asian economies is how they may take advantage of the massive inflow of capital, the availability of technology and the talent that arrived onshore to help advance the kind of development that Southeast Asia aspires to achieve. Here are a couple of points for consideration.
First, Southeast Asian economies that have no direct domestic competition with China in the New Three products and/ or use these products as inputs for further processing in supply chains could potentially benefit from China’s supply of various productive factors. Many Southeast Asian economies could be beneficiaries of China’s outward investment, technology transfers and better integration to China’s supply chains in low-carbon technologies to supply cheap low-carbon technologies at home. Reforms in domestic trade policies such as Indonesia’s restrictive local content requirement could help materialise these benefits.
Second, Southeast Asian economies that compete head-to-head with China in the New Three products, such as Thailand in the EV industry, could better prepare and protect themselves against China’s unfair trade practices by joining the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). The MPIA is a temporary fix to the non-functional WTO Dispute Settlement Mechanism. Under it, countries can arbitrate any WTO disputes, notwithstanding how difficult it is to demonstrate anti-dumping. Currently, only Singapore and the Philippines are members of the WTO MPIA while importantly, China is among its 53 members. This is a less distortionary pathway than imposing unilateral tariff and non-tariff measures. Recently, for example, Indonesia announced increased tariffs on a range of Chinese goods up to 200 per cent and even entertained the idea of diverting imported consumer goods from entering ports in Java to other locations outside Java.
Third, the upgraded ASEAN-China Free Trade Agreement and the Regional Comprehensive Economic Partnership (RCEP) provide an avenue for cooperation in managing the transition towards more sustainable growth. With their green economy components, the two agreements could be better utilised to manage trade imbalances, unfair trade practices and their consequent repercussion on domestic economies.
China’s overcapacity issue can be a blessing for Southeast Asian economies despite the concerns it may raise. It would be a far more productive endeavour to find a win-win cooperation with China instead of sweating over China’s internal economic affairs or the US’ “capacity politics“. The upgraded ASEAN-China FTA and RCEP may provide the umbrella for a stronger win-win cooperation.
