Trade War 2.0

China’s Export Machine Roars Back to Life

CubicPV, a Massachusetts-based startup, had high hopes for its silicon wafer venture—a critical component in solar panels. Backed by billions in tax credits and government loans from climate legislation signed by President Biden two years ago, CubicPV announced plans in late 2022 to build a $1.4 billion wafer plant in Texas.

But China quickly ramped up its own silicon wafer production, nearly doubling its output to far exceed domestic demand.
The surplus found its way to global markets, driving prices down by 70%. This price collapse forced CubicPV to suspend its project earlier this year, leaving engineers and other workers jobless, citing "market distortions caused by China’s overproduction."

Meanwhile, in Chile, iron ore miner and steelmaker CAP faced similar challenges. Beijing's dedication to producing low-cost commodities flooded the market with cheap Chinese steel. CAP announced it would indefinitely shut down its massive Huachipato steel mill in central Chile, resulting in 2,200 job losses. Even with higher tariffs on imported steel products, the company couldn’t compete with China’s low prices.

Dumping At A Global Scale

China’s strategy to revive its struggling economy by supercharging its manufacturing sector is putting pressure on industries worldwide, stoking fears of a looming global trade war. The European Union’s recent tariffs on Chinese electric vehicles are just one example of rising tensions. Earlier this year, the U.S. raised duties on Chinese steel, aluminum, EVs, and solar cells. Other countries, including Turkey and Pakistan, followed suit by increasing tariffs on Chinese imports like electric vehicles, stationery, and rubber goods.

Around the globe, countries are launching antidumping investigations to determine if Chinese products are being sold at unfairly low prices.
India is scrutinizing Chinese pigments and chemicals, Japan is looking into electrodes, and the U.K. is investigating imports of excavators and biodiesel. Argentina and Vietnam are probing Chinese microwave ovens and wind towers.

Behind China’s strategy is a bold but risky gamble: Beijing is betting that expanding manufacturing will revitalize its economy and strengthen its industrial base, despite the risk of international backlash that could jeopardize its future.

Self-Sufficient Anti-Consumerism

Chinese President Xi Jinping has ordered officials to double down on this state-led manufacturing approach, channeling billions of dollars in subsidies and credit to strategic industries. His mantra, “Establish the new before breaking the old,” underscores the emphasis on building industries China wants to dominate, such as electric vehicles, semiconductors, and green energy, while maintaining its traditional strength in sectors like steel. Any concerns about overproduction can be dealt with later.

Xi’s strategy is guided by two core principles: First, China must build a self-sufficient industrial supply chain to sustain its economy in the face of potential sanctions from the U.S. and its allies. Second, Xi has a deep-seated aversion to U.S.-style consumerism, which he views as wasteful.

The consequence? Jobs lost in the U.S., Europe, and Brazil, while Chinese workers remain employed.

Official data reveal the impact of Xi's priorities on the economy. Since the end of 2021, loans to industrial sectors, including manufacturing, have surged by 63%, while Chinese banks have significantly reduced lending to real estate developers. Government subsidies are also on the rise. For example, Chinese battery manufacturer CATL received $790 million in aid, double what it received in 2022. Today, 99% of publicly listed Chinese companies disclose some form of government subsidy. China’s spending on industrial development, at 4.9% of its GDP, is far higher than that of the U.S., Germany, and Japan.

In April, the People’s Bank of China established a $70 billion facility to support bank lending to tech companies. By May, a national fund dedicated to financing semiconductor production raised $48 billion from state-owned banks and government-affiliated investment funds.

"Beneficial" To The World

In a series of articles published in the People’s Daily in May, Beijing defended its manufacturing and export strategy as beneficial to the world, dismissing U.S. concerns about overcapacity as mere attempts to gain a competitive edge.

Industrial output in China rose 8% in the first quarter of this year compared to the end of 2021, when the country’s real estate crisis began to worsen.
China has built capacity to produce 40 million vehicles annually, despite only selling around 22 million domestically. Similarly, it is on track to manufacture 750 gigawatts of solar cells this year, though it needs only 220 gigawatts for its domestic market.
By doubling down on manufacturing while already producing nearly a third of the world’s goods, China is essentially asking other countries to cut back on their own industrial output.

The U.S. has been somewhat insulated from the effects of China’s overproduction due to high tariffs on many Chinese goods. However, Washington’s ambition to boost domestic manufacturing, particularly in renewable energy, is at risk if China continues to flood the market with cheap products. For Xi, the danger lies in triggering a wave of protectionist measures that could leave China with fewer major markets to sell to.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Galen Crout / Unsplash.