Beijing and Washington, DC Clash Over Excess Capacity: A Guide for the Bewildered

SINGAPORE, 6 AUGUST 2026 —

Washington, March 11 — The United States launched a Section 301 investigation into alleged structural excess capacity in manufacturing and production sectors across sixteen jurisdictions including Malaysia.

Malaysia exported RM115 billion in manufactured goods to the US in 2025, according to US Census data, making the country the ninth-largest source of manufactured imports. USTR Katherine Tai said in a statement that the probe aims to ensure a level playing field for American workers and firms. “We are committed to using all available tools to address distortions that harm US industry,” she said.

On July 28, China’s Ministry of Commerce (MOFCOM) published a position paper rejecting claims that excess capacity is a systemic feature of its economy. The paper argues that excess capacity is a normal feature of market competition and that state support in China is comparable to industrial policies used by other major economies. MOFCOM’s response frames the debate as a contest between market-led adjustment and state-directed industrial planning.

The US notice and China’s rebuttal highlight a growing divergence over how to define and measure excess capacity. US officials have not released quantitative thresholds or sector-specific evidence to support the investigation, while MOFCOM’s paper calls for a ten-question framework to evaluate claims of harmful excess capacity.

These questions ask whether excess capacity exists, how it is measured, what causes it, whether it harms trading partners, and whether proposed remedies—such as tariffs—address the root cause or merely shift costs.

Malaysian officials have not publicly commented on the Section 301 probe. In 2024, the government tightened industrial incentives under its National Energy Transition Roadmap, seeking to align state support with market demand rather than capacity expansion for export. Bank Negara Malaysia has warned that global trade distortions, including those linked to excess capacity, could weigh on export growth this year.

The investigation sets a 12-month window for evidence gathering and consultations. If the USTR finds harm to US industry, it may recommend tariffs or quota-like measures. Past Section 301 cases—such as those on steel and solar panels—showed that targeted tariffs often led to temporary relief but did not eliminate underlying capacity imbalances.

Analysts at the Washington-based Peterson Institute for International Economics say the probe reflects a broader shift in US trade policy toward using industrial policy tools to counter foreign state subsidies. They note that the inclusion of allies such as Japan and South Korea signals the US is broadening its scrutiny beyond China. The investigation may also test whether the WTO’s dispute settlement system can resolve disputes over industrial policy without escalating into bilateral tariff wars.

For Malaysian exporters, the probe adds to uncertainty in key markets. The US is Malaysia’s second-largest trading partner after Singapore, accounting for 11% of total exports in 2025. The Electrical and Electronics sector—which shipped RM68 billion to the US last year—could face higher costs if tariffs are imposed, even if Malaysian firms are not the primary target.

The Malaysian Industrial Development Authority says it is reviewing the investigation’s implications for firms in the E&E, machinery and chemicals clusters. US Trade Representative Katherine Tai did not specify which sectors or countries are the focus of the investigation.

The investigation coincides with a separate US effort at the OECD to establish common definitions and measurement standards for excess capacity. That initiative, launched in 2025, has drawn mixed responses from members over whether excess capacity should be treated as a trade distortion or a normal feature of global supply chains.

Malaysian business groups say they are monitoring the US probe closely but have not yet prepared contingency plans. The Malaysian International Chamber of Commerce and Industry said it would wait for more details before assessing the potential impact on trade flows. “We need clarity on which sectors are involved and what evidence the US claims to have,” said a spokesperson.

Trade lawyers in Kuala Lumpur say the Section 301 process allows for public hearings and submissions, giving Malaysian firms a chance to present evidence. However, the timeline is tight: the USTR has set a 45-day comment period once the notice is published in the Federal Register.

The probe comes as the US and EU intensify scrutiny of industrial subsidies in Asia. Japan and South Korea have both raised concerns at the WTO over China’s state-backed capacity expansion in sectors such as steel and solar. These disputes suggest that excess capacity claims may become a recurring feature of global trade policy, regardless of who occupies the White House after the 2026 US elections.

For Malaysian manufacturers, the immediate risk is higher tariffs on specific product categories rather than a blanket ban. The Section 301 process allows for targeted remedies, which could spare entire industries if evidence points to isolated practices.

Related: Singapore