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

SINGAPORE, 6 AUGUST 2026 —

Headline: Beijing and Washington, DC Clash Over Excess Capacity: A Guide for the Bewildered Lead: Excess capacity in China remains a major point of contention in business and policy discourse this year. Some governments and commentators connect it to trade tensions, global imbalances, deindustrialisation in China’s trading partners, and threats to their economic and national security. Accusations of excess capacity in particular sensitive sectors, such as steel, were first levelled a decade o Body: Excess capacity in China remains a major point of contention in business and policy discourse this year. Some governments and commentators connect it to trade tensions, global imbalances, deindustrialisation in China’s trading partners, and threats to their economic and national security. Accusations of excess capacity in particular sensitive sectors, such as steel, were first levelled a decade or more ago. Now, some seek to delegitimise the entire Chinese economic system by contending that it is based almost entirely upon state measures that allow excess capacity to persist in manufacturing sectors. Combined with slow growth of domestic demand in China, this is said to result in China “venting” its surplus production on to world markets. The resulting Chinese export “surge” is said to be causing a “China Shock 2.0”. Such exports could not occur if there was insufficient production capacity, hence the contention that excess capacity is a driver of Shock 2.0. Therefore, excess capacity is at the centre of this delegitimisation campaign. Careful analysts will have noticed that excess capacity is not the sole factor mentioned and that alternative explanations for Chinese export success and the upgrading of its firms ought to be considered. None of this is to deny that the Chinese state actively intervenes in its economy. What matters for businesses abroad and for trade policy deliberation is cross-border fallout from Chinese state measures and whether trading partners have tools that can effectively curb adverse fallout or the causes of such fallout. On 11 March 2026 the United States invoked Section 301(b) of the Trade Act of 1974 and opened an investigation into what the associated Federal Register notice calls “structural excess capacity in production and manufacturing sectors”. The investigation names sixteen jurisdictions: Bangladesh, Cambodia, China, the European Union, India, Indonesia, Japan, Malaysia, Mexico, Norway, the Republic of Korea, Singapore, Switzerland, Taiwan, Thailand, and Vietnam. Notice that this Section 301 investigation does not target only China. Several of those American trading partners that supported the campaign mounted by the United States at the OECD on sectoral excess capacity (which largely targeted China) now find themselves under investigation on the same grounds. Trade officials in those trading partners should have an interest in what follows as it sheds some light on how the U.S. Views the matter of excess capacity. On 28 July 2026 the Ministry of Commerce of the People's Republic of China (MOFCOM) published a position paper on what it terms the so-called excess capacity question. Its release allows for a systematic comparison of the American and Chinese positions on excess capacity, set out in the table that follows. The table organises this comparison around ten questions, each of which is stated precisely there. These questions fall into five groups: Question 1 asks for a definition of excess capacity. A comparison between the two documents should start with an examination of what this term means to each party. Questions 2 and 3 turn to measurement: once a definition exists, the next question is what scale the phenomenon reaches and how often it occurs across countries and sectors. Questions 4, 5, and 6 then ask why excess capacity arises, testing stated causes against evidence and against rival, typically market-based, explanations. These questions sit after measurement because a claim about cause can be judged only once the scale of the thing to be explained is known. Questions 7 and 8 move from cause to consequence, asking whether excess capacity harms other countries and what evidence supports that claim. Questions 9 and 10 close the sequence by asking what trade policy-related remedy is proposed, whether its logic connects to the causes identified, and whether such a remedy has worked in the past. A remedy can only be judged once the questions of cause and effect of excess capacity have been answered. Notice that this sequence of questions builds on each other. Contending that excess capacity is pervasive is not enough to justify restrictive trade measures because excess capacity may be the outcome of competition between firms uninfluenced by state action. Evidence ought to be provided that excess capacity has produced demonstrable harm to the commercial interests of trading partners (keeping in mind the possibility that benefits may have been created too.) A credible theory of harm must be articulated and evidence provided (based on actual firm and market behaviour, not speculation or cherry-picked examples.) Moreover, a credible theory of remedy is needed as well. If an import restriction does not eliminate or sufficiently reduce the offending foreign excess capacity then the source of the harm will not have been dealt with—so any claims that the import restriction is only a temporary corrective measure can be set aside. It follows from this sequence of questions that there is a significant burden on those making the case that excess capacity is a pervasive, harm-creating feature of the world trading system and that there is a case for deploying import restrictions to “fix” the problem. Advocates of import restrictions need to provide compelling answers to all 10 questions outlined in the table that follows. U.S. Law may demand less of officials conducting the Section 301 investigation. However, for those interested in the commercial logic for intervention, these 10 questions get to the substance of the matter. In contrast, and here is a key asymmetry, the logical chain implied by this sequence of questions implies that claims about damaging excess capacity can fail at several points. Still, one should make clear that failure to demonstrate that a trading partner’s excess capacity has harmed U.S. Commercial interests does… (AI-assisted rewrite, based on the original source)

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