EV Overcapacity

by
Danny Quah
July 2024

Every nation is right to seek to ensure a level playing field. Every nation is right to make sure its industries and communities thrive, good jobs are available for its workers, and its economic future is secure, according to the accepted rules of the international system. All economies, whether they're the EU, the US, China, or everyone else, have legitimate concerns that trade occur on terms benefiting both sides of the exchange.

However, it is an unclear narrative that is emerging from the US and the EU on China's overcapacity making for unfair trade. Be that as it may, as a consequence of that thinking applied to strategic sectors such as new energy (electric vehicles or EVs; electric batteries; solar panels), Biden has quadrupled to 100% US tariffs on China-made EVs.

I understand why intense economic competition is a good thing in important forward-looking, save-the-planet sectors. But the assertion often made is that rivalry here is also strategic. Some months ago at an academic conference in the US, I asked why EVs are a strategic matter of national security. Two Americans jumped on me: "Tanks. We make the best military attack vehicles when ours are the best automotive technologies."

In a related move the EU proposes NEV (New Energy Vehicle) tariffs of 38% from July. Europe is less hardline. The reasoning is that this rate, rather than the US's 100%, is what it takes to level the playing field against China's unfair economic practices in EVs.

Unlike concerns surrounding national security---where even magnets and rubber tires are suspect---economic reasoning can be publicly interrogated using empirical evidence.

What is overcapacity? If it were no more than what the English language says it is, then overcapacity is just capacity that arithmetically exceeds use. In economics, it is excess of supply over demand; it is how much can be produced over how much gets consumed. In international trade, overcapacity in this sense is exports minus imports, for that is how much more an economy produces than it consumes. This isn't very useful, however, as then comparative advantage implies every economy will have overcapacity in some sector.

An alternative view is that overcapacity refers to an unlevel playing field, i.e., where one side doesn't play fair. That side is a nation that applies slave labour, practices economic coercion and uses illegally-sourced raw materials, operates low-standard engineering processes, thereby emitting excessive CO2 and pollution; and subsidizes industry or otherwise distorts markets in ways that violate international rules. Such a nation is then unfairly able to produce at cost lower than others who appropriately obey rules.

Certainly, China is known to break WTO regulations. In June 2024 the World Trade Organization (WTO) registered 49 dispute cases against China, with the US raising 23 of those and the EU 11. However, China is not alone in facing dispute action for not obeying rules. Indeed, at that same time the WTO recorded 171 cases against the US, with China raising just 18 and the EU, 35. In other words, the USA has more than three times dispute cases against it compared to China, whether raised by the rest of the world or by the EU. (Obviously, this is not to say that all those 49 and 171 dispute cases involved the specific malpractices I described; it is merely to indicate that a lot more evidence needs to be placed on the table than simply reciting suspicions and prejudices.)

One of these complaints I've heard in yet other discussions, is that China might well be producing clean-energy machines. But it does so using dirty energy. This needs to be documented; I have seen no credible empirical evidence supporting it. But further questions should be asked, how are other nations making their clean-energy machines? Should dirty energy never be applied to invest in cleaner energy devices? Is it preferred to use dirty energy so that it has no obvious impact on future possibilities for clean energy?

A more appropriate and more immediate way to look at overcapacity is how many economists might naturally do so, i.e., via the concept of dumping: Is the exporter selling in a foreign country at a price lower than it sells in its own, and hence is running losses on its own account so as to harm that foreign country? It is easier to get evidence on this. That evidence, however, does not support the initial hypothesis. Many Chinese products---especially electric batteries and EVs---are cheaper in China than in the EU or the US. This is hardly surprising in light of the so-called Balassa-Samuelson effect, that says poorer countries are cheaper countries.

Are Chinese industries accused of overcapacity seen to be making losses? Market competition in China is fierce. But many Chinese industries, especially EVs, are profitable in the aggregate. Some individual firms businesses of course do fail. But that is evidence of creative destruction, not of dumping. The Chinese goverment does provide subsidies in the EV industry. But it does so for consumers to purchase EVs, not for producers to make them. Those subsidies can purchase Teslas just as easily as they do BYDs. Arguably, such consumer subsidies ought to be used more in all other economies to encourage transition to clean-energy vehicles and away from fossil-fuel combustion.

Finally, is China flooding Western markets with clean-energy products? China's total exports of EVs are only 14% of its aggregate production, a smaller fraction than that of cars exported out of Japan and South Korea production. Yes, that means more in absolute numbers---but penalising a country for its size is a different economic argument than for its breaking international rules. And, on the other side of the exchange: What fraction of total new car sales in the US are China-made EVs? Two percent.

China is hardly flooding the world with loss-making EVs.

Finally, what economists might describe as general equilibrium thinking rather than partial equilibrium analysis: While rightly looking out for their own industries and businesses, everyone needs to think a little also about the good of our planet. Simply put, the world needs clean cheap energy. To gain any reasonable measure of control over their own destiny, emerging economies will need massive sustained bursts of energy. Poor countries cannot afford costly technologies to replace fossil fuels and, as a result, unless things change, the Global South will be responsible for most of the world's impending carbon emissions. These countries are not agitating about clean-energy overcapacity: for the 70% of humanity that lives there, for a long while still, there is no state of the world where there are too many EVs, too much electric battery storage, and too many solar panels.

References

"新加坡学者：美国将自身的经济混乱与政治议题混为一谈" https://xinwen.bjd.com.cn/content/s667d8bb2e4b07e497a97382e.html (Beijing Daily, Fri 28 Jun 2024)

Atlantic Council. 2024. "Europe is gearing up to hit Chinese EVs with new tariffs. Here’s why", New Atlanticist (June 12) https://www.atlanticcouncil.org/blogs/new-atlanticist/experts-react/europe-is-gearing-up-to-hit-chinese-evs-with-new-tariffs-heres-why/

Frankel, Jeffrey. 2024. "It Doesn't Make Sense: Why US Tariffs on Chinese Cleantech Risk the Green Transition", The Guardian (26 Jun) https://www.theguardian.com/business/article/2024/jun/26/it-doesnt-make-sense-why-us-tariffs-on-chinese-cleantech-risk-the-green-transition

Quah, Danny. 2024. "'Export-led Growth': The Trade-Technology Relation in Small and Poor Economies", LKYSPP Working Paper (May) https://dannyquah.github.io/In-progress.html#small-poor-trade-technology

Reuters. 2024. "Chinese overcapacity claims by US, Europe are 'trade protectionism', ministry says" (May 16) https://www.reuters.com/business/chinese-overcapacity-claims-by-us-europe-are-trade-protectionism-ministry-says-2024-05-16/

Yellen, Janet. 2024. "Remarks by Secretary of the Treasury Janet L. Yellen at the Economic Club of New York (ECNY)" (June 13) https://home.treasury.gov/news/press-releases/jy2405