Simon J. Evenett & Johannes Fritz | 03 May 2018

During the past year some of America’s trading partners have sought to rein in Washington’s unilateral protectionist instincts by framing the woes of the trading system in terms of global excess capacity—essentially diplomatic code for Chinese excess capacity in manufactures. The joint EU, Japanese, and US statement pledging cooperation on such matters at last December’s WTO Ministerial Conference was an important milestone in this co-option strategy. In light of the threatened imposition of tariffs on steel and aluminium products on widely-derided national security grounds, this report examines whether America’s trading partners should double down on this particular strategy. To do so, we evaluate whether excess capacity in manufactured goods is a systemic threat to the world trading system. 

We conclude there is no compelling case for governments going spare over global excess capacity in manufacturing. From the perspective of the global trading system, a nation’s excess production capacity is not the issue per se but the harm such excess capacity does to trading partners is. We build our case first by critically evaluating the implementation of the only G20 initiative to tackle sectoral excess capacity, namely in the steel sector. The dissatisfaction of key steel sector stakeholders with this initiative’s execution is merited. That the steel sector is plagued by trade distortions is not in question, how the G20 has gone about tackling it is. 

Then we muster empirical evidence that sheds light on how little global trade is in sectors where China has excess capacity. Moreover, exports from these sectors account for only a small share of China’s total exports. Critically we show how systemically unimportant are the trade-related knock-on effects of excess capacity such as import surges and how infrequently G20 governments have bothered to respond to import surges in excess capacity sectors during the past 10 years. 

On examination, it turns out that the phrase excess capacity is slippery—rhetorically useful, but hard to pin down, even harder to operationalise, and at the same time woefully misleading. So excess capacity joins the list of superficially appealing trade policy jargon such as unfair trade and managed trade. A focus on excess capacity in some manufacturing sectors ignores the trade policy challenges building up in other sectors of the world economy. Framing future trade cooperation in terms of global excess capacity isn’t the way forward. The focus should be on the altering policies that distort commerce not targeting market outcomes, of which excess capacity is one.