On July 28, China's Ministry of Commerce released a document titled "China's Position on the So-called Excess Capacity Issue". It said that the evolving global capacity landscape is the result of international industrial labor division and cooperation, and that the capacity issue requires a rounded, objective and just approach that combines historical perspective with dialectics.

File photo: IC

The position paper comes as the U.S. and Europe have increasingly focused their trade policies on what they describe as "overcapacity in Chinese manufacturing", with electric vehicles (EVs), solar panels and batteries emerging as the main flashpoints.

But how should "overcapacity" be defined?

Vuk Jeremić, a former president of the United Nations General Assembly and former Serbian foreign minister, said in early July that if producing more than a country consumes domestically were enough to define overcapacity, French wine would also qualify, since France produces far more wine than it drinks.

Justin Yifu Lin, former chief economist of the World Bank, made a similar point in April, citing Germany's auto industry. Germany exports about 4 million vehicles a year, representing roughly 80 percent of its total vehicle production. China, by comparison, exports about 7 million vehicles, accounting for only around 20 percent of its total output. If Germany's export ratio were used as the benchmark, China's auto industry could hardly be described simply as having "overcapacity".

In fact, the current debate over China's new energy industries reflects more than a question of supply and demand. It also reflects broader shifts in global industrial competition.

Bloomberg columnist David Fickling has maintained that the overcapacity debate ignores the ways that the car industry is changing, in China and around the world. He contends that foreign automakers have lost market share in China partly because they were slower to electrify their product lineups.

Martin Sandbu, the Financial Times' European economics commentator, has argued that claims that so-called "Chinese overcapacity" threatens European industry are exaggerated. Instead, he says Europe's real challenge is the lack of robust, predictable domestic demand, while Europe stands to benefit from greater Chinese import competition, as a spur to faster productivity improvements at home.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, has also noted that if every country produces only to meet its own consumption demand, global trade would cease to exist.

Europe itself remains divided over how to respond to competition from China. While the Centre for European Reform argued in May that the European Union should adopt more flexible trade defense instruments, Belgian think tank Bruegel has warned that while Europe should reduce its excessive dependencies, cutting China out of the process is an impossibility. It added that ignoring the rest of the world for security reasons would dramatically increase costs and hurt the overall competitiveness of European industries.

Some European companies operating in China have also expressed concern that trade restrictions could push up supply chain costs and erode their competitiveness.

On the demand side, industries such as EVs and solar panels continue to expand. The International Energy Agency expects global EV sales to reach 23 million units in 2026, accounting for nearly 30 percent of new vehicle sales.

As the global green transition continues, China's new energy industries have helped drive down costs through technological innovation, large-scale production and supply chain coordination, offering consumers worldwide more choices.

John Quelch, executive vice chancellor of Duke Kunshan University, said earlier this year, "What may appear to be domestic overcapacity in EVs is actually appropriate capacity for the markets in the world. So in a way, the Chinese 'overcapacity' is a gift to the world."