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ASIAN PROTECTIONISM:RESPONSE TO CHINESE OVERCAPACITY



  Jul 15, 2024

ASIAN PROTECTIONISM:RESPONSE TO CHINESE OVERCAPACITY



Understanding Overcapacity

• Definition: Overcapacity occurs when a country’s production capabilities exceed the domestic demand for its products, leading to an excess that needs to be exported.

• Chinese Overcapacity: China has built up significant production capabilities in various sectors, leading to a surplus of goods such as electric vehicles (EVs), metals, chemicals, and consumer goods. This surplus is then exported, often at low prices, flooding global markets and affecting local industries in other countries.

Causes of Chinese Overcapacity

• Government Policies: China’s government has supported rapid industrial expansion through subsidies, loans, and infrastructure investments.

• Economies of Scale: Large-scale production facilities in China benefit from lower costs per unit, encouraging mass production.

• Global Market Strategy: China aims to dominate global markets by producing goods at lower costs, which can outcompete local manufacturers in other countries.

Impacts of Chinese Overcapacity

• Global Trade Tensions: The U.S. and European Union have increased tariffs on Chinese imports, particularly on high-tech goods like EVs and batteries, to protect their own industries.

• Emerging Markets Response: Countries like Turkey and Brazil have also imposed additional tariffs on Chinese goods to shield their domestic markets.

• Economic Disruption: Chinese overcapacity affects various Asian industries:

• Consumer Goods: Low-cost Chinese products dominate markets in Thailand, Indonesia, and South Korea, mainly through e-commerce platforms.

• Metals and Chemicals: Domestic producers in India, Vietnam, Thailand, and South Korea face significant competition from cheap Chinese exports.

• Automotive Sector: Chinese EV exports to Asia have surged, threatening local automotive industries. In 2023, over 30% of Thailand’s vehicle imports were from China, up from 10% in 2013.

Policy Recommendations for Asia

1. Implement Tariffs and Taxes:
• Protection Measures: Countries with large working-age populations can impose tariffs to protect local industries.

• Example: Thailand introduced a 7% value-added tax on low-cost imported goods.

2. Strengthen Domestic Manufacturing:
• Local Content Requirements: Policies to encourage domestic sourcing and reduce reliance on Chinese intermediate goods.

• Ecosystem Development: Invest in building robust domestic manufacturing ecosystems.

3. Support Strategic Sectors:
• Subsidies and Incentives: Financial support for local production through subsidies and tax incentives.

4. Mitigate Supply Chain Risks:
• Alternative Sources: Secure alternative sources of raw materials to reduce dependence on China.

• Long-Term Strategies: Follow examples like South Korea’s strategy to decrease import dependence.

5. Diversify Trade and Investment:
• Attract Diverse Investments: Encourage foreign direct investment from a variety of sources.

• Expand Trade Partners: Diversify trade relationships to minimize risks.

Conclusion

• Protecting Domestic Interests: Asian countries need to balance economic and geopolitical priorities while safeguarding local industries and jobs.

• Policy Shift: An increase in protectionist measures in response to Chinese overcapacity and global trade tensions is expected.




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