Guo Kai, executive president of the China Finance 40 Institute (CF40), said recently that the issue of China’s overcapacity referred to in Europe and the United States is not purely an economic issue, but a complex issue involving international relations and the international political landscape.

Speaking at the launch of CF40’s quarterly macroeconomic policy report on April 22, Guo pointed out that he did not agree with the United States’ definition of overcapacity and the problems cited there. Guo was formerly the deputy director of the monetary policy department of the People’s Bank of China.

For example, U.S. academics say the U.S. manufacturing sector has lost two million jobs because of the “China Shock.” Guo Kai said that changes in manufacturing employment are a complex issue involving a number of factors, of which the trade relationship with China is just one, whereas automation and productivity increases are the key factors leading to the decline in manufacturing employment. In fact, manufacturing employment is declining in many countries around the world, including China. This is largely attributable to technological advances and industrial upgrading. In addition, even without Chinese competition, low-end manufacturing would not remain in the United States, but would move to other low-cost countries such as Mexico, Vietnam, and Indonesia. Therefore, blaming China for the decline in manufacturing employment is unreasonable.

Guo Kai pointed out that China, as a global manufacturing power accounting for more than ten percent of total global manufacturing output, plays a pivotal role. In the past two years, calculated in U.S. dollars, China’s manufacturing [trade] surplus has reached U.S. $1.8 trillion a year, and this figure represents a doubling compared to before the COVID-19 epidemic. China’s huge surplus means deficits for other countries, and given the importance of manufacturing to countries, the overcapacity problem has become particularly prominent.

“We in China have grown at a kind of rocket speed, and our manufacturing trade surplus has risen over these past years, especially during the pandemic years, to reach two percent of global GDP, which is the level of the United States’ post-war manufacturing trade surplus as a share of global GDP,” he said.

He mentioned that, looking back at history, the manufacturing trade surplus of Japan and Germany in their heyday did not exceed one percent of global GDP. At the end of World War II, the manufacturing trade surplus of the United States represented two percent of global GDP, but then it fell to 0.5%, and has basically been in deficit thereafter.

“People are greatly worried about China’s manufacturing sector, because when you have such a large manufacturing sector and you still have such a large trade surplus with others, you basically have a trade surplus with all the countries in the world, which creates a big political problem. It’s not an economic problem; it’s a political problem,” Guo Kai said.

He pointed out that politicians in the United States often use the “China shock” and the overcapacity issue as election chips. This year happens to be an election year in the United States, and when you look at the comments of the current president, Joseph Biden, you can find his statements for specific industries quite interesting. In Michigan, he claimed he would impose high tariffs on China’s electric cars; in Pennsylvania, he proposed high tariffs on Chinese steel and aluminum products. These issues are being used as election chips despite the fact that China has yet to export a single electric car to the United States, and its exports of steel to the United States are minuscule. The reason for this is that specific industries in these states have a decisive impact on the outcome of elections, and Biden needs to use this to win voters’ support.

“As politicians, both Trump and Biden have to face this perceived reality or they can’t win elections,” said Guo Kai.

He emphasized that in understanding this narrative and the political motivations in the United States, we must realize that whether it is correct or not, social perceptions of this sort are unlikely to change in the short term. While it is true that China’s entry into the WTO has had an impact on certain segments of the U.S. population, far more groups of people have benefited than have been harmed. However, because the groups of people who have been harmed are relatively concentrated, their voices tend to be louder and more direct, leading to a perceptual asymmetry. In contrast, those groups who have benefited are scattered across fields and industries, making it difficult for them to form a unified voice. As a result, the views of harmed groups are more likely to be amplified and emphasized in political contexts such as elections.

Returning to China’s domestic perspective, Guo Kai said that in recent years, due to adjustments in the real estate sector, China’s economic growth has relied to a large extent on manufacturing sector investment. The manufacturing sector’s rapid growth has not only provided strong support for China’s economy, but has also brought about a rapid expansion of production capacity and increasing exports. However, this rapid growth has also exacerbated the overcapacity problem.

Guo Kai offered a series of specific policy recommendations to address the overcapacity issue. First, increasing domestic demand is an important way to ease overcapacity. Expanding the domestic market and raising the level of consumption can effectively reduce dependence on other countries, and at the same time helps spread export risks.

Second, it is also necessary to adjust how production capacity is exported. By strengthening cooperation with other countries, China can promote production capacity cooperation and sharing, and achieve mutual benefits and win-win results. At the same time, it can encourage enterprises to increase technological innovation and R&D investment, and raise product quality and value-added, enhancing their international competitiveness.

In addition, Guo Kai emphasized the importance of policy coordination and international cooperation. Countries should strengthen communication and cooperation to jointly address the challenges of global manufacturing. Promoting trade liberalization and investment facilitation can further the healthy development of the global manufacturing industry.