Great follow-up from Arnaud Bertrand in reference to my post about China vs. West trade.

My post,

Top US economists admit defeat and go to China with begging cup in hand: colonial-capitalism is getting its butt kicked around the world by many shades of communism-socialism. China Rising Radio Sinoland 240408

Arnaud Bertrand’s analysis,

It’s interesting to think through what Yellen is actually saying when she asks China to address its “industrial overcapacity”, particularly in fields like solar panels or EVs. First of all, what is “industrial overcapacity”? The official definition for it is “when an industry’s production capabilities exceed the demand for its products, leading to inefficiencies and reduced profitability”. What are the key metrics to assess if a country has “industrial overcapacity”? There are 3: – Capacity utilization rates: this shows the % of a country’s industrial capacity actually being used. If you don’t use much, you have too much capacity. – Inventory levels: high levels of unsold goods can indicate that production exceeds demand, suggesting overcapacity. – Profit margins: declining profit margins in manufacturing sectors might indicate overcapacity, as firms may reduce prices to stimulate sales. So let’s look at China for all three. Let’s start with capacity utilization rates. Look at the graphs: it’s crystal clear they’ve been pretty much constant in China for the past 10 years, standing at roughly 76% right now, which is in the same ballpark as America’s own utilization rates at about 78%. So no issue there. Now let’s take a look at inventory levels. As of the beginning of 2024, China’s finished good inventory PMI index stood at about 49 (… ) vs the US at 48 for manufacturing inventories (… ). An index of over 50 is a sign of growing stock levels: this is not the case here for either country, so there is no issue with inventory levels. Lastly, let’s check profit margins. China’s industrial profits rose 10.2% in the first 2 months of the year (… ), consolidating a gaining streak since August last year. So no issue there either. So what gives? No matter how you look at it, there is just no sign of industrial overcapacity in China. By accusing China of “industrial overcapacity”, could the US maybe mean that China is breaking WTO rules by practicing “dumping”, meaning the practice where companies export products at prices lower than what they charge in their home market, or below the cost of production? No, this is not what China is accused of doing here: despite the very low prices for its EVs or solar panels, the companies involved still make a profit (heck, as we just saw, industrial profits are rising at double digit growth), and they DO charge higher prices abroad than at home. No, the real issue here is in fact not one of industrial capacity but one of competitiveness. What is crystal clear is that the competitiveness of Chinese companies is overwhelming: today, in scores of industries – like solar or EVs – there is simply no way for American or European companies to compete with Chinese ones. This is the real issue: Yellen and Western leaders are afraid that if things keep going, China will simply eat everyone’s lunch. Contrary to popular belief, this competitiveness isn’t thanks to Chinese “cheap labor”. One guy who explained this extremely well is Apple’s Tim Cook (…): “There’s a confusion about China. The popular conception is that companies come to China because of low labor cost. I’m not sure what part of China they go to, but the truth is China stopped being the low-labor-cost country many years ago. And that is not the reason to come to China from a supply point of view. The reason is because of the skill, and the quantity of skill in one location and the type of skill it is.” He credits the Chinese education system for this: “I give the education system a lot of credit for continuing to push on that even when others were de-emphasizing vocational […] China called that right from the beginning.” Having a huge depth of skills is one thing, but there is also control of the entire supply chain since China is the only country in the world that produces all categories of goods classified by the World Customs Organization (WCO). This gives it a key advantage when it comes to end prices: when you want to build something in China you can literally find the entire supply chain for it at home. Energy prices is another thing: for instance the International Energy Agency highlights that “low-cost electricity is key for the competitiveness of the main pillars of the solar PV supply chain” (… ) and “around 80% of the electricity involved in polysilicon production today is consumed in Chinese provinces at an average electricity price of around USD 75 per megawatt-hour (MWh)”. For comparison, in 2023 energy prices for industrial customers in Germany averaged 251.21 USD per megawatt-hour (MWh) (… ): that’s an incredible 234.94% more expensive! Lastly, China has become an innovation powerhouse. In 2023 it filed roughly as many patents as the rest of the world combined (… ) and it’s now estimated to lead 37 out of the 44 critical technologies for the future (… ). All this too has implications when it comes to the final prices of its products. To take the example of solar panels again, the IEA notes that “continuous innovation led by China has halved the emissions intensity of solar PV manufacturing since 2011” (… ), which means that not only does China have raw electricity prices which are immensely cheaper than in the West, but it’s innovated in such a way that it uses way less electricity in the production of its solar panels… So “the threat of China’s industrial overcapacity” is a buzzword that actually means that China is simply too competitive, and by asking it to address this, what Yellen is truly asking of China is akin to a fellow sprinter asking Usain Bolt to run a less fast because he can’t keep up. Now I’m not saying there isn’t some merit in this ask. At the end of the day, it’s understandable that when you see a competitor continuously gaining in strength, you grow quite anxious as to your own future and that of your people. But it needs to be framed the right way: framing it as if China was doing something malign with deliberate “overcapacity” is just a very unfair characterization. China played the game right: as Tim Cook explained, it first and foremost invested in its people, in their education. They also invested big time in innovation and they didn’t shoot themselves in the foot when it comes to energy prices the way Europe did, among many other policies. Demonizing this is just not right, and it’s certainly not the right way to ask China for what’s an incredibly big favor: running less fast so the West can keep up… Especially when the West running slow is the result of catastrophic leadership for the past few decades: first and foremost choosing to waste trillions of dollars in killing people abroad instead of investing in its own progress… I’m afraid this “overcapacity” framing is just another illustration of this poor leadership: when you prefer to blame others for your own failures rather than face reality.



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