China's commerce ministry convened a rare dedicated press briefing on July 28 to push back against mounting global accusations that Beijing is flooding world markets with artificially cheap goods — but the structural forces driving its export surge show little sign of easing.
Beijing Frames 'Overcapacity' Charge as Protectionist Cover
The State Council Information Office gathered Chinese and foreign journalists on July 28 to address one of the most contentious flashpoints in global trade. The charge: that China is producing far more than its domestic market can absorb and dumping the surplus internationally at ruinous prices.
From electric vehicles and solar panels to lithium batteries, the "overcapacity" accusation has become a routine feature of trade negotiations with the United States, the European Union, and a growing number of emerging-market economies.
China's official answer was blunt. Commerce Ministry Vice Minister Yan Dong told reporters that "Chinese overcapacity" is the result of some economies politicizing trade and economic issues — a pretext for protectionism, not a genuine economic diagnosis. A briefing document distributed at the session argued across three dimensions — historical, theoretical, and practical — that industrial capacity fluctuations are normal in market economies. It contended that China's industrial capacity utilization rate falls within a reasonable range, that a trade surplus does not automatically equal overcapacity, and that industrial subsidies do not necessarily produce it.
The central argument distilled to this: the evolution of the global industrial structure from a single-center to a multi-center arrangement is simply how international division of labor works. China becoming the world's factory is a natural product of its integration into globalization. Labeling that outcome "overcapacity," Beijing argued, is protectionism dressed in economic language.
Export Dependency Built Into China's Economic DNA
To understand why Beijing is so resistant to the overcapacity framing, it helps to understand how deeply export earnings are wired into the country's economic architecture. Since China's reform and opening-up, the economy has relied heavily on trade — not merely because net exports contribute to GDP, but because foreign exchange income has served a strategic function. China has long depended on imports for energy supplies, advanced manufacturing equipment, and high-end technology components. A strong, stable flow of foreign currency makes those imports possible.
When export profits exceed what the domestic market can offer, manufacturers naturally expand capacity to capture the margin. That dynamic was sustainable — and largely self-concealing — during the years when China's property sector was booming and household incomes were rising steadily. Domestic consumption absorbed enough output that the structural imbalance between production capacity and home demand remained below the surface.
That equilibrium has since broken down. As economic growth has slowed, property markets have contracted, and household debt levels have climbed, consumer spending has shifted visibly toward lower-cost goods. Businesses that once relied on domestic sales are now redirecting production overseas in significant volumes. The explosive growth of Chinese cross-border e-commerce platforms over the past several years is, in no small part, a story of manufacturers hunting for outlets for capacity that the home market can no longer absorb.
Domestic Price Wars That Foreign Competitors Cannot Match
When Western governments accuse China of overcapacity, the core of their concern is not really a statistical disagreement. It is about something that has become so normalized in China's domestic economy that it barely registers as unusual: relentless involution — the Chinese term for a competitive dynamic in which firms race to undercut each other until profit margins approach zero — and the price wars that follow.
Chinese companies, competing for domestic market share, have developed a reflex of continuous price cutting — using scale advantages to compress margins and sustain cash flow even when profitability disappears. On international markets, that same approach lands with enormous force.
For European, American, and Japanese manufacturers, undercutting a Chinese competitor on price often means accepting losses that cannot be sustained. Matching the price destroys margins. Failing to match it means losing customers.
Han Yong, director of the Commerce Ministry's WTO division, defended China's subsidy regime at the July 28 briefing. He said government support targets technology research and development, innovation commercialization, and market consumption — delivered through public services, technical standards, and skills training rather than direct production subsidies.
He Shaojun, the ministry's foreign trade chief, argued that Chinese exports of computers, phones, furniture, clothing, and toys have expanded consumer choice worldwide, lowered living costs, and cushioned inflation. He also noted that while China runs a large goods trade surplus, it carries deficits in services trade and capital accounts — and that its current account surplus of roughly 3.7% of GDP falls within what he described as internationally recognized reasonable limits.
Why Local Officials Keep Factories Running Even at a Loss
One structural feature of China's economy that rarely surfaces in official commentary on overcapacity is the incentive system facing local governments — and it helps explain why capacity contraction is so difficult to achieve even when national-level authorities might prefer it.
Under China's GDP accounting methodology, which measures economic output through the production method, industrial activity generates measurable value-added simply by occurring. As long as a factory is running, the local official overseeing that county or city can point to industrial output growth. Even if the factory's profits are shrinking or negative, the production numbers hold up the economic indicators that determine career performance.
A large factory also represents far more than its direct output. It anchors a local tax base, provides stable employment, enables land development, and anchors upstream and downstream supply chains. For a county government whose fiscal health depends on keeping that web of economic activity intact, the incentive to keep factories operating — even at compressed margins, even in sectors experiencing ruinous price competition — is powerful and real.
This logic applies across industries. In electric vehicles, solar manufacturing, and lithium battery production, local protectionism is particularly visible. But even in consumer goods sectors where no explicit local protection exists, the employment and tax-base considerations create the same structural resistance to capacity reduction. Across both strategic and traditional industries, the incentives point in the same direction: keep producing.
Where Beijing and Brussels See Fundamentally Different Problems
The collision between China's export surge and its trading partners' concerns reflects a genuine divergence in what each side is trying to protect, not simply a gap in data interpretation.
Beijing's framework prioritizes production efficiency, industrial competitiveness, and the ability to allocate goods to wherever global demand is highest. From this perspective, a country making things better and cheaper than its competitors is doing exactly what trade theory prescribes. Restricting that outcome through tariffs or market access barriers is the problem — not the production itself.
Washington, Brussels, and Tokyo operate from a different set of concerns. Industrial security — the ability to produce critical goods domestically even when imports are cheaper — ranks as a policy objective in its own right, not an inefficiency to be eliminated. Employment stability in manufacturing communities carries political weight that GDP aggregates do not capture. Supply chain resilience, brought into sharp relief by pandemic-era disruptions, has reinforced the case for maintaining domestic capacity even at higher cost.
That divergence in goals explains why this argument is so difficult to resolve at a negotiating table. The involution habits embedded in China's competitive culture, the export dependence built into its external balances strategy, the price wars that spill across borders, and the local government incentives that reward production over rationalization together form a structure that is genuinely hard to change.
Formally acknowledging it as systemic overcapacity would force Beijing to confront a cascade of consequences — compressed investment, eliminated capacity, rising unemployment. For now, it has every reason not to name what it cannot afford to fix.
