China’s 1 trillion yuan EV, solar and battery exports face overcapacity concerns as US and EU concerns mount

China’s exports of electric vehicles, lithium batteries and solar cells worth 1 trillion yuan ($139 billion) could face a new round of challenges this year, as Western policymakers expressed “genuine concerns” about overcapacity that will hit their markets to disturb.

Legal action and tariff increases by the United States and European Union against a perceived oversupply of cheap products could set back a crucial segment of the world’s second-largest economy unless China diversifies away from the West and also increases domestic demand stimulates, say analysts.

“The key question is how these industries grapple with these growing headwinds, which involve not only finding new business opportunities but also balancing geopolitical and trade policy risks,” said Nick Marro, chief global trade analyst at the Economist Intelligence Unit.

“I think it will be less of an ‘excuse’ for Western policymakers to engage in protectionism, and more a reflection of genuine concerns about whether these products will disrupt their own markets.”

You can get some kind of immediate protective effect by filing an anti-dumping lawsuit

Jayant Menon

He also noted that there is a “growing sentiment” in Western capitals against the idea of ​​allowing their consumers to subsidize China’s growth engine.

The European Commission has launched an anti-subsidy investigation into Chinese electric vehicles a train maker, while the U.S. Department of Commerce imposed tariffs on solar panel makers that finish products in Southeast Asia to avoid tariffs on Chinese-made goods.

The US government already bans EV battery materials from China as a “foreign entity of concern.”

The war in Ukraine, which marks its second anniversary on Saturday, is also a factor affecting China’s ties with Western markets. The British government announced a new package of sanctions against Russia on Thursday, including three Chinese electronics companies.

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“You can get a kind of immediate protective effect by filing an anti-dumping case,” said Jayant Menon, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore.

“If a competitor loses that market share, it is difficult for the country to regain it.”

According to online investment publication Gelonghui, Chinese manufacturers could make 4,800 gigawatt hours of batteries by 2025, four times the demand of their EV manufacturers.

Annual solar panel supply capacity last year was between 800 gigawatts and 1,100 gigawatts, well ahead of expected global demand of around 300 gigawatts, according to the Economist Intelligence Unit.

Expanding domestic demand is a difficult undertaking that will require time, effort and, perhaps most importantly, domestic reform

Wang Zichen

Chen Zhiwu, a finance professor at the University of Hong Kong, said local governments are providing venture capital and land tax incentives to EV companies.

“Beijing recognizes that insufficient domestic demand is a key economic challenge,” said Wang Zichen, a researcher at the Beijing-based Center for China and Globalization.

“However, expanding domestic demand is a difficult undertaking that will require time, effort and, perhaps most importantly, domestic reform.”

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Marro added that trade frictions in China are equally linked to the economic challenges the country is grappling with domestically.

“Deflationary forces and weak domestic demand are related to China’s slowing growth engine and weak consumer confidence,” he said.

“The worsening savings and investment imbalances in the Chinese economy are obviously being replicated in the trade arena.”

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In a February 2023 article, the MIT Technology Review stated that the development of batteries and electric vehicles provided China’s auto sector with growth opportunities during the coronavirus pandemic, as well as greater weight in “climate policy leadership.”

And China can reduce overcapacity and avoid the wrath of Western countries by setting up factories in the US or Europe – which is already an “option” – or in Southeast Asia, said Peng Peng, executive chairman of the Guangdong Society of Reform.

Manufacturers can also sell their hardware to India or other parts of the world not connected to the US or Europe, as the sheer number of other potential non-Western markets can help offset declines in demand, Peng added.

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