China Exports Excess Capacity Below Cost US producers displaced by Chinese dumping

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WASHINGTON – In order to build strong defenses against the ill effects of the 2008 Great Recession China launched a massive domestic investment program funded by a gigantic stimulus package. This may have saved China from the direct impact of the global financial crisis; but the cure created major problems that now affect China and all its trading partners.

Too much stimulus

Simply stated, the gigantic stimulus supported mega construction projects across China. This in turn created unprecedented new demand for cement, steel, copper, wood products, plumbing, electrical fixtures and everything else that is needed in construction.

Beyond this, easy credit ordered by the Chinese authorities unleashed a huge demand for more cars. More cars meant more tires. Hence the explosion of demand for rubber. This led entrepreneurs in Indonesia and Thailand to start new rubber tree plantations.

Over capacity

As it usually happens, new supply financed by easy credit outpaced actual demand, in a major way. If we fast forward to today, the picture is rather ugly. In China today there is enormous over capacity in almost all economic sectors.

In a normal country the weaker producers would be bought by the stronger ones, or they would simply shut down, with unpleasant consequences for millions of workers who would lose their jobs. This would probably cause a recession.

Export the excess production

But this is China, not a normal country. Large scale bankruptcies and lay-offs are out of the question, for political rather than economic reasons. Keeping moribund companies afloat, with everybody still on payroll, is mostly a political issue. Therefore banks keep financing essentially bankrupt enterprises that keep producing stuff for which there is no domestic demand.

And so what happens to all this excess production? You guessed it, it is exported. In fact, since it is priced below its actual cost, it is dumped.

And so in America, (according to a detailed WSJ report), we have now an invasion of  super cheap Chinese tires, while inexpensive imported Chinese steel is causing US producers to go out of business.

Horrendous distortions

Of course low prices are good  for US consumers. But these are not low prices due to more efficient production methods. These cheap imports are the result of horrendous distortions created by improvident Chinese policy-makers. They thought they had  devised a winning strategy to avoid the impact of the global financial crisis.

Whereas, it turned out that their stimulus package was poorly designed. Massive investments led to over capacity and to an abnormal growth of demand for imported raw materials. Now that the party is over in China, Beijing decided that the smart thing to do is to export all this subsidized excess capacity, this way causing major troubles for US producers.

Dumping is illegal. But it is also difficult to prove. And there is hesitation in Washington about the prospect of starting a trade war with China.

Not a market economy

Whatever the course of action that will be decided by Washington policy-makers to deal with Chinese dumping, at least one thing is clear. China is not a true market economy.

In China credit is allocated for political reasons by state owned banks. Over production is encouraged and then subsidized. Virtually dead companies are kept alive in order to avoid unpleasant social and economic dislocations that might  morph into political unrest. And money losing companies are encouraged to export at below cost prices the excessive capacity encouraged by the central authorities.

This is Chinese “capitalism” for you.

 

 

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