Navigating China’s Overcapacity: A Looming Threat too the EU Economy
China’s relentless pursuit of economic self-reliance has inadvertently created a massive industrial overcapacity, posing important challenges to global markets, especially in Europe.Effectively, China is now churning out far more goods than it can consume, leading to a glut of supply that drives down prices worldwide. This situation isn’t just an economic issue; it’s a strategic one, with potential long-term implications for the EU’s competitive landscape.How can European businesses and policymakers adapt to this new reality, and what sectors are most at risk?
Understanding China’s Overcapacity Crisis
China’s economic model, driven by extensive industrial policy and massive subsidies, encourages overinvestment and overproduction. The country now accounts for roughly one-third of global value-added manufacturing, with its trade surplus nearing USD 1 trillion last year. The result is a flood of inexpensive, China-made goods entering global markets, creating intense price pressures.
Within China,this overcapacity has led to fierce price wars and declining profitability,with nearly a quarter of industrial enterprises operating at a loss. In a market economy, such conditions would trigger consolidation, but China’s unique economic structure prevents this natural correction. The current leadership views its vast manufacturing base as a core geopolitical strength, tolerating waste and inefficiency in the name of self-reliance and technological security.
European Sectors at Risk From Chinese Overcapacity
While some conventional industries like steel and aluminum have already felt the impact, the current wave of overcapacity affects more value-added sectors, such as passenger vehicles and electric vehicles (EVs). Several othre industries are also vulnerable:
- Short Term: Legacy semiconductors,low- to mid-range industrial machinery and components,IT equipment,low- to mid-range medical devices,and pharmaceuticals.
- Medium to Long Term: Electrolyzers, advanced medical devices, advanced industrial machinery and components, and new materials.
These sectors share common traits, making them susceptible to the ripple effects of China’s overproduction. For example,the semiconductor industry,already facing global supply chain disruptions,could see further price erosion due to Chinese competition.
The Impact of Trump’s Tariffs: A Double-edged Sword
The issue of Chinese overcapacity predates Trump’s tariffs,but the tariffs’ intermittency creates new dynamics. While the tariffs aimed to curb Chinese exports to the U.S.,thay also redirected some exports to other markets,including the EU. Data from Q1 2025 showed that while exports to the U.S. declined, overall exports rose, boosted by increased shipments to ASEAN countries and the EU.
It’s unlikely that these tariffs will create significant opportunities for EU firms in the U.S. market. Evidence from the 2018 U.S.-china trade tensions showed that the gap in the U.S. market was primarily filled by exports from South and Southeast Asia, regions with economic structures similar to China’s. These regions might also serve as transit points for Chinese firms rerouting exports to the U.S.
Could Increased Chinese Demand Solve the Problem?
A substantial increase in China’s domestic demand could potentially absorb some of its excess production, but this seems unlikely under the current leadership. Beijing continues to prioritize the supply side of the economy, focusing on industrial policy and high savings rates rather than boosting household consumption. This approach is deeply ingrained in China’s economic model, making a significant shift improbable.
Table: Vulnerable European Sectors
| Sector | Vulnerability | potential Impact |
|---|---|---|
| Legacy Semiconductors | Short Term | Price erosion and reduced market share for European manufacturers. |
| Low- to Mid-Range Industrial Machinery | Short Term | Increased competition and potential job losses in the EU. |
| Electric Vehicles (EVs) | Current | Market saturation and reduced profitability for European EV producers. |
| Advanced Medical Devices | Medium to Long Term | Dependence on Chinese components and reduced innovation in Europe. |
Europe’s Response: Strategic Options
the EU faces a complex challenge that demands a multifaceted response.Some potential strategies include:
- Strengthening Competition Law: Adapting regulations to address the unique challenges posed by state-subsidized enterprises.
- Investing in Innovation: Supporting research and advancement to maintain a competitive edge in key industries.
- Diversifying Supply chains: Reducing reliance on Chinese suppliers and exploring choice sources.
- Negotiating Trade Agreements: Working with international partners to address unfair trade practices.
The European common market, designed for fair competition, must evolve to effectively compete with firms benefiting from China’s state-driven economic model. This requires a proactive and strategic approach to safeguard European industries.
Reader Question
What specific policy changes do you think are most critical for the EU to protect its key industries from the impacts of China’s overcapacity?
Frequently Asked Questions (FAQs)
Overcapacity refers to a situation where a country’s industrial production exceeds its domestic consumption, leading to a surplus of goods that are then exported to other markets, frequently enough at lower prices.
Trump’s tariffs have redirected some Chinese exports from the U.S. to the EU, intensifying competition for European companies in sectors where the EU has strong players, such as machinery and components.
Sectors like legacy semiconductors, low- to mid-range industrial machinery, IT equipment, medical devices, and EVs are particularly vulnerable to the impact of China’s overcapacity.
While increased demand could help, it’s unlikely under the current economic policies that prioritize supply-side growth over household consumption.
The EU can strengthen competition laws,invest in innovation,diversify supply chains,and negotiate trade agreements to address unfair trade practices.
