There has been a spate of recent articles discussing the economic impacts of China’s trade policy that floods global markets with Chinese manufactured products that far surpass internal Chinese consumer demands. Chinese leaders claim such concerns are exaggerated. At the end July, China’s Ministry of Commerce published a study purportedly demonstrating that output from Chinese factories falls well within the range of other growing economies. The study noted, “There is currently no broad global consensus on what constitutes ‘overcapacity’. Capacity utilization rate is commonly used as a metric, but it needs to be considered in light of each country's specific circumstances. Data from relevant institutions indicates that the median capacity utilization rate in developed and rapidly growing economies is mostly between 75 and 80 percent, while in less developed countries it is generally between 50 and 64 percent.”[1] According to the study, in 2025, the capacity utilization rate of China’s industrial enterprises was 74.4 percent, which, the study concluded, “is within reasonable range.” Much of the rest of the world sees a very different picture.

The Overcapacity Problem

Michael B. G. Froman, President of the Council on Foreign Relations, writes, “There has been no shortage of complaints about Chinese overcapacity in recent years. Beijing’s commitment to driving exports and widening its trade surplus, by any means necessary, has undermined the manufacturing aspirations of advanced economies such as the United States and those in Europe, as well as developing countries in Africa, Asia, and Latin America. There is more of a global consensus about the nature of the challenge than ever before, but it has had little effect on Chinese policy.”[2] According to Froman, “The world’s ability to absorb Chinese overcapacity is approaching a breaking point. And if that breaking point comes, the consequence could be a global economic crisis at a time when governments are particularly ill equipped to manage the fallout.” He adds, “[China’s trade policy] is politically and structurally unsustainable — creating an increasing and underappreciated risk to the entire global economy.”

The reason that Froman insists that China’s current trade policy is unsustainable is because on its current trajectory China will eventually run out of customers. When that happens, he predicts, “The reckoning will be most painful for China. But a material slowdown in its economy would send shock waves around the world, especially among China’s major trading partners, not only in the Asia Pacific but also in countries elsewhere whose economies have become intertwined with China’s. The United States would not be immune to the shock, but it would be the only actor with the economic and institutional capacity to stabilize the global economy.”

According to Esther Goreichy and Jacob Gunter, analysts at Mercator Institute for China Studies (MERICS), Chinese policies leading to the current overcapacity challenge have been in play for over a decade. They explain, “Overcapacity is a result of long-running policies aimed at establishing China as a global industrial leader. Policies such as Made in China 2025, launched in 2015, have accelerated capacity growth. This industrial push intensified during the US–China trade and technology war, initiated at the end of Trump’s first presidency, and again during the Covid pandemic, as fixed-asset investment surged while household consumption weakened sharply.”[3] Although China denies claims that it violates historical trading norms, Goreichy and Gunter observe, “Beijing relies on a broad set of policy tools that in several cases have been found to contravene international trade rules. These include vast subsidies — estimated at around 4.5 percent of GDP by the IMF, as well as preferential loans, tax breaks, land concessions, and other tariff and non-tariff measures. In parallel, China has invested heavily in logistics, digital infrastructure, and transport networks, creating an ecosystem designed for industrial expansion.” Froman adds, “The Organization for Economic Cooperation and Development has estimated that 60 percent of China’s gains in global manufacturing market share have been driven by government subsidies.”

Despite growing concerns, there are currently no indications that China is thinking about changing its trade policy. Journalist Daisuke Wakabayashi reports, “China’s manufacturers, hurt by overcapacity and relentless price competition that have squeezed their profits, have sought growth abroad by inundating overseas markets with low-cost goods. The widening trade surplus has intensified frustration in the West over the growing dominance of Chinese companies across a range of industries.”[4] Goreichy and Gunter acknowledge that some consumer and environmental advocates don’t see a problem. These advocates ask questions like: “Aren't cheap Chinese goods beneficial for consumers? Wouldn’t Chinese green technologies accelerate the climate transition? Isn't China simply reproducing what Germany and Japan did before?”

According to Goreichy and Gunter, answers to those questions aren’t simple “yes” or “no” responses. They explain, “In market economies, unprofitable capacity is shut down and capital reallocates. In China, state-directed lending and an ideology that treats productive capacity as strategic power, or even just as a source of jobs, prevents this adjustment.” That’s why most analysts insist China’s current trade policies must be revised.

The Way Out

According to Froman, “China’s trade surplus could, in effect, collapse on itself.” He adds, “The surest way to avoid this costly chain of events is a preemptive and gradual rebalancing of the Chinese economy. This has long been China’s best path toward more sustainable growth, and a route the United States has advocated for years. But whereas in decades past it was a smart choice, now it is a necessity.”

Despite the urgency of reform expressed by Forman, Goreichy and Gunter insist that Chinese leaders are adopting policies that fail to get to the heart of the problem. They explain, “To tackle these issues, including the fiscal burden of negative returns on investment due to ever smaller profit margins and the weakening of incentives for innovation — Beijing has launched an ‘anti-involution’ campaign. Far from signaling a retreat from industrial policy, however, the campaign seeks to manage overcapacity while preserving China's strategic dominance. While the approach varies by sector, it remains supply-driven: price floors and capacity cuts in solar, export controls in batteries to limit ‘technology leakage,’ forced consolidation in electric vehicles, and tighter capacity replacement rules in steel and chemicals. Despite these efforts, local government behavior, notably, continues to reinforce overcapacity. In metals, chemicals, and automotive manufacturing for example, margins remain low and volatile, and profitability has failed to recover despite repeated policy campaigns. In the absence of demand-side reforms supporting household consumption, supply-side measures alone are unlikely to deliver lasting adjustment.” That’s a problem.

Froman insists, “A crisis is not inevitable.” Nevertheless, if the overcapacity problem is not addressed soon, the crisis may be inevitable. Froman predicts, “If the world faces a China crisis, Beijing will be unlikely to lead the response. China has yet to demonstrate any capacity for or interest in assuming the position that Washington has held since World War II.” Antara Ghosal Singh, a Fellow at the Strategic Studies Program at the Observer Research Foundation, is a bit more sanguine about the possibilities that Chinese leaders will respond to current concerns. She explains, “China is particularly concerned, as the ‘China Shock’ narrative is now back with force, currently dominating European and American economic and political discourse.”[5]

She reports, “Leading Chinese economists, such as Zhang Yansheng, Secretary-General of the Academic Committee of the National Development and Reform Commission (NDRC), and Chief Researcher of the China Center for International Economic Exchanges, have warned that a huge trade surplus may mean wealth for smaller countries; however, for a large country like China, it means disaster. This is because it implies that China is prospering at the cost of the rest of the world, having already antagonized other countries by emptying their pockets, making a backlash, in the form of severe decoupling and trade containment, almost inevitable.” Despite such concerns, Singh admits, “The Chinese government, rather than taking the measures needed to correct imbalances in its economy, is instead doubling down on its export-led growth model.”

Concluding Thoughts

Chinese leaders believe that the outcry from the West about Chinese products is simply sour grapes. China’s Ministry of Commerce insists, “The development difficulties faced by some Western economies are the result of a combination of factors, including the profound restructuring of global industrial chains, geopolitical instability, and lagging reforms, and are by no means due to the so-called ‘Chinese industrial shock’.” Mary Gallagher, the Marilyn Keough Dean of the Keough School of Global Affairs at the University of Notre Dame, writes, “The Commerce Ministry report suggests that officials are willing to defend overcapacity simply as a sign of China’s economic prowess. But in ignoring the political choices that have been made along the way to build such a massive economic engine, including subsidies and lax regulatory compliance, China forfeits credibility. Treating excess capacity as a significant problem at home, while ignoring it abroad, casts doubt on whether the pending trade negotiations with the EU this fall have a chance of succeeding.”[6]

Ignoring the problems outlined above, however, will not make them go away. Froman is hopeful that China will change course and collaborate with other countries. He writes, “To avoid the most catastrophic outcome, China must orchestrate, with the United States and other major economies, a preemptive and gradual rebalancing of its economy.” As Goreichy and Gunter explain, “For advanced economies, the stakes are high. High levels of loss making were bad news for China when it made up a very small share of global manufacturing. Now that China is 28% of global manufacturing value added, this is a problem for the rest of the world too.”

Footnotes

[1] Staff, “China clarifies so-called overcapacity issue, provides opportunities to globe: commentary,” Bastille Post Global, 31 July 2026.

[2] Michael B. G. Froman, “The Next Global Economic Crisis Could Be Made in China,” Foreign Affairs, 13 August 2026.

[3] Esther Goreichy and Jacob Gunter, “China’s overcapacity threatens to reshuffle global industrial bases,” Mercator Institute for China Studies, 10 February 2026.

[4] Daisuke Wakabayashi, “China’s Export Boom Rolls On Despite Trade Backlash,” The New York Times, 7 August 2026.

[5] Antara Ghosal Singh, “China’s Trillion-Dollar Problem: Why China Fears Its Own Trade Surplus,” Observer Research Foundation, 12 August 2026.

[6] Mary Gallagher, “Beijing Still Doesn’t Think Overcapacity Is a Problem,” World Politics Review, 4 August 2026.