China’s Not-So-Secret Economic Weapon

A new report has provided compelling evidence that China’s excess manufacturing capacity – long considered a potential weakness by many Western economists – may in fact be a critical part of Beijing’s efforts to undermine the United States by decimating the American manufacturing sector.

As the Alliance for American Manufacturing (AAM) writes, “Overcapacity is a feature, not a bug, of China’s model of state capitalism.” While a production glut may be a serious problem in a free-market economy, Beijing’s willingness to heavily subsidize Chinese industry has allowed Chinese companies to continue pouring cheap goods into foreign markets – including using backdoors through countries like Vietnam and Mexico to skirt American tariffs.

The concept of the state using its control of markets to wield excess manufacturing output as an economic weapon against capitalist nations has a long history in communist thought. Mao Zedong, China’s first communist leader, was an avid proponent of the writings of early Soviet philosopher Lyubov Axelrod, who proposed that the oversupply of capitalist markets with cheaper products manufactured by the communist state-sponsored companies could undermine the power of Western capital.

But it was Mao’s successor, Deng Xiaoping, who strategically prepared Chinese industry to actually implement this goal – a goal that Xi Jinping has fully embraced.

Retired Dutch economist Dr. Cornelis Leeuwenhoek, who was a consultant for China’s petrochemical industry in the 1980s but left after the Tiananmen Square massacre, told me that manufacturing overcapacity will never “peak” by design. “We tried to explain that a business must be feasible and profitable,” Dr. Leeuwenhoek told this author. “But it became clear to me that the intention was to gain economic power and turn it against [the West.]”

He added that he tried to raise the alarm about this looming threat in 1992. But “nobody wanted to listen,” he said.

The AAM report lays out at least six major industries where China appears to have intentionally created an oversupply problem to drive American manufacturers out of business, leading to the loss of an estimated 600,000 American jobs in those sectors from 2001 to 2014. Left unchecked and unaddressed, China’s state-subsidized exports could lead to millions more job losses.

In the paper industry alone, the U.S. lost at least 260,000 jobs after Chinese manufacturers acquired U.S. technology (oftentimes through intellectual property theft) and increased its production capacity, reaching 100 million tons in 2015, up from 3 million tons in 1990.

The U.S. steel industry has faced a similar fate, losing 250,000 jobs between 2001 and 2014 as China has bolstered its production to 804 metric tons in 2015 from a measly 23.7 tons in 1977.

In many cases, U.S. policy has played right into the hands of Beijing. After China joined the World Trade Organization (WTO) in 2001 thanks to the assistance of the United States, the Chinese government provided $27.5 billion in subsidies to bolster its supply chains in the tire and auto parts industries. This led to a 162 percent increase in production within four years – corresponding with a 30 percent reduction in American jobs in those sectors from 2001 to 2014.

Researchers from the Economic Policy Institute have estimated that China’s entry into the WTO cost the United States 3.4 million manufacturing jobs by 2017. Other studies have found that figure to be 5.65 million over just the first decade of the 21st century.

Without swift action from policymakers, the AAM report warns that the consequences for American companies could get even worse, most notably in emerging technologies like microchip manufacturing and solar panel production.

Mike Carr, the executive director of the industry group Solar Energy Manufacturers for America, has compared the Chinese business model based on excess capacity to “a bankruptcy sale.”

“These products are just flooding into the U.S. market, they’re willing to take any price, and they’re just losing money on it,” Carr said, arguing American companies who need to turn a profit are at a structural disadvantage.

Chinese dissident Professor Suen Yong, who was a high-ranking official in the Central Political and Legal Affairs Commission before he defected to the West in the early 1990s, told this author that Xi’s primary goal is the “misery of Western workers which might lead them to turn to a communist revolution, not the well-being of the Chinese people.” Professor Suen stated that the CCP views “a potential workers’ revolution in the U.S. as a pivotal confirmation of its ideological claims.” Therefore, the Chinese government “will never change this course.”

Indeed, during a recent party meeting, Xi doubled down on the increase of excess capacity by calling for more production sources to pave the way for what he called “a Chinese rejuvenation.”

The solution for the United States must be a trade and economic policy that understands the scope of the threat. AAM notably praised former President Donald Trump’s approach, but stressed that more action is needed, in particular to combat China’s practice of using third countries to avoid American tariffs.

Regardless of who wins the White House this fall, the next administration will be at a critical juncture in the battle to save American manufacturing from China’s economic assault.

Ben Solis is the pen name of an international affairs journalist, historian, and researcher.