Beijing Watch: Is Overcapacity a False Issue? China Releases 'China Opportunity 2.0' White Paper, Opening the Chapter on US-China-EU Trade and Economic Rivalry

On July 28, China's Ministry of Commerce released a document exceeding 10,000 characters titled 'China's Position on the So-Called 'Overcapacity' Issue,' aiming to systematically respond to recent criticisms from the US, EU, and other countries regarding China's industrial capacity. The document emphasizes that the global capacity structure is the result of the evolution of international division of labor, stating that 'overcapacity' lacks a universally agreed international definition and that there is no necessary link between industrial subsidies, trade surpluses, and production capacity. China's industrial development, it argues, is driven by innovation and reform, representing a 'China Opportunity 2.0' for the world rather than a 'China Shock 2.0'.

Notably, Beijing's timing in releasing this document coincides with rising European manufacturing concerns over Chinese competition. The day before, Italy's machine tool manufacturers' association (UCIMU) publicly called on the EU to implement stricter trade defense measures, demanding that all imported equipment meet the same safety and technical standards as European-made products, in response to competitive pressure from rapidly expanding Chinese firms.

China's official release of this document immediately after the US announced new tariff policies is particularly noteworthy.

The core arguments of this over-10,000-character policy document from China's Ministry of Commerce can be summarized into four main directions.

First, Beijing argues that the global allocation of production capacity is inherently the result of international division of labor and market competition, and that 'overcapacity' should not be inferred solely from increased exports or trade surpluses. Second, China contends that there is no uniform standard for 'overcapacity,' and that different countries, industries, and stages of development should employ different evaluation methods.

Third, Beijing denies any inevitable causal relationship between government subsidies and overcapacity, asserting that China's manufacturing competitiveness stems primarily from its complete supply chain, market scale, technological innovation, and continuous reform.

Finally, China criticizes certain economies for using 'overcapacity' as a new justification for imposing tariffs, launching anti-subsidy investigations, and restricting Chinese corporate investments, arguing that this is essentially protectionism, not adherence to market economy principles.

Compared to the sporadic responses from past routine press conferences by China's Ministry of Commerce, this document resembles a policy white paper aimed at the international community, indicating that Beijing now views 'overcapacity' as a key issue in future US-China and China-EU economic and trade competition.

China's Ministry of Commerce previously stated, 'Currently, the US alternative tariff rate on China is 12.5%, meaning the US still has 7.5 percentage points of room to raise tariffs before reaching this cap.' The US previously initiated a separate investigation into China's manufacturing 'overcapacity,' and the results could lead to further tariff hikes. This move implies the US still has 7.5 percentage points of tariff-raising space. The US previously initiated a separate investigation into China's manufacturing 'overcapacity,' and the investigation results could lead to further tariff hikes.

Regarding this, Siming, an Australian-based Chinese political economist who previously worked at Shandong Province's Department of Commerce, said in an interview, 'China's economy is currently experiencing a significant turning point, with excessively long product turnover cycles and a consumer market unable to absorb existing production, forcing current capacity to continue exporting to Western countries.'

In the interview, Siming analyzed, 'The problem with China's economy has shifted from the earlier 'externally imported' overcapacity to a more dangerous 'endogenous' overcapacity. China emphasizes 'internal circulation' more strongly, meaning the market is increasingly confined within mainland China (excluding Hong Kong and Macau, with Hainan already sealed off).'

European anxiety is spreading from new energy to traditional manufacturing

Over the past two years, 'overcapacity' has gradually replaced concepts like 'Made in China 2025' and 'state subsidies' as a key narrative for Western adjustments to their economic and trade policies toward China.

The EU has recently imposed anti-subsidy measures on Chinese electric vehicles and continues to discuss expanding trade defense tools, assessing additional measures to reduce reliance on Chinese supply chains.

A NIO electric vehicle battery swap station in Shanghai, China. (Photo by Ma Anni)

Among these, Italy's machine tool industry association UCIMU argues that imported machinery should be subject to the same technical and safety standards as European manufacturers, advocating for 'fair competition.' This aligns with Italy's earlier joint call with France, Spain, and others urging Brussels to strengthen trade defense tools.

According to data compiled by UCIMU, China's global export market share for metal processing machine tools rose from 8% in 2016 to 23% in 2025, while Europe's share declined from 52% to 46%. Italy, as the world's fourth-largest exporter, saw its share drop from 8.4% to 7.8%, and exports to China plummeted from 316 million euros to 110 million euros.

The data also shows that China has surpassed Germany to become the world's largest exporter of metal processing machine tools. Between 2016 and 2025, China's share of the global machine tool export market increased from about 8% to 23%, while Europe's overall share decreased from 52% to 46%; Italian exports to the Chinese market have also clearly shrunk.

The machine tool industry is considered foundational equipment for high-end manufacturing sectors such as automotive, aerospace, and military industries, so its competitive dynamics are often seen as a key indicator of manufacturing competitiveness.

Interviewed scholars also pointed out, 'Historically, the US and Europe also experienced overcapacity, but their large market sizes allowed them to break through barriers at critical moments. However, China's geopolitical partners are mostly small countries in Africa, parts of Southeast Asia, and Latin America, which cannot absorb such a massive volume of excess capacity, leaving China highly dependent on Western markets, technology, and capital.'

Beijing is shifting from 'passive defense' to actively constructing its narrative

Notably, while Beijing's current document focuses on economic theory, European industry demands are more centered on institutional aspects.

For example, Italian industry calls for all products, regardless of origin, to comply with the same technical, safety, and environmental standards to establish a 'level playing field.' This suggests that the focus of future China-EU competition may shift beyond tariffs to institutional tools such as product standards, government procurement, supply chain security, and industrial policy.

As 'overcapacity' evolves into a comprehensive issue encompassing supply chain security, industrial resilience, and economic security, the EU's focus is no longer solely on whether China truly has excess capacity, but on how major economies will redefine the rules of global manufacturing competition.