China needs a new strategy to rebalance its industrial might 

(Edited and refined by Josephine Hong, with the assistance of AI translation.)

Michael Froman, who served as US trade representative under former President Barack Obama and now leads a Washington think tank, recently warned that the world’s ability to absorb China’s 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.

China’s industrial engine and international pushback

In his article published in Foreign Affairs, Froman noted that over the past two decades, China has established the largest trade surplus in recorded history. In 2025, it reached nearly US$1.2 trillion, growing at three times the rate of global goods trade.

He said this paradigm has been strategically beneficial for China and disinflationary for the rest of the world in the short run, but it is politically and structurally unsustainable.

Froman’s central argument is that China’s economy is now vastly different in scale from what it once was. It accounts for roughly 30% of global industrial production, a share that could rise to 45% by 2030. With the exception of the US economy immediately after World War II, there is no historical precedent for such a concentration of industrial power. 

He further argued that China’s formidable industrial capacity has benefited from subsidies. Research by the Organization for Economic Cooperation and Development (OECD) estimated that 60% of China’s gains in global manufacturing market share have been driven by government subsidies. However, the same OECD study also found that subsidies are not unique to China; over the past 20 years, around 22% of the global market share gains by firms worldwide can be linked to subsidies.

For more than two years, the debate over “Chinese overcapacity” and subsidies has become another point of friction between the Western world and China, alongside national and technology security, as well as geopolitical and sovereignty disputes. The US has responded with high tariffs, Europe is increasingly anxious, and even some developing countries, such as those in Southeast Asia, have begun to worry about the influx of Chinese-made goods. China’s highly price-competitive products can reach any market in the world through sophisticated logistics networks and sales channels, placing immense competitive pressure on local businesses and adding fuel to claims of Chinese overcapacity.

Overcapacity and macroeconomic imbalances

In late July, China’s Ministry of Commerce issued a document titled “China’s Position on the So-called Excess Capacity Issue”, reflecting how the dispute has reached a point where China feels compelled to respond in a systematic manner. 

The document explained that the evolving global capacity landscape is the result of international industrial labour division and cooperation. The three regional manufacturing centres of North America, Europe and East Asia account for 17%, 17% and 38% respectively of global manufacturing value added. Decades ago, the US was also the world’s industrial centre, accounting for as much as 44.7% of global industrial output in 1953.

In other words, Chinese officials do not deny the need to expand domestic demand, but reject the claim that insufficient domestic demand in China has led to overcapacity. Many Chinese scholars believe that “overcapacity” is an issue promoted by former US Treasury Secretary Janet Yellen, a new formulation of the “China threat theory”. They argue that the concept overturns the most fundamental economic theory of comparative advantage, developed over more than 200 years. Supporters of the Chinese overcapacity argument cite “Chinese subsidies” to demonstrate that the growth in China’s industrial capacity does not stem from comparative advantage. Meanwhile, China counters that Europe and the US also provide subsidies. Ultimately, both sides are locked in a vicious cycle of competing claims, each insisting that it is right.

The concept of “overcapacity” is arguably open to economic debate; a more moderate term would be “excessively large capacity”. Yet it cannot be denied that China’s ever-expanding trade surplus cannot continue indefinitely without consequences, because the realities of international politics will not allow it. 

No matter how competitive Chinese manufacturing may be, local industries also need to survive. As Froman warned, affected regions will respond with trade protectionism. Moreover, the US replaced Britain as the world’s industrial centre around the time of World War I, with its industrial output exceeding 40% of the global total in the 1950s. This was an important foundation of US global hegemony. Today, amid US-China rivalry, China’s industrial capacity is no longer merely an economic issue but a strategic one. The US will have greater incentive to pressure other countries into adopting protectionist measures against Chinese exports.

Urgency of rebalancing

After former Chinese Premier Zhu Rongji died last week, many articles reviewing his political legacy have sprung up online. Many of the more measured commentaries praised Zhu’s role in pushing China to join the World Trade Organization, opening up international markets for the country, and using China’s opening up to advance domestic market reforms and economic growth. But more than 20 years on, China may have outgrown the model of that period, and its economic structure needs further adjustment. 

Last year, final consumption expenditure contributed 52% to China’s economic growth, but this could be raised by more than 10 percentage points for an economy of China’s size. To rebalance the economy, China could allow the renminbi to appreciate, vigorously open its modern services sector to the outside world, raise the standard of its services industry, strengthen the social safety net so that people can spend with confidence, and increase the contribution of domestic demand to the economy.

These are reforms suited to the present era. They need not be pursued with the same intensity as during the Jiang Zemin-Zhu Rongji era of the 1990s, but can be allowed to develop gradually. Given China’s current circumstances, reform is also far less difficult than it was then. 

Conversely, because internal and external economic pressures are not as acute as they were at the time, the impetus for reform is much weaker. That may be the real risk.

This article was first published in Lianhe Zaobao as “中国可以再进行怎样的经济改革”.

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