Comments to USTR Regarding Section 301 Investigations of Certain Economies’ Structural Excess Capacity and Production in Manufacturing Sectors

Contents

Introduction and Summary 1

U.S. Trade Policy Should Be Centered on the Techno-Economic Competition With China. 3

China's Excess Capacity Is Intentional and a Core Part of Its Techno-Economic Agenda. 4

Electric Vehicles (EVs) 5

Display Industry 6

Solar Photovoltaics Industry 7

USTR Needs to Recalibrate Its Assessment of Other Trade Partners Having Systematic Excess Capacity Issues 7

Conclusion. 8

Endnotes 8

Introduction and Summary

The Information Technology and Innovation Foundation (ITIF) is pleased to submit the following comments for consideration by the United States Office of the United States Trade Representative (USTR) for the initiation of investigations regarding the acts, policies, and practices of various economies under Section 301(b) of the Trade Act of 1974 relating to structural excess capacity and production in manufacturing sectors of 16 economies. ITIF is an independent, nonprofit, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy.

USTR defines excess capacity as "producing more goods than they can consume domestically." In other words, nations with manufacturing trade surpluses. There are at least three problems with this definition. First, if the concern is the trade balance, the measure should be the overall trade balance, not just manufacturing. By narrowing the scope to manufacturing goods, USTR omits-for example-that many countries produce and extract more natural resources than they consume domestically.

Second, it's unclear why some of the countries designated as having excess capacity pose a problem for the United States. Norway is listed, but its top exports are petroleum gases, crude oil, fish, and refined petroleum.[1] Bangladesh's and Cambodia's imports to the United States are mostly garments. None of these are strategic industries for the United States.[2]

Third, while some of the listed nations, such as India and Indonesia, run a trade surplus in manufactured goods with the United States, they run a trade deficit in goods with the rest of the world. Clearly, they do not have excess capacity by USTR's own definitions. Even Taiwan-which runs a global trade surplus-cannot be considered as having excess capacity aimed at flooding the American economy, as Taiwan's trade surplus with China and Hong Kong is roughly three times its trade surplus with the United States.[3]

These get to the more central issue. It is unclear what the overarching goal of U.S. trade policy is. There are two mutually exclusive objectives: to eliminate the trade deficit-regardless of the importance of particular industries to U.S. national power-or not to lose national economic power and industrial capabilities to China. Both goals cannot effectively be pursued at once. ITIF believes the central goal should be keeping China from winning.

The People's Republic of China (PRC) should be the central focus of this investigation, as it is the only nation on the list that uses surplus production as a weapon, to gain a competitive advantage for its advanced industries over its adversaries.[4] China's failure to meet its accession commitments to the World Trade Organization (WTO)-including its forced technology transfer, subsidies for local champions, and weak intellectual property rights (IPRs) protections and trade secret theft-is well documented by ITIF.[5]

This Section 301 investigation rightly focuses on structural excess capacity. Still, its scope encompasses 16 economies rather than narrowly addressing the core cause of global trade upheaval-China's mercantilism-thereby risking dilution of the blame for the country responsible for causing the need to recalibrate the global system. To be sure, the other trade partners outside China that USTR contemplates to include in this Section 301 investigation have trade irritants and unfair practices that affect U.S. businesses-which are widely covered annually by USTR's National Trade Estimates reports. The difference is that China is, by design, a non-market system aimed at achieving global techno-economic dominance, and the scale of its non-market interventions "dwarfs anything in Organization for Economic Cooperation and Development (OECD) nations."[6]

In that context, ITIF's comments to this ongoing Section 301 investigation are structured into three parts. First, it suggests that U.S. trade policy should be centered on the techno-economic competition with China-an aspect missing from this investigation, which instead conflates China's mercantilism with irritants from other trade partners. A second section provides a succinct description of how excess capacity in the People's Republic of China (PRC) is part of its overarching agenda for techno-economic dominance, and it presents examples from ITIF's analysis of China's excess capacity in selected industries. Finally, a later section outlines why ITIF views the PRC's agenda as distinct from that of other U.S. trade partners and therefore argues that this Section 301 investigation should be narrowed to focus solely on China's excess capacity.

U.S. Trade Policy Should Be Centered on the Techno-Economic Competition With China

China's strategic campaign to dominate advanced-technology industries is an existential threat to the United States. As ITIF stated in its seminal work on national power industries, "unlike any competitor in American history, China combines the continental scale of a 1.4-billion-person economy with a political system explicitly committed to achieving techno-economic supremacy over the Western democratic world."[7] China embarked on a multi-decade strategic campaign to displace U.S. industrial capabilities and fundamentally reshape global trade.

The Chinese innovation mercantilist system and its failure to meet its World Trade Organization accession commitments were the main causes of disrupting global trade. ITIF has argued that Chinese policymakers "fundamentally reject the principle of "comparative advantage"-the classic trade notion that countries should specialize in production of goods or services at which they are the most efficient and then trade for the rest-and rather seek absolute advantage (for purposes of serving both domestic and international markets) across a range of industries-from high-speed rail and steel to semiconductors, vitamins, and solar panels."[8]

The Chinese economy's policy-induced overcapacity is not excess. It is exactly what China wants to produce to gain dominant share in global markets. China's push to dominate advanced industries follows a familiar playbook.[9] It starts by attracting foreign investment and pulling multinational firms up the value chain inside China. These investments-coupled with forced technology transfer-enable learning from knowledge new to the country, leading to a shift toward a "China Inc." development model focused on indigenous innovation. Over time, those firms become independent innovators, and foreign firms' influence-and access-shrinks. The final stage is outward: once Chinese firms have won at home, the state helps them scale globally, capture market share, and set the terms of competition. Thus, excess capacity is critical to this latter phase.

China is also dominating in trade among Global South countries. Market share in the Global South matters in the context of U.S.-China techno-economic competition, as leadership is defined by scale. A recent ITIF report found that exports of Chinese goods to the Global South increased more than 39-fold between 2000 and 2024-from roughly $34 billion to over $1.3 trillion; on the other hand, exports from the United States during the same period increased roughly two-fold.[10] American exports to Global South markets have consistently declined over the last two decades, and the decline in strategic industries is even more pronounced.

Additionally, wage suppression helps the PRC government maintain its global competitiveness, while other economies cannot compete on equal terms.[11] Lower salaries also mean that the Chinese economy relies more on overcapacity-driven production for exports to foreign markets than on local consumption.[12] Low wages, combined with high productivity in manufacturing, reinforce the cycle of building scale, outcompeting foreign manufacturers with lower production costs, gaining market share in third markets, and displacing competitors there.

U.S. policymakers should acknowledge that no country alone has the capabilities to counter Chinese techno-economic aggression-not even the United States. Instead of using a tariff threat to address trade irritants with our trade partners and form an alliance to jointly confront China's mercantilist practices-the real threat to American economic and technological dominance-the Trump administration's tariffs-and investigations-indiscriminately hit allies and competitors alike. This Section 301 investigation follows this pattern. As ITIF has previously reported, U.S. tariffs are arguably "the worst possible solution to address a problem they have rightly identified."[13]

China's Excess Capacity Is Intentional and a Core Part of Its Techno-Economic Agenda

China should be treated differently from any other economy. There is a core difference between China and the other 15 countries subject to this Section 301 investigation: China's structural excess capacity is part of a centralized design to flood global markets to create dependence on the Chinese technology ecosystem and to deindustrialize countries competing with it (or prematurely deindustrialize in the case of emerging economies). As ITIF has stated:

Product "dumping" is a conscious decision at the core of the Chinese strategy of capturing global market share. Chinese companies are able to price below costs because they are subsidized by the state (and enjoy other cost advantages). And they know that companies in capitalist economies will not have the patience to suffer losses for more than a short period, after which they will cede market share and reallocate their capital to higher profit activities, including going bankrupt and returning capital to shareholders, or if they could get USG approval, selling their assets to a Chinese company.[14]

Another way of seeing the Chinese system is its stated "dual circulation" strategy to become the world's dominant economy. Dual circulation is a strategy to boost China's domestic demand while simultaneously increasing China's foreign dependence. In other words, the goal of this strategy is precisely to reduce the importance of imports to the Chinese economy so that Chinese firms get more market share, both domestically and globally. As the PRC's National Development and Reform Commission outlines, China will:

Prioritize domestic circulation to build a strong domestic market, turn China into a trader of both quality and quantity, and create a strong gravitational pull for global resources and production factors. We will promote the coordinated development of domestic and external demand, imports and exports, and inward and outward investment, and work faster to develop new strengths for engaging in international cooperation and competition.[15]

Excess capacity is central to China's strategy. The only way China can dominate strategic technology industries in foreign markets is by displacing incumbents and potential competitors. To do so, it employs the textbook example of dumping: government-backed, subsidized supply enters third markets with underpriced goods and low-cost solutions, sacrificing profitability, ultimately crippling local competitors and gaining market share.

More than 99 percent of listed firms in China receive direct subsidies from the Chinese government, according to a study by the Kiel Institute for the World Economy that analyzed a sample of 5,260 listed Chinese firms receiving subsidies totaling €35.3 billion in 2022, double the amount in 2015.[16] Compared with subsidies received by firms in other countries, Chinese subsidies are between three and nine times greater. Yet these subsidy estimates do not include government support that is not easily quantifiable, such as preferential access to raw materials and forced technology transfer, which are of considerable value. China has provided substantial support to clean energy industries, including battery-powered electric vehicles, wind turbines, and railway rolling stock, to create world-leading firms.[17]

The following subsections will present summaries and extracts from ITIF research and cases in which advanced technology industries have been dominated globally by China, in part due to its excess-capacity strategy.

Electric Vehicles (EVs)

In 2024, China manufactured about 70 percent of the 17.3 million EVs produced worldwide.[18] In that year, China led the world with 1.25 million EV exports, accounting for 40 percent of global exports.[19] China has also established a near-monopoly on EV battery component production, supplying nearly 85 percent of cathode active materials-including nickel manganese cobalt (NMC) and lithium iron phosphate (LFP) chemistries-and over 90 percent of anode active material production.[20]

China's aggressive use of a range of mercantilist practices, including subsidies, intellectual property (IP) theft, forced technology transfer, and preferences for domestic firms, has played a dramatic role in advancing China's EV competitiveness.[21]

China's subsidies to its EV sector perhaps exceed those directed toward any other sector. Indeed, researchers at the Center for Strategic and International Studies (CSIS) have estimated that, from 2009 to 2023 alone, China channeled $230.9 billion in subsidies and other support to its domestic EV sector.[22] Moreover, Chinese EV subsidies have only increased in recent years, with an estimated $120.9 billion in subsidies over just the previous three years of that CSIS study ($30.1 billion in 2021, $45.8 billion in 2022, and $45.3 billion in 2023), compared with a total of $49 billion in subsidies the three years prior, and $60.7 billion in subsidies from 2009 to 2017 (then at a $6.74 billion annual rate).[23] A separate study examined which Chinese companies were the top subsidy recipients among China A-share companies (publicly listed companies in mainland China) and found that half of these firms were in China's auto industry, led by CATL in first place, SAIC Motor in third, and BYD in fourth.[24]

The extensive government subsidies flowing into China's EV industry have led to considerable global overcapacity. In fact, at one point in 2018, China had over 500 EV start-ups registered, although that number had shrunk to about 200 by mid-2024 and to an estimated 130 as of August 2025.[25] Nevertheless, significant overcapacity remains, with one assessment finding that Chinese EV overcapacity now stands at 50-10 million vehicles per year.[26] This overcapacity persists because, as one analyst explained, "Chinese companies are not responding to demand signals from the market, but production incentives from across all levels of the Chinese government."[27]

Display Industry

Chinese enterprises' global share of liquid crystal display (LCD) production has reached 72 percent, while their share of organic light-emitting diode (OLED) production has surpassed 50 percent, both up from under 1 percent a decade ago.[28] The Chinese government has targeted the display sector since the early 2000s. China's "Made in China 2025" strategy also targeted the display industry, calling for the development of 100-inch-level 8K and 4K printed AMOLED displays by 2025, as well as similar flexible displays by the same year.[29] Notably, in 2019, China's Ministry of Industry and Information Technology (MIIT) promulgated the "Implementation Opinions on Promoting the Quality of Manufacturing Products and Services," which provided guidance and funding to establish a flexible display innovation center and to promote the further development and commercialization of display technologies.[30]

The display industry has been one of China's largest recipients of government subsidies. Government subsidies are ubiquitous in China, and more than 99 percent of listed firms received direct government subsidies in 2022. In fact, Chinese industrial subsidies totaled about $245 billion, or 1.73 percent of China's gross domestic product (GDP) in 2019.[31] The largest Chinese display manufacturer by far, BOE Technology Group Co., Ltd. ("BOE"), is regularly among the top 10 recipients of Chinese government subsidies each year.[32] BOE received a total of $3.9 billion in subsidies from the Chinese government from 2010 to 2021, averaging $325 million in subsidies annually; in 2023, BOE received $532 million in subsidies, which was more than the company's $350 million in profits for the year. In addition to loans and grants, subsidies for Chinese display manufacturers have taken the form of tax breaks, discounted capital, free or discounted land and utilities, and state-provided financing for hiring foreign talent.[33]

Broadly, China provides 50 to 70 percent of investment costs for Chinese display makers through equity investments, cash benefits, and discounts on loans, land, and infrastructure.[34] China also provides a selling price subsidy of 5 to 15 percent (normally when a panel maker sells a product to the original equipment manufacturer (i.e., the TV maker)). China also provides talent recruitment subsidies of up to 100 percent and supports annual salaries when display manufacturers hire personnel with master's/doctor's degree from overseas. The Chinese government also ensures attractive financing to the sector, providing capital at zero or low interest rates. Companies in the sector are also eligible for reduced corporate tax rates of as low as 15 percent.[35]

In addition, as has now been confirmed in two separate ITC investigations, Chinese display producers have also benefited from extensive foreign IP theft.[36]

China's massive subsidization of the display industry has both led to overcapacity in the sector and driven down prices to an extent that is damaging to firms that don't receive such massive subsidies and have to earn market-based rates of return. Chinese overcapacity has driven competitors out of the business and/or precluded new competitors from entering. Japanese firms ceased all investments for LCDs larger than 8Gen as of 2010.[37] In March 2024, Sharp announced it would close its Gen 10 LCD factory, which one industry analyst noted "would hasten flat panel display industry consolidation and further strengthen China's TC panel suppliers."[38]

Solar Photovoltaics Industry

China became the dominant global player in solar photovoltaics (PV) manufacturing during the 2010s, with critical government support. China's share of global solar panel exports grew from just 5 percent in the mid-2000s to 67 percent by 2018, with Chinese solar output turbocharged by at least $42 billion in subsidies from 2010 to 2012 alone.[39] This instigated a global glut that saw world prices for solar panels crash by 80 percent from 2008 to 2013, bankrupting some 500 of the often much more innovative foreign competitors in the sector.[40]

A 2020 ITIF report analyzed the impact of China's production surge on innovation in the global solar PV industry, finding that China's subsidy-aided rise to dominance in PV manufacturing was a cause of lower global prices in this sector.[41] The report describes a government-supported nascent industry story. China's PV manufacturing industry was minuscule before 2005.[42] It surpassed 100 megawatts (MW) of cell production that year, rising to 7 percent of global supply from less than 2 percent in 2003. Production grew by an order of magnitude in the next two years, another order of magnitude in the following three, and doubled again in 2011, capping roughly 200x growth in a six-year span.

USTR Needs to Recalibrate Its Assessment of Other Trade Partners Having Systematic Excess Capacity Issues

ITIF commends the Trump administration's attempts to recalibrate trade relations with allies. Indeed, America's deindustrialization, trade imbalances, and discriminatory policies against U.S. companies have been a feature of trade relations for the last several decades. The United States needed a reset of trade relations. Still, the current approach to trade and diplomacy-treating friends and foes alike-risks alienating America's closest allies and stifling efforts to change their trade irritants. This Section 301 investigation seems to follow that same pattern.

USTR's background information for the current Section 301 investigation appears to conflate manufacturing capacity utilization with excess capacity. A relatively low-capacity utilization does not necessarily mean an artificial excess of supply capability. USTR states that "U.S. government estimates, global manufacturing capacity utilization remains between 75.0 and 75.9 percent, below healthy utilization rates for many sectors of approximately 80 percent."[43] Indeed, this rate is 3 percentage points below the historical average for the United States between 1972 and 2025.[44]

USTR is correct in signaling that underutilized industrial production capacity is a sign of the Chinese economy's structural excess capacity. However, it is not possible to extrapolate that metric to other countries that respond to market economy incentives. Underutilization of China's manufacturing capacity is only one aspect of the country's growing domestic production surplus, which threatens manufacturing industries worldwide. As the Rhodium Group-the same source used by USTR-states, "Chinese companies, across a wide range of sectors, now produce far more than domestic consumption can absorb. This domestic surplus can produce low factory utilization rates. But it can also find its way into foreign markets, creating a growing trade surplus and, at times, global redundancies that threaten industrial ecosystems in other countries."[45]

Finally, a manufacturing trade surplus is not a sign of excess capacity. USTR details its rationale for the current Section 301 investigation into trade partners-aside from China-which is primarily based on these countries' manufacturing trade surpluses with the United States. Many of these surpluses stem from the failure to maintain a competitive manufacturing industry in the United States, rather than from a deliberate, systematic attempt by a third country to create excess capacity and export to America. Some of the U.S. manufacturing industry's decline is attributable to country-level competition: other jurisdictions have been more effective at attracting and nurturing investment. Nearly 20 years ago, in 2007, ITIF stated: "Like it or not, in an increasingly global economy, most nations enact policies to tilt the choice of corporations to invest there. This means that the United States needs to develop a comprehensive competitiveness policy focused on ensuring that innovative activities, as well as innovative people, are attracted to, stay in, and grow in the United States."[46]

Conclusion

The U.S. government is right to seek to recalibrate trade relations by addressing irritants and discriminatory policies through negotiations that affect U.S. companies overseas. Many U.S. trade partners need to reform their non-tariff barriers if they want a fair and reciprocal trade relationship with the United States. However, to paraphrase the saying about the three most important things in real estate; the most important things in trade are "China, China, China." China should be treated differently-the scale of its non-market interventions is not comparable to any other U.S. trade partner, and excess capacity is a tool in its quest for global techno-economic dominance. Thus, this Section 301 investigation should solely focus on China's excess capacity, rather than treating friends and foes alike.

Thank you for your consideration.

Endnotes