Chinese Q1 2024 Export Data Offers No Smoking Gun for Over-capacity Debate

Simon J. Evenett

The first full set of Chinese trade data for Q1 2024 was released last week. Much commentary linked this release to the narrative gaining traction this year that over-capacity in China’s manufacturing industry is leading to a flood of goods on to world markets. Planks of the economic and competitive logic at the core of the critique of the harm done by the Chinese non-market practices are hard to reconcile with last week’s Chinese export data. Future data releases may, of course, be kinder to that critique, but for now the narrative is getting too far ahead of the evidence.

Last week, the Chinese General Administration of Customs released the estimates of the total value of Chinese exports and imports in Q1 2024. Chinese officials emphasised this quarter’s trade was up 5% year-on-year.

In contrast, several western media outlets focused on a March 2024 fall in total exports (when compared to March 2023.) Falling exports were linked by some to Chinese price cutting and dumping on foreign markets. Other connected recent Chinese export performance to concerns about manufacturing over-capacity in China, arguably the highest profile trade policy issue to date this year.

Credible trade data providers, such as the Trade Data Monitor, report that the total value of Chinese exports in March 2024 was 7.5% lower than in March 2023. Furthermore, TDM reported that, compared to Q1 2023, Chinese total exports in Q1 2024 were 1.5% higher. Turning to those foreign nations whose governments are critical of Chinese “non-market practices,”over the same time frame the total value of Chinese bilateral exports fell to Australia, the EU overall, Germany, Japan South Korea, the UK and the USA. But the total value of Chinese bilateral exports rose to Canada and Italy and marginally to France.

What can be learnt from this Q1 2024 Chinese export data release? Not as much as one might like because changes in the total value of exports were not, it seems, decomposed into changes in the prices and volumes of goods exported. This is a pity as we could have checked whether price cutting was larger in Chinese sectors where there is more over-capacity and whether export volumes rise more for products sold abroad where Chinese firms had cut their prices the most.

Still, all is not lost, Indeed, the very critique we often hear from Western analysis and officials about the harm done by Chinese over-capacity involves a logic that has implications for observed value of Chinese exports.

Now recall your first microeconomics course-where the impact on firm revenues of customer price sensitivity was discussed. In cases where Western customers are very price sensitive, then Chinese price-cutting will generate such large increases in export volume that the total value of Chinese export will go up. The revenue losses due to lower prices are more than offset by high sales volumes. If Western customers aren’t that price sensitive, then any firm (Chinese or otherwise) that tries to expand total sales revenue by slashing its prices is going to be disappointed.

And here is the rub. If the commercial threat of Chinese over-capacity to the market shares of local firms is serious, then oft-contended price cutting by Chinese exporters this year should have resulted in higher reported values of Chinese exports. But for so many Western economies-as noted earlier-the total value of Chinese bilateral exports was lower in Q1 2024 than in Q1 2023. Unless another factor is blunting Chinese competitiveness, then the leading critique of the Chinese economic model this year finds no smoking gun in export data published last week.

Let’s address four likely objections to this inference-which no doubt many G7 and European analysts and officials will find very inconvenient.

1. Chinese firms are cutting and dumping product on world markets but another factor blunts their growth in export volumes.
2. Even if overall bilateral trade doesn’t bear out the latest critique of Chinese over-capacity, sectoral data does.
3. Future data releases will reveal the damage done by the current Chinese over-capacity.
4. You don’t get. China has many non-market economy practices and that’s all that matters. To hell with this inconvenient data release.

The problem with the first of these retorts is that the commercial factors most likely to blunt Chinese export volume growth are lower prices by import-competing firms-in essence the latter matching the price cuts of their Chinese rivals. Thus retort immediately concedes that Western customers benefit from lower prices at a time when many firms and individuals are facing mounting costs. Chinese over-capacity then contributes to effective inflation control, which Western populations and political leaders say they want.

The problem with the second argument is that TDM export value and volume data shows a very mixed pattern of Chinese export behavior in Q1 2024 compared to Q1 2023. The volume of each of the following products exported from China in Q1 2024 was more than 10% in ceramics, household appliances, motor vehicles, Rare Earths, and ships. In addition, the total value of Chinese exports rose in Q1 2024 by more than 10% in plastics, furniture, general machinery and integrated circuits. In these sectors some of the necessary conditions for the Chinese over-capacity narrative hold-but not all to these sectors (ceramics, furniture, kettles!) are commercially sensitive. Overall, on the basis of the Q1 2024 Chinese export data released last week, no critique of the systemic, malignant effects of Chinese manufacturing sector over-capacity can be sustained. At most, the argument isn’t refuted in a few, clearly identifiable sectors.

The third likely objection is perhaps the weakest of all-as it essentially concedes that currently available Chinese export data does not support the Chinese over-capacity critique. Still, there is a case for a “watching brief”and for carefully examining data releases on the imports of Chinese goods into major trading partners. Discrepancies between one nations’s export statistics and another nations’s import data on the same trade flow have happened before.

The fourth objection is, in my experience, likely to be the most instinctive response. To be clear: Few deny that Chinese public bodies intervene extensively in their economy. Arguably, the Global Alert Team has done more to document relevant policy intervention at a granular level than other independent analysts and performs well when bench-marked against international organisations.

What matters from a trade policy perspective, as those critical of Chinese non-market practices acknowledge, is whether those practices and any attendant manufacturing over-capacity harm trading partners. Since the principal transmission mechanism for such harm is via cross-border trade, the export data examined here is relevant. Even more important is to demonstrate a robust empirical link between Chinese policy and trade outcomes. Only evidence on spillovers matters.

The good news is that recently IMF officials have uncovered evidence on where corporate subsidies do not affect trade flows. To this should be added a study Johannes Fritz and I conducted on the impact of foreign subsidy and trade policies on extra-EU export growth. Excellent peer-reviewed sectoral studies exist as well. These studies do the heavy lifting of tracing out the impact of actual policy change on market outcomes. They are to be contrasted with unsubstantiated claims made by a growing number of Western analysts and officials, the weaknesses of which were laid bare by last week’s Chinese export data for Q1 2024. In addition to a substantiating a critique based on cross-border spillovers, there is more and more evidence that Chinese industrial policy is failing to meet the very objective Beijing sets.

Simon J. Evenett is the Founder of the St. Gallen Endowment for Prosperity Through Trade and an economic professor.

Prof. Simon Evenett is an Advisory Board Member of the Trade Negotiations and Investment Forum