>China’s role as the world’s factory—producing and exporting goods across the globe—has entered a new phase. In the past decade, China has made a concerted effort to move its manufacturing sector up the value chain, producing a deluge of cheap, green technology in the process, including electric vehicles, batteries, and solar panels. It now makes EV models that sell for under $10,000—most of the low-cost models in the United States start at around $30,000—and it dominates roughly 80 percent of the global solar supply chain.
>But rather than welcome the influx of renewable energy products, the world’s two largest consumer markets have lambasted these Chinese imports as a structural threat to fair competition. In May 2024, the [Biden administration](https://www.foreignaffairs.com/topics/joe-biden-administration) imposed tariff hikes of up to 100 percent on a variety of Chinese goods, which were justified as a defensive response to Beijing “flooding global markets with artificially low-priced exports.” The European Commission followed suit, imposing duties on Chinese electric vehicles in October 2024 and complaining that China’s “unfair government subsidies” were causing “a threat of economic injury” to EU producers. Regardless of the efficacy of such trade remedies, the message is unambiguous: China makes more than the world can take.
>This tension, of course, is not new. China’s “overcapacity”—the shorthand term for producing more than demand calls for—has long led other governments to complain. In the past, [China](https://www.foreignaffairs.com/regions/china) produced too much steel, coal, cement, and other goods, which crowded out competitors elsewhere and drove global prices to unprofitable lows. China’s tendency toward overcapacity has traditionally been blamed on a fundamental mismatch in its economy; government subsidies and investment in manufacturing and infrastructure are unusually high compared with those in other advanced economies, and the country’s household consumption as a share of GDP is unusually low. Simply put, China lacks enough domestic demand to soak up what the country’s factories produce, which then causes a glut of exports.
>But China’s green tech boom is exposing a more sinister and systemic aspect of the country’s political economy. In reality, today’s Chinese overcapacity does not result from domestic demand that has peaked or excessive subsidies. Consider the solar power industry. China is still seeing significant demand for solar installations. In 2024 alone, China installed 277 gigawatts of new solar capacity—more than twice the total cumulative capacity ever installed in the [United States](https://www.foreignaffairs.com/regions/united-states)—and 2025 is on track to match or surpass that record. At the same time, the notion that subsidies are propping up China’s solar growth is outdated; China ended central government subsidies for solar in 2021. Meanwhile, in the EV and battery sectors, demand among Chinese consumers is still booming, and direct purchase subsidies have been phased out.
>The real challenge, then, lies not in weak domestic demand or excessive state handouts but in an extraordinary and seemingly uncontrollable surge in supply—one that Beijing is struggling to get its arms around. Since mid‑2024, central government authorities have warned repeatedly about “blind expansion” in solar power, batteries, and EVs. This summer, after a brutal price war in the solar industry saw prices fall around 40 percent year-over-year, Chinese leaders directed officials to tackle overcapacity and “irrational” pricing in key industries, including solar. Shortly thereafter, high-level officials met with industry leaders to collectively urge companies to curb price wars and strengthen industry regulations.
>But Beijing’s efforts won’t make much of a dent in the problem. Unlike earlier bouts of overcapacity, today’s top offenders are private companies, not state-owned enterprises. If Beijing were to step in and force consolidations or shutter factories, it would risk sparking unemployment and potentially stall local growth engines that depend on these industries. Moreover, exports have become one of the few remaining bright spots in otherwise slowing GDP performance. If Beijing were to meaningfully curb production and exports, it could cause significant damage to China’s overall economy.
The fundamental problem is that by rewarding speed and scale over productivity and differentiation, the internal plumbing of China’s political economy incentivizes businesses to produce too much stuff. Although that has always been the predictable outcome of China’s political and financial system, the dysfunction was kept in check during much of China’s spectacular rise. Changes in the Chinese economy since 2020, however, including the cratering real estate market and a crackdown on private businesses and investments, have compounded the structural incentives that lead to overcapacity.
>The result is not only damage to China’s trade relationships but also plummeting company profits, significant deflationary pressure, and constraints on innovation. Over time, cutthroat price wars also spill into the labor market, with firms freezing wages or cutting jobs, which weakens household spending, deepens China’s structural slowdown, and makes growth even harder to sustain. Without significant reforms, China risks repeating earlier missteps as it tries to move further up the value chain and into advanced fields such as artificial intelligence and biotechnology—potentially with even greater consequences for its economy.
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>China’s role as the world’s factory—producing and exporting goods across the globe—has entered a new phase. In the past decade, China has made a concerted effort to move its manufacturing sector up the value chain, producing a deluge of cheap, green technology in the process, including electric vehicles, batteries, and solar panels. It now makes EV models that sell for under $10,000—most of the low-cost models in the United States start at around $30,000—and it dominates roughly 80 percent of the global solar supply chain.
>But rather than welcome the influx of renewable energy products, the world’s two largest consumer markets have lambasted these Chinese imports as a structural threat to fair competition. In May 2024, the [Biden administration](https://www.foreignaffairs.com/topics/joe-biden-administration) imposed tariff hikes of up to 100 percent on a variety of Chinese goods, which were justified as a defensive response to Beijing “flooding global markets with artificially low-priced exports.” The European Commission followed suit, imposing duties on Chinese electric vehicles in October 2024 and complaining that China’s “unfair government subsidies” were causing “a threat of economic injury” to EU producers. Regardless of the efficacy of such trade remedies, the message is unambiguous: China makes more than the world can take.
>This tension, of course, is not new. China’s “overcapacity”—the shorthand term for producing more than demand calls for—has long led other governments to complain. In the past, [China](https://www.foreignaffairs.com/regions/china) produced too much steel, coal, cement, and other goods, which crowded out competitors elsewhere and drove global prices to unprofitable lows. China’s tendency toward overcapacity has traditionally been blamed on a fundamental mismatch in its economy; government subsidies and investment in manufacturing and infrastructure are unusually high compared with those in other advanced economies, and the country’s household consumption as a share of GDP is unusually low. Simply put, China lacks enough domestic demand to soak up what the country’s factories produce, which then causes a glut of exports.
>But China’s green tech boom is exposing a more sinister and systemic aspect of the country’s political economy. In reality, today’s Chinese overcapacity does not result from domestic demand that has peaked or excessive subsidies. Consider the solar power industry. China is still seeing significant demand for solar installations. In 2024 alone, China installed 277 gigawatts of new solar capacity—more than twice the total cumulative capacity ever installed in the [United States](https://www.foreignaffairs.com/regions/united-states)—and 2025 is on track to match or surpass that record. At the same time, the notion that subsidies are propping up China’s solar growth is outdated; China ended central government subsidies for solar in 2021. Meanwhile, in the EV and battery sectors, demand among Chinese consumers is still booming, and direct purchase subsidies have been phased out.
>The real challenge, then, lies not in weak domestic demand or excessive state handouts but in an extraordinary and seemingly uncontrollable surge in supply—one that Beijing is struggling to get its arms around. Since mid‑2024, central government authorities have warned repeatedly about “blind expansion” in solar power, batteries, and EVs. This summer, after a brutal price war in the solar industry saw prices fall around 40 percent year-over-year, Chinese leaders directed officials to tackle overcapacity and “irrational” pricing in key industries, including solar. Shortly thereafter, high-level officials met with industry leaders to collectively urge companies to curb price wars and strengthen industry regulations.
>But Beijing’s efforts won’t make much of a dent in the problem. Unlike earlier bouts of overcapacity, today’s top offenders are private companies, not state-owned enterprises. If Beijing were to step in and force consolidations or shutter factories, it would risk sparking unemployment and potentially stall local growth engines that depend on these industries. Moreover, exports have become one of the few remaining bright spots in otherwise slowing GDP performance. If Beijing were to meaningfully curb production and exports, it could cause significant damage to China’s overall economy.
The fundamental problem is that by rewarding speed and scale over productivity and differentiation, the internal plumbing of China’s political economy incentivizes businesses to produce too much stuff. Although that has always been the predictable outcome of China’s political and financial system, the dysfunction was kept in check during much of China’s spectacular rise. Changes in the Chinese economy since 2020, however, including the cratering real estate market and a crackdown on private businesses and investments, have compounded the structural incentives that lead to overcapacity.
>The result is not only damage to China’s trade relationships but also plummeting company profits, significant deflationary pressure, and constraints on innovation. Over time, cutthroat price wars also spill into the labor market, with firms freezing wages or cutting jobs, which weakens household spending, deepens China’s structural slowdown, and makes growth even harder to sustain. Without significant reforms, China risks repeating earlier missteps as it tries to move further up the value chain and into advanced fields such as artificial intelligence and biotechnology—potentially with even greater consequences for its economy.