Do we finally agree on overcapacity? Now what?

It’s been a busy few weeks for the trade-policy naming industry. We’ve had a Franco-German “non-paper,” a Milwaukee “comprehensive framework,” and a “joint ministerial statement” bringing together 15 economies around an initiative championed by the office of the U.S. Trade Representative (USTR) during the U.S. G20 presidency. Structural excess capacity, overproduction, global macroeconomic imbalances, industrial shocks, non-market policies and practices, or what some of the best trade nerds call overcapacity—the terminology alone has kept trade officials and experts occupied for years. Add this to the anxiety surrounding possible imminent action in USTR’s Section 301 investigation under the remarkably expansive definition of “acts, policies, and practices of certain economies relating to structural excess capacity and production in manufacturing sectors.” 

The latest pronouncements, however, may signal a move from collective hand-wringing to collective action around a real challenge for the open global market economy. China’s large-scale industrial policy can sustain investment and production even when weak demand and low returns would ordinarily force firms to scale back or close. That support can force producers elsewhere to absorb more of the adjustment, losing sales, jobs, and the ability to sustain production capacity. The concern is not simply that producers elsewhere lose market share, but that state-supported expansion can concentrate entire industries in China, potentially giving Beijing market power it can use to shape commercial outcomes in pursuit of national objectives, including those that go beyond commercial competition. Whether these pronouncements ultimately lead to meaningful action against the distortions created by China’s strategic industrial policy or simply provide a common justification for protectionism is as much a political test as an economic one.

Where is the overcapacity?

China’s gaping manufacturing trade surplus has become a symbol of overcapacity concerns. It has reached an eye-popping $2 trillion in nominal terms, driven by a near-relentless rise in exports paired with much slower import growth. While consistent with concerns about state-supported industrial expansion, a trade surplus is not proof of economic malfeasance, as better economists than me rightly warn. Treating it as such risks turning an effort to preserve competition into a license for protectionism—undermining the very benefits of open markets that governments are supposed to be defending. Recent research finds that much of China’s export growth is concentrated in a relatively small number of products, underscoring the need to look beyond aggregate trade figures. Alas, no single indicator definitively establishes whether state support is sustaining industrial investment and production that would otherwise contract under normal commercial conditions, much less whether the resulting expansion threatens to drive out competitors and leave China with market power. Making the case requires a veritable cornucopia of evidence on subsidies, investment, profitability, capacity utilization, and more. 

The challenge of distinguishing the effects of overcapacity from ordinary comparative advantage—the very mechanism that delivers the benefits of trade—is more than academic hair-splitting. It has been a genuine obstacle to effective action by governments, individually and collectively. International trade rules, along with the national laws that implement them, are designed to allow countries to impose tariffs or other trade defenses against import surges and unfair trade practices, but only if the countries meet demanding evidentiary and product-specific requirements. These constraints aren’t simply an expression of “neoliberal” devotion to free trade. They were designed to guard against arbitrary protectionism—and for good reason, since it undermines the benefits of open trade and imposes costs on the consumers and taxpayers who ultimately pay for it. Yet rules built to constrain arbitrary protectionism are poorly suited to addressing the scale and global reach of China’s strategic industrial policy. 

The recent Franco-German proposal recognizes this gap and signals agreement between Europe’s two largest economies that the EU needs faster and stronger defenses against market-distorting industrial policies that threaten European competitiveness and could give foreign governments market power over strategically important industries. But national defenses can only do so much. Restricting imports in one market may simply redirect exports elsewhere. That’s part of what happened when the United States raised tariffs on imports from China beginning in 2018. Since then, China’s manufacturing trade surplus with the EU has soared even as its surplus with the United States has declined (Figure 2). Empirical research finds that U.S. tariffs contributed to redirecting Chinese exports toward other markets, including Europe. And even if national defenses successfully limit import competition in domestic markets, they leave firms to compete against production benefiting from Beijing’s support in third-country markets. In industries where scale and continued investment are essential to competitiveness, losing ground in those markets can make it difficult for firms to become—or remain—globally competitive.

Beyond national defenses?

Meanwhile, an interesting development has emerged in the perennially trade-challenged steel industry. Finding a beacon of light in steel trade policy is a bit of a shock, but that’s where we are these days. Governments have been wrestling with global excess capacity in steel since long before electric vehicles and semiconductors entered the conversation. Years of Organisation for Economic Co-operation and Development (OECD) monitoring have established both the scale of the problem and China’s outsized role in it. Steelmaking capacity has continued expanding even as demand has contracted, leaving global excess capacity in 2025 exceeding the entire steel production of OECD countries by more than 200 million metric tons. Government subsidies are an important part of the story, and nowhere are they more extensive than in China. Detailed work by intrepid OECD researchers finds that steel production in China receives substantially more subsidies than elsewhere (Figure 3). In 2024, the median Chinese steel firm received 15 times as much in subsidies, relative to its assets, as the median firm elsewhere.

On September 30, members of the Global Forum on Steel Excess Capacity (GFSEC), meeting in Milwaukee under the chairmanship of U.S. Trade Representative Jamieson Greer, adopted the Milwaukee Comprehensive Framework for Joint Action, outlining how they intend to coordinate their existing policies and trade defenses to tackle global excess capacity. Although the framework doesn’t establish binding obligations, it lays out concrete steps members intend to take and what meaningful coordination could look like. Members propose to coordinate their trade defenses, including by monitoring whether restrictions in one participating market redirect steel into another and considering appropriate responses. The framework also proposes sharing “melt-and-pour” information to help trace steel to its original source and prevent circumvention of trade restrictions through processing in third countries—no small task in modern supply chains. Looking beyond direct competition from excess-capacity steel, the framework proposes that members investigate and consider responses to export restrictions on critical steelmaking inputs that could undermine their competitiveness. If governments follow through on the Milwaukee framework, coordinated action could make their national trade defenses more effective against import competition from excess capacity steel. GFSEC members account for more than half of global steel imports. If they can coordinate restrictions, they could make it harder for China and other sources of excess capacity steel to replace sales lost in one country with sales elsewhere. It might even change the incentives for China and other countries to continue expanding excess capacity in steel.

Where could this lead?

The October 7 ministerial statement signed by 15 trade ministers following the G20 meetings in Milwaukee raises the possibility of extending the framework’s approach to sectors beyond steel. The signatories agreed to establish sectoral platforms to examine and address structural excess capacity in autos and EVs, batteries, chemicals, foundational semiconductors, and solar panels. These sectors are familiar from China’s earlier industrial priorities. Their economics differ considerably from steel—and from one another. The OECD’s technical expertise could help governments distinguish genuine distortions from ordinary competitive success and develop responses suited to each industry. A credible diagnosis of excess capacity may also help persuade countries without an immediate defensive interest that coordinated action is warranted.

Even if countries agree that structural excess capacity is distorting trade, they may not agree that trade defenses are in their own interest. In steel, governments have established industries, workers, and political constituencies that may be pressing for protection. In other sectors, interests are more varied: some countries want to preserve production, others want to establish new capabilities, and still others may decide that the benefits of inexpensive imports outweigh the costs of distorted competition.

The politics make cooperation even harder. China has shown itself willing to retaliate against countries that challenge its policies, while the United States is making demands of the very partners whose cooperation it needs, without giving them much confidence that they won’t be its next target. Building an effective coalition may therefore require a bargain that allows countries to make trade-offs across sectors, gaining enough where they see benefits to justify cooperation elsewhere, even when the political and economic risks are substantial.

Preserve competition, not just production

Concentrating collective efforts on responding to the consequences of China’s past industrial policy risks missing the bigger challenge. Coordinating national defenses against structural excess capacity addresses only one way that large-scale industrial policy can undermine competition. China’s industrial policies can also help China gain control over critical inputs or establish market positions that become increasingly difficult for competitors elsewhere to challenge—even without a flood of inexpensive imports.

Coordinating national trade defenses is a start, but we shouldn’t mistake the means for the end. The real prize would be international responses that preserve competition, allow countries to benefit from specialization and innovation, and prevent state intervention from systematically eliminating competitive alternatives. The recent pronouncements are a long way from that ambition. The Milwaukee framework offers a glimpse of how countries might begin turning shared concerns into coordinated action. The question is whether, over time, they can build coordinated responses that preserve competition rather than simply coordinate protection.