Michael Froman, Chairman of the Council on Foreign Relations, Warns That China's Overcapacity Could Trigger a Global Crisis
Michael Froman, Chairman of the Council on Foreign Relations, pointed out in an article in Foreign Affairs that China's growth model, which relies on exports and manufacturing investment, is no longer sustainable. If adjustments are not made, it could trigger a global economic crisis.
By 2025, China's trade surplus is expected to approach $1.2 trillion, growing at about three times the rate of global goods trade; China accounts for about 30% of global industrial output, which could rise to 45% by 2030 according to UN forecasts.
Government subsidies, policy-based credit, and local government support for loss-making enterprises have driven companies to expand production at low prices; nearly 30% of Chinese industrial enterprises are currently in a loss-making state, with subsidies accounting for about 60% of the growth in global manufacturing market share, allowing companies to price about 30% lower than their overseas counterparts.
Insufficient domestic consumption and capacity expansion create a vicious cycle, with a higher proportion of losses in priority industries; Germany's car exports to China are expected to decline by 66% between 2022 and 2025, as China becomes the world's largest car exporter, prompting Europe to impose tariffs and push for local production requirements, while the U.S. and others strengthen trade restrictions and seek to reduce dependence on China's critical minerals and supply chains.
Capacity in solar energy, electric vehicles, and batteries has far exceeded domestic demand, making it difficult for the global market to fully absorb; if more markets close, it could lead to business bankruptcies, bad debts in banks, deteriorating local finances, and rising unemployment. Countries like Australia, Brazil, Chile, and several African nations that rely on Chinese demand will be impacted, commodity prices may come under pressure, debt risks in developing countries may rise, and public debt in developed economies is already significantly higher than in 2008, leaving limited fiscal response space.
Market mechanisms: Continuous subsidies and targeted credit inject supply into manufacturing, creating pressure for low-priced exports; overseas buyers and governments respond with tariffs, local content requirements, and supply chain shifts, which may force supply adjustments due to demand-side contraction; Chinese manufacturing entities are under pressure, commodity-exporting countries and end consumers benefit from low prices in the short term, but once exports are hindered, resource-rich countries and high-debt nations will face simultaneous pressure.
Source: Public Information
ABAB AI Insight
Michael Froman served as the U.S. Trade Representative from 2013 to 2017, during which he promoted negotiations such as the TPP and addressed trade issues related to China. Previously, he was responsible for international economic affairs at the National Security Council and participated in G20 coordination; he has long focused on the impact of China's industrial policies on global trade and has discussed the tensions between the rules-based system and the Chinese model in several articles.
In terms of capital pathways, China has continuously directed resources towards manufacturing expansion through a state-led financial system, local government financing platforms, and industrial subsidies. The OECD estimates that subsidies have driven about 60% of the growth in global manufacturing market share; this model allows companies to operate at negative or minimal profit margins to capture market share, while local governments rely on land sales and factory taxes to maintain finances, creating a difficult-to-exit expansion cycle.
Similar cases include trade frictions and adjustments following the peak of Japan and Germany's manufacturing surpluses in the 1980s, as well as the first round of "China Shock" after China's accession to the WTO in 2001; currently, China's scale far exceeds that of the past, with manufacturing concentration nearing levels seen in the U.S. post-World War II, approaching a stage where expansion is nearing market absorption limits.
Essentially, this is a restructuring of the industrial chain. Export-oriented and subsidy-driven supply expansion has exceeded the global demand absorption capacity, and protectionism and supply chain shifts are reshaping the division of labor; if there is no shift towards consumption and a reduction in targeted support, overcapacity may force adjustments through business exits, price declines, and external demand contractions, transmitting shocks from Chinese manufacturing to commodity-exporting countries and high-debt emerging markets.
ABAB News · Cognitive Laws
- Supply growth consistently exceeding demand will eventually hit absorption limits.
- Subsidy-driven expansion often has exit costs higher than entry costs.
- Concentrated capacity in a single economy will amplify external shocks globally.