China Could Flood The World With Goods, Damage Global Economy

China’s stimulus package may work too well. The world’s most populous nation is still building many factories even though its exports remain low. Building the facilities creates jobs and offers the country the chance to be ready to send out a huge amount of goods when the world’s economy recovers without straining its manufacturing capacity

China may have erected so many new manufacturing facilities that it could flood the world with goods as it keeps millions of its workers employed creating products for which that are not enough buyers in the West.

A new study from The European Union Chamber of Commerce in China describes the problems of overbuilding. European Chamber President Joerg Wuttke wrote, “Our study shows that the impact of overcapacity is subtle but far-reaching, affecting dozens of industries and damaging economic growth not only in China but worldwide. Domestically, excess capacity squeezes profit margins, hampers innovation and prevents the emergence of true local champions, while on the global stage its influence is clearly seen in the rise in trade tensions between China and its major trading partners.”

The dangers from the overbuilding could be grave. As America and Europe begin to re-industrialize, providing millions of new jobs, a huge supply of goods, manufactured at below market prices in China could undermine the foundations on which a Western recovery needs to be built. China will have created a means for employing it massive middle class work force, but that middle class will not be large enough to consume what China builds, at least not on its own.

China is almost certain to create the unprecedented problem of revitalizing its own economy by increasing its manufacturing capacity so greatly that its output will reach levels well beyond those that existed when the global economy was expanding rapidly. No other industrial nation will countenance having its own manufacturing base destroyed by a massive influx of Chinese goods.

It is the stuff that trade wars are made of.

Douglas A. McIntyre