China Rejects Overproduction Allegations Amidst Greater Trade Scrutiny

Beijing is laying the groundwork for Paramount Leader Xi Jinping’s upcoming visit to Washington.

On July 30, U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer met with high-level Chinese representatives. China used the meeting to voice “serious concern” over new trade restrictions — including Washington’s Section 301 investigations into China’s unfair trade practices and the European Union’s October deadline to reduce its unsustainable trade balance with Beijing.

China’s Ministry of Commerce previewed its “concern” in a July 28 paper defending its industrial model. The paper also denied allegations of overproduction, accused the United States and European Union of hypocrisy and protectionism, and characterized “so-called excess capacity” as a natural market phenomenon.

Washington and Brussels are worried that, as outlined by the U.S.-China Economic and Security Review Commission, China’s “industrial overcapacity amid consumer stagnation poses a direct risk to U.S. competitiveness and the resilience of global markets.” Beijing’s concerns, however, reflect Chinese vulnerabilities that Washington and its allies can pressure in trade negotiations.

Beijing’s Overproduction, Over-Subsidization Harms Western Firms

Preset “growth targets” — not demand — shape Chinese production. Beijing pays hundreds of billions in subsidies to incentivize excessive manufacturing, then dumps excess supply abroad at artificially low prices that fail to reflect production costs. Last year, cheap, widely-available Chinese steel imports undercut local competitors in Brazil — pushing domestic mills to operate around 15 percent below healthy production levels and driving a record 5,100 layoffs. This same behavior threatens other sectors globally, including the automotive, cement, and solar industries.

Once rivals are gone, Beijing holds its consumers captive. China can effectively control prices and sever entire supply chains by restricting exports at moments of geopolitical tension. For example, in 2025, Chinese restrictions on rare-earth exports caused delays and factory closures for American and European automotive production lines.

China Seeks To Maintain Captive Consumers

China’s 15th Five-Year Plan pledges to “vigorously boost (domestic) consumption,” implicitly acknowledging that weak domestic consumption is a problem. However, China is working overtime to dissuade Western countries from imposing trade barriers because its economic model depends on access to their consumer markets. In 2024, around a third of China’s GDP growth came from net exports alone; of that, about 31 percent went to the United States, the European Union, and United Kingdom. Trade barriers from Washington or Brussels would force Beijing to either explore avenues for illicit transshipment, accept shrinking growth, dump into smaller markets, or fundamentally rebalance its economy toward domestic consumption.

Based on this paper, Beijing is not open to changing course. Officials argue that “reasonable” subsidies correct market failures, and that because China is “the world’s largest consumer market,” rising domestic demand — not subsidies — explains the growth in production.

The data tells a different story. Chinese exports grew by nearly 20 percent between June 2025 and June 2026. Over that period, China’s subsidies were three to eight times larger than those other governments give their own competing industries. The OECD reportedly found that these subsidies accounted for 60 percent of Chinese companies’ recent gains in global market share. In other words, it is the subsidies — not rising domestic demand — that appear to be driving China’s production growth.

The Time for a Near-Global Economy

China’s defense of its economic model reveals structural vulnerabilities,  providing leverage for Washington and its allies in trade negotiations. Current U.S. Section 301 investigations and EU market rebalancing deadlines are promising but uncoordinated — isolating markets while shielding against a shared threat. For the greatest impact, Washington and Brussels should jointly raise tariff walls to prevent dumping, while lowering tariffs and investment barriers for partners behind those walls. Common tariffs and import caps on countries that refuse to play by the rules — like China — can support trade negotiations from a shared position of strength.

The United States and European Union should also coordinate on trade enforcement to avoid rerouting and masking of Chinese imports. This requires implementing rules-of-origin requirements for goods imported from third-party states, investigation of transshipped goods, and, if necessary, the imposition of additional tariffs on countries providing a front to Chinese manufacturers.

Elaine Dezenski is senior director and head of the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). Susan Soh is a research associate at FDD. For more analysis from Elaine, Susan, and FDD, please subscribe HERE. Follow Elaine on X @ElaineDezenski. Follow Susan on X @SusanSoh827. Follow FDD on X @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focused on national security and foreign policy.