In recent times, the term “overcapacity” has become a hot topic in global politics. U.S. Treasury Secretary Janet Yellen, during her visit to China in April, raised concerns about the country’s economic imbalances and what she called “overcapacity.” Her focus was particularly on three key sectors: solar power, electric vehicles (EVs), and lithium batteries. These industries are central not only to China’s low-carbon transition but also to the world’s efforts to combat climate change.
However, opinions are divided on whether this overcapacity is a problem or a potential benefit. Some fear it harms industries in countries like the U.S. and the EU, while others see it as an opportunity, especially for developing nations in the Global South.
Understanding Overcapacity
Overcapacity happens when a sector produces more goods than the market can absorb. This often leads to reduced prices, making it difficult for competing companies to survive. The U.S. and EU argue that this dynamic hurts their industries, justifying the tariffs they’ve imposed on Chinese green technology.
For example, in May, the U.S. implemented a 100% tariff on Chinese-made EVs, along with a 25% tariff on lithium-ion batteries and a 50% tariff on solar cells. Similarly, the EU introduced tariffs of up to 45% on Chinese EVs by October. The justification for these measures often revolves around what Western countries describe as unfair Chinese government subsidies. A report by the Kiel Institute revealed that subsidies for green tech companies in China surged significantly in 2022, with BYD, a major EV manufacturer, receiving nearly 10 times the support it had two years earlier.
China dominates global production in these green sectors. It produces 75% of the world’s lithium-ion batteries, essential for EVs, and over 80% of solar panels, which saw a 34% export increase in the first half of 2023.
Despite these figures, Chinese officials reject the notion of overcapacity. President Xi Jinping has stated there is “no such thing as China’s overcapacity problem,” attributing the imbalance to fluctuating global demand rather than excessive supply.
The Global Demand for Green Technology
While overcapacity might seem like a problem now, the future of green technology demand paints a different picture. According to the International Energy Agency (IEA), global EV sales could hit 45 million units annually by 2030, more than tripling the 2023 numbers. Similarly, solar and battery technologies are expected to see booming demand.
China itself has ambitious solar energy goals. A 2023 report by Global Energy Monitor suggests the country could double its solar capacity by 2025, meeting its 2030 target of 1,200 gigawatts five years early. Globally, renewable energy is projected to grow rapidly, with wind and solar expected to contribute 30% of the world’s electricity by 2030, up from 12% in 2023.
However, this rapid growth hasn’t come without challenges. Chinese renewable energy companies are experiencing an imbalance between supply and demand, leading to declining profits. Many industry leaders are now calling for better production controls to stabilize the market.
Opportunities for the Global South
While debates about overcapacity often center on China, the U.S., and the EU, the conversation is equally relevant for the Global South, particularly Africa. Many experts believe China’s excess capacity in green sectors presents significant opportunities for developing countries.
Frangton Chiyemura, a researcher at the Open University, suggests that Africa could help absorb some of this overcapacity by connecting China’s supply with local demand. Although Africa’s current market for green technology is relatively small, stronger cooperation with China could expand the market and foster technological innovation.
One example is Africa’s increasing imports of Chinese solar panels. In the first half of 2023, Pakistan imported 13 gigawatts of low-cost solar photovoltaic systems from China. South Africa, the continent’s largest importer of Chinese solar panels, brought in 4 gigawatts of capacity in the 12 months leading to September 2023. This is equivalent to about 3% of the country’s annual electricity needs.
Despite these developments, Africa’s renewable energy production remains low. The entire continent generates just 13 gigawatts of electricity from solar panels—less than many single countries around the world.
Chiyemura proposes that China relocate some of its production lines to Africa. Many African countries have favorable trade agreements with the U.S. and Europe, offering them easier market access. For example, the African Growth and Opportunity Act provides duty-free access to U.S. markets for eligible sub-Saharan African countries. Producing green technology in Africa could therefore benefit both China and local economies.
The Case for Local Manufacturing
Relocating production to Africa aligns with broader economic goals in the region. Countries like Rwanda are pursuing policies aimed at industrialization and increasing local manufacturing. Establishing renewable energy production facilities in Africa would create jobs, boost manufacturing capacity, and help African nations add value to their natural resources.
The Africa Finance Corporation’s head, Samaila Zubairu, believes collaboration between China and Africa could also diversify renewable energy supply chains. This would benefit both regions, allowing China to manage its production levels while helping Africa develop its green economy.
Muyi Yang, a senior researcher at the energy think tank Ember, argues that diversifying supply chains will benefit China in the long run. As global resource constraints grow, shifting production to resource-rich regions like Africa will become more sustainable.
However, challenges remain. Yang highlights poor infrastructure and limited private-sector investment in many African countries as significant obstacles. Public utilities dominate the energy markets in most of Africa, leaving little room for private investment or innovation.
China-Africa Cooperation in Green Energy
There are signs that China is already taking steps to address these challenges. The Forum on China-Africa Cooperation (FOCAC), held in September, resulted in several pledges to boost green development in Africa. China committed to supporting 30 clean energy projects, establishing a green industry fund, and providing African countries with new energy technologies.
These commitments are part of the broader Beijing Action Plan, which aims to strengthen China-Africa industrial cooperation over the next three years. This includes building industrial parks, developing local value chains, and offering training on industrialization.
Chiyemura views these developments as positive. He believes the Chinese government’s support signals a shift toward greener projects in Africa. Chinese companies, whether private or state-owned, are likely to follow this lead and prioritize renewable energy investments.
A Vision for the Future
Some experts propose even more ambitious ideas. Huang Yiping, dean at Peking University’s Institute of South-South Cooperation and Development, has suggested a “Green Development Plan for the Global South.” This initiative, modeled after the Marshall Plan, would provide financial support to developing countries for purchasing Chinese green technologies. The plan would stimulate demand for Chinese products while helping the Global South achieve its climate goals.
For countries in the Global South, China’s so-called overcapacity could be an opportunity rather than a problem. With much work needed to meet global climate targets, the affordable and abundant green technologies China offers might help bridge the gap. However, successful cooperation will depend on how well China fosters partnerships in regions like Africa and Southeast Asia. Building factories, transferring technology, and supporting local energy industries will be crucial steps in this process.
Ultimately, China’s green overcapacity may hold the key to accelerating the global energy transition. By leveraging its strengths in renewable energy production, China has the potential to transform not just its own economy but also those of developing nations around the world.
