China’s Overproduction Paradox: A Crisis Driven by Weak Domestic Demand, Not Tariffs

Domestic consumption lags far behind production capacity
Global price distortions deepen amid dumping surge
Concerns grow over a self-perpetuating trade imbalance

China’s chronic overproduction, which has distorted global markets, stems less from U.S. tariffs than from persistently weak domestic demand, according to new analyses. Fueled by heavy state subsidies, artificially expanded manufacturing capacity has collided with sluggish internal consumption, forcing excess goods into global markets at cut-rate prices. With key Chinese industries—from electric vehicles to steel and semiconductors—trapped in a cycle of cheap exports, countries around the world are striking back with anti-dumping probes and steep tariffs. Experts warn that unless Beijing revives consumer demand and restructures its industrial model, this destructive cycle will persist.

Mounting Price Pressure Across Industries

The European Central Bank (ECB) concluded in its report “China’s Growing Trade Surplus: Why Exports Are Surging as Imports Stall,” released on November 11, that China’s export dumping in Europe stems not from U.S. tariffs but from chronically weak domestic demand. The ECB found that China’s export surge to Europe began well before the U.S.–China trade conflict and coincided precisely with the onset of weakening domestic consumption. However, the report also noted that each time trade tensions with the U.S. rise, China diverts even more of its exports toward Europe.

The ECB warned that treating China’s export boom and trade imbalance as a short-term diplomatic dispute is dangerously simplistic. “The weakness in China’s domestic demand originated in the property downturn of the early 2020s,” the report said, adding that subsequent state-led manufacturing investment fueled massive overcapacity. As real estate collapsed, imports plunged and household spending weakened, while state-directed capital poured into factories, leaving supply far outpacing demand. “Chinese firms turned outward to maintain sales,” the ECB noted, “but their repeated resort to price cuts has entrenched a race to the bottom.”

Economic data underscores the same trend. China’s third-quarter GDP growth slowed to 4.8 percent—the first drop below 5 percent this year—down from 5.4 percent in the first quarter and 5.2 percent in the second. Property development investment fell 13.9 percent year-on-year, while fixed-asset investment slipped 0.5 percent, its lowest since 2020. Retail sales growth slowed to 3.0 percent in September, the weakest since November last year. Despite steady exports, domestic demand remains too frail to sustain growth momentum.

Deflationary signs are also emerging. China’s consumer price index fell 0.3 percent in September from a year earlier, marking a second consecutive monthly decline and signaling its first real deflation risk in 16 years. The CPI has failed to rise more than 0.2 percent even once this year and has fallen five times since February. Such prolonged low inflation erodes corporate margins and dampens hiring, intensifying fears of a consumption-driven slowdown.

This malaise is visible in everyday life. Among younger consumers, bargain hunting has become a lifestyle, with bankrupt automakers’ models like Neta and HiPhi selling for steep discounts. Analysts say declining incomes and job insecurity have pushed consumption firmly toward low-cost goods. Overproduction drives prices down, cheap pricing further weakens sentiment, and the feedback loop tightens. The average price of Chinese passenger cars has fallen from about 31,000 USD in 2021 to 24,000 USD this year, while profit margins across automakers have halved within seven years.

Dumping Abroad Deepens the Cycle

China’s industrial sector is trying to offset weak domestic sales with exports, but the outlook is grim. In October, vehicle exports rose 27.7 percent year-on-year, even as local sales stagnated. Yet this expansion hides what analysts call “profitless exports.” Aggressive discounting boosts short-term volume but undermines margins, leaving entire industries caught in a low-return trap.

According to the World Trade Organization, 79 anti-dumping and countervailing investigations targeting Chinese products were launched in the first half of this year—more than double the semiannual average of 20–30 cases between 2021 and 2023. The United States led with 21 cases, followed by India (10), Mexico, and Brazil. Once limited to advanced economies, such probes are now spreading across emerging markets, reflecting broad pushback against China’s low-price export strategy.

Steel has borne the brunt. As of October, 62 countries had imposed 207 trade restrictions on Chinese steel, 168 of which were anti-dumping measures. China’s steel exports have more than doubled annually since 2020, reaching 110.72 million tons last year and 87.69 million tons by September this year, up 9.2 percent year-on-year. The OECD said subsidies, tax breaks, and cheap loans allow Chinese mills to sustain unprofitable output, warning that “as long as such distortions persist, price-cutting and dumping will remain unavoidable.”

This explains why countries are racing to erect new trade barriers on steel, batteries, and electric vehicles. The fear is that China’s industrial oversupply could destabilize global trade itself. The U.S. and EU have already strengthened import quotas and origin tracking, while Thailand and Vietnam have joined with new anti-dumping duties. Enhanced tracing of crude-steel origins has also begun to limit China’s ability to reroute semi-finished products through third countries.

Tariffs and Backlash Mount Worldwide

Even China’s semiconductor sector—newly crowned as a strategic industry—shows the same strain. Following U.S. export curbs on advanced chips, China ramped up production of older 20-nanometer-and-above nodes using legacy equipment. As a result, its share of the mature-process chip market has reached 28 percent this year and is projected to climb to 39 percent by 2027. But this expansion reflects not technological progress but a flood of unsold inventory redirected overseas. Analysts say the entrenched overproduction model has replaced innovation with volume-based price competition.

Foundries such as Semiconductor Manufacturing International Corporation (SMIC) have shifted resources away from cutting-edge nodes since the U.S. crackdown. Exports rose temporarily, but profitability fell. Excess chips that domestic markets could not absorb have pushed global prices lower, eroding margins industrywide. China’s attempt to offset weak domestic demand with exports risks deepening imbalances across the global semiconductor ecosystem.

Resistance is now mounting beyond high tech. Countries from South Korea to India and Brazil are imposing countermeasures against Chinese oversupply. Seoul initiated provisional anti-dumping duties on Chinese steel plate in December, India is weighing safeguard tariffs of up to 25 percent, and Brazil has already approved a 25 percent levy on Chinese steel imports. Even BRICS partners that once touted close economic ties with Beijing are now pushing back, signaling growing fatigue with China’s export-driven distortions.