The analysis produced by the Brussels based Think tank, Bruegel argues that there has been a serious mismatch between production capacity and sustainable demand. This is evident from China’s low-cost manufacturing capturing global markets over the past two decades. Goods have flooded the market, but demand has not kept pace with the production.
In this context of global overcapacity, industries such as solar panels, electronics, electric vehicles (EVs), and traditional sectors like steel and textiles have been affected. Capacity utilization rates have fallen. In the US, it was 82% in 2018 and dropped to 80% in 2024. In the same way, EU’s capacity utilization was 83% in 2018 and became 78% in 2024.
And, China’s capacity utilization fell down to 76%. While a two-percentage-point may appear modest. But in an economy, it cost around trillions of dollars in manufacturing assets. Such a decline represents a substantial volume of idle capacity. All three major economies have therefore fallen short of 85% benchmark considered a threshold for tight conditions, indicating under-utilisation across the board.
In line with this, sectors like semiconductors and AI have turned innovation into a geopolitical and national security issue, prompting governments to provide subsidies and industrial policies to expand production ahead of demand, creating excess capacity. Key policies supporting this include the US CHIPS Act, EU Chips Act and China’s Big Fund for semiconductors. Such strategic escalation risk disrupting markets and reinforcing overcapacity.
Fearing unemployment, social unrest, or political backlash, government intervene to prevent creative destruction. This includes indirect support such as state loans, subsidies, and protectionist measures, resulting in the survival of “zombie enterprises” (in China) in outdated sectors like steel, coal, shipbuilding, and textiles. This problem intensifies when these interventions are used as a protectionist measure (Such as EU investigation into Chinese EVs).
Understanding the dual dynamics of overcapacity, strategic sectors like semiconductors, EVs, and clean energy receive subsidies, creating capacity, while government intervention delay the exit of uncompetitive producers in traditional sectors to preserve employment and social stability.
Overall, overcapacity arises from strategic innovation competition and government protection. This trend could make the coming decade as an era of global deflation, entrenched overcapacity, and shrinking demand. Therefore, reforms are urgently needed to address overcapacity.
News Reported by: Saurav Raj Pant
