What the Heck Is “Structural Excess Capacity”?

The United States is preparing to expand its trade war against numerous countries using Section 301 charges alleging "structural excess capacity," a result of government intervention in the economy. China is targeted first, with the U.S. planning to impose a 7.5% tariff on Chinese goods during an upcoming meeting between President Xi Jinping and President Donald Trump.

This would bring the U.S.'s trade duties on China to around 20%, a previously agreed-upon level for China. These tariffs join other levies from Trump's first term and extended during the Biden administration.

The U.S. Trade Representative (USTR) has announced sixteen investigations, starting March 11th, focusing on countries it claims have "structural excess capacity." These countries include China, the European Union, Japan, Mexico, India, Switzerland, Norway, and others. The USTR argues that these nations maintain policies such as subsidies, state financing, and industrial planning that allow factories to continue production even when market conditions do not support it.

The concept of "excess capacity" is not commonly familiar to many, as it often appears in monopolistic competition models in a domestic (closed economy) context. However, according to the U.S. government, global manufacturing capacity utilization remains between 75.0 and 75.9 percent, below the healthy utilization rate for many sectors, which is approximately 80 percent. This suggests that while global production is expanding, the underlying global supply exceeds the demand.

The U.S. government sources its definition of structural excess capacity from steel excess capacity literature. When examining trade theory and trade law, it becomes evident that the USTR intends to define "structural excess capacity" differently compared to its approach for the 2025 National Trade Estimate Report. The definitional scope is measurable, involving evidentiary indicators such as trade surpluses, low capacity utilization, sector overcapacity, and unprofitable firms.

Seven policy interventions are also considered, including production subsidies, wage suppression, state-owned enterprise activities, market access barriers, lax environmental or labor protection, subsidized lending, and currency manipulation.

The vast majority of these 16 targeted economies exhibit varying degrees of currency intervention, undervaluation, and zombie firms. However, "overcapacity" is primarily addressed in the context of China, with one mention of Indonesia. The USTR's scope for defining structural excess capacity differs from the National Trade Estimate Report (NTE), which focuses on the causes of trade distortion. The NTE only discusses USTR's seven policy interventions, while the S301 does not.