Keep overcapacity off agenda
C120 should locus on core issues and not gel bogged down in topics that should be dealt with at a domestic level
By YANG VANQING
Some developed countries w;mt China's excess capacity to be put on top of the agenda Of the G20 summit that starts in Hangzhou, Zhejiang province on Sept 4. But should the G20 summit focus on this issue?
Zhou Xinochuan, governor of the Peopled Bank of China, made a key point at the Chinese Economists 50 Forum in February: Since Chinals overcapacity is a domestic issue, it should be resolved within the country, not at international conferences, in order to keep trade protectionist tendencies away.
We need to have a clear under-Btanding <>f the correlation between overcapacity and international trade. People generally believe global trade is al) about "absolute comparative advantage" as Adan) Smith put it in Tha H'iultti ofNatiuns.
But Zhou said: "lt does not conform to theories of classical economics, where, even without factoring in differences in resource endowments, u country may have higher capacity and therefore higher output of a certain product as a result of labor division; and, by the same token,
other countries may have stronger production capacity and output of other products. This reflects clustering of production skills and equipment."
In other words, global trade is not possible without excess output capacity, ns David Ricardo postulated in his theory of relative comparative advantage.
According to Zhou: "Structural issues and those involved in supply and demand of physical goods arc actually rooted in price misalignments, and therefore product/ industry related structural issues arc all caused by pricing distortions."
I low should we understand the relationship between structural burnt and price in the context of overcapacity?
ITom the micro perspective, no company will overproduce when prices aix> right. From the global balancing perspective, however, without factoring in price distortions and unjustified subsidies, balanced market prices should never lead to continuous overcapacity.
Serious overcapacity is ultimately attributable to structural problems, apart from the cyclical nature of economy and the temporary
decline in demand because of a slowdown in growth.
Companies' production and capacity investments are always based on cost and profit analyses. If there is no cost or price distortion, and no subsidies are provided, manufacturers can use their rational judgment to avoid overcapacity.
But what if subsidies are provided? When subsidies ore clearly in place, products should not be sold below cast price, according to anti dumping regulations from the World Trade Organization (WTO).
The WTO has also set explicit rules against "state trading" meaning international mechanisms arc in place to guard against dumping and subsidies, and there is no need for G20 to pay too much attention to the issue and seek alternative solutions.
And, mon1 Importantly, China does not provide imy overt subsidies for industries suffering overcapacity.
But how should wc tackle overcapacity caused by underestimated costs associated with environmental and climate change? By "inter-nalization" of externalities.
As Zhou said: "Internalization of carbon dioxide emissions involves
factoring in relevant externalities in the cost of energy consumption aud pollution/emission generation — Ulat is, if you need to emit CO2, you should pay upfront the money needed to absorb the resulting emissions. This is what is involved in internalization of carbon emissions."
It follows Ulat the trade in carbon emissions offers a pragmatic solution to Uie issue, tt essentially requires manufacturers to price into their products costs associated wiUi environmental and climate change, and ultimately reflect them in output prices. In this way, overcapacity arising from externalities can also bc tackled through market forces.
Therefore, international debate on overcapacity should focus on whether subsidies are provided, and whether the variables depend on environmental and climate change. China lias been taking proactive measures in this regard os it suffers huge losses because of air pollution and abnormal weather.
Many critics argue the "Christmas tree" phenomenon, where items ore constantly added to a list of core topics of discussion in much the same way decorations
are added to a Christmas tree, is evident at the G20 — diverting attention from fixing the global financial crisis and promoting economic growth.
As a result the G20 luus last focus on very important matters, and its influence and leadership in the international community has weakened.
Therefore, the G20 should focus on core issues in order to restore its leadership and power of execution, instead of discussing unnecessary issues.
•   As for general overcapacity, it should be a domestic, rather than global, issue and should be resolved within the concerned country's pricing and trade policy framework. The disputes should be settled in accordance with the WI'O rules.
And the G20 should focus on resolving global issues related to climate change (that is, costs and subsidies associated with climate change).through existing international mechanisms and make efforts to end once and for all the lingering effects of the global financial crisis.
Vie author is the deputy editor-in-chiefof China Business Netvs.