Overcapacity, Forced Labor, and China's PNTR Reckoning

This week’s episode of The Big 3 with CPA economists Mihir Torsekar and Andrew Rechenberg centered on three major trade investigations that go to the heart of CPA’s industrial policy agenda: global overcapacity, forced labor, and revoking China’s permanent normal trade relations status.

First, the crew examined the Section 301 overcapacity investigation, arguing that China remains the central driver of global industrial excess, but that countries such as Vietnam, India, Mexico, and Egypt also function as conduits or secondary sources of distortion. They pointed to enormous overcapacity in sectors like steel and solar, warning that subsidized production is flooding world markets and undercutting U.S. manufacturers.

Second, the hosts turned to forced labor, describing it as a hidden production subsidy that lowers labor costs, suppresses fair competition, and is deeply intertwined with the same supply chains driving overcapacity, particularly in Chinese polysilicon and solar production.

Finally, they discussed CPA’s comments to the U.S. International Trade Commission on revoking China’s permanent normal trade relations status. The team argued that China’s entry into the WTO devastated American manufacturing communities, and they highlighted CPA modeling showing that moving China to Column 2 tariff treatment could generate large GDP gains, create jobs, and begin correcting a decades-old policy mistake.

Transcript

SPEAKER_02 0:01

From our perspective, we're looking for stability. We're trying to achieve, we're trying to get the trade deficit reduced. We're trying to increase manufacturing in the United States, and we're trying to increase real wages. And all of that is happening.

SPEAKER_00 0:14

So All right, hello, and welcome to the big three from the Coalition for a Prosperous America, where each week we break down the three biggest stories uh shaping U.S. trade, industrial policy, and the American economy. I'm Mihir Tworsikar, alongside my fellow senior economist Andrew Reschenberg. So let's get to it. So this week's episode might be a little unusual because these aren't necessarily three items that are kind of in the in the news, so to speak, but they're relevant because there are three big investigations that CPA will be providing or has provided comments on. There's two investigations from the U.S. Trade Representative, um 301's section, um, Section 301 investigation specifically uh into forced labor practices and overcapacity that we're going to get into. And the third topic concerns uh comments that we filed uh regarding uh U.S. uh International Trade Commission investigation into the implications of revoking China's uh permanent normal trading relations uh status. Um so I think to just start off uh at the top, I think it might be good to just walk through what are some of the comments, what's our focus here? Um maybe we'll just start up front with the overcapacity investigation. Um, Andrew, you and I both kind of teamed up on that. So why don't uh why don't I kick it over to you? You tell me about um some of the analysis that you put together on that front, and we'll just take it from there.

SPEAKER_01 1:36

Yeah, so for global the global overcapacity investigation, this is focused on a lot of different countries. One of our main focuses was, of course, China, because they are really at the heart of these global overcapacity issues. But it's really important that it's not just focused purely on China. We have a lot of other countries that are basically conduits of this Chinese overcapacity and at this point, even generating some of their own excess capacity in and of themselves. And particularly Southeast Asian countries, India, even some Middle Eastern countries like Egypt, we're seeing this with a number of products such as steel. And overall, we're seeing of the scale of the global overcapacity issue is overwhelming, and it's really damaging U.S. producers and undermining them on prices. For example, for steel, it steel is projected to reach a global overcapacity of 721 million metric tons by 2027. And just to put things in perspective, that's over twice what the global total steel output was in 2024. And so our excess is now over twice what our total output was just a few years ago. And so this is really getting to be a huge scale of an issue that is really making prices plummet. And we're seeing this across a number of different sectors. We focused on steel from both China and from countries like Vietnam and Egypt and countries like that. And also we're seeing the same sort of issues with solar. For example, China still controls 90% of global polysilicon production, which is the key ingredient for making solar panels. And we're still importing a huge number of solar panels, about 70 gigawatts in 2024, even though current module production in the US can meet all of demand. And so we're seeing this across a number of different sectors, whether it's steel or pharma or any of these sectors, that global overcapacity is plummeting prices. They're undermining US producers. And a lot of it does stem from China, especially when you look at the upstream input ingredients that you need for a lot of these sectors, whether it's the raw seal or the polysilicon or for pharmaceuticals, the APIs we've talked about a lot. But it's increasingly being funneled through these third countries, especially as tariffs on China directly are being increased. And so we really need to look at this overcapacity issue not just as a China issue, but as a global issue.

SPEAKER_00 3:59

Yeah, it's you know, it's interesting because I think most people have come around to the idea that the overcapacity with China is is endemic and we all recognize China as the big culprit in all of this. But when people see there's 16, you know, countries that are that are implicated in this Section 301 investigation, people might wonder, you know, what do you have like Korea, Vietnam, Mexico, Japan, India, et cetera? And exactly to your point, I mean, you might not necessarily well, I mean, uh I it's actually an industry like steel, it's probably like a lot of these economies are implicated in directly overcapacity, you know, producing too much. Uh, but they are also, you know, they serve a role in distorting global, you know, macroeconomic imbalances by being those conduit hubs for, you know, uh excess capacity to kind of flow through and maybe find their way directly into the United States. I mean, we've documented surging imports from, as you mentioned, some of the industries that we've identified in the, you know, in the analysis that we put together. Like, you know, there's so many examples like solar, for example. Okay, we we put uh sanctions on you know China in some way, we put some trade really uh actions against China on solar. They can just move production over to Vietnam or just gets rerouted. All of a sudden we see a surging boom of imports from you know Southeast Asian countries. Um, you know, it's not just like, okay, you just penalize one country. And again, I want to say penalize, but you don't want to just put trade actions against one country. You have to address a whole system of production here that's finding its way into the United States and undercutting our own capacity. Now, just to step back though, when we talk about industrial, you know, when we talk about um industrial overcapacity, it's important to understand, and I think Andrew, you you pretty much hinted on it. I think the viewers can understand just from context what we're talking about. But just so we're on the same page, it's basically like when a country produces so much capacity that's built well beyond what domestic or global markets actually demand. And it's all largely sustained through government policy rather than like a market signal. And so this produces great, you know, distortions in the market, whether it's pricing, whether it's supply, whether, you know, it's just completely out of sorts with with what uh again the market is demanding. So it creates real distortions in the economy, especially at a time when we're trying to re-industrialize our economy, not just for national security reasons, but for just overall, you know, manufacturing competitiveness and industrial well-being. So I think the the second the second um Section 301 investigation, which was released just a day after the overcapacity investigation, was the investigation into forced labor. Now, obviously, I mentioned up front, we at CPA kind of put the two items together because these are really we see them as very very much interlinked, and some people might wonder what's the connection. I mean, I think anything that uh is inadvertently kind of juices the manufacturing competitiveness for a country, um, for lack of a better way of putting it, is something that it it all kind of speaks to the same issue. So forced labor is one of those things, excuse me, where you can, you know, forced labor essentially lowers your labor unit costs. And obviously that it you know can ultimately lower the sticker price and the the production costs overall for what you know consumers are paying and and and it has implications there. But Andrew, if you want to talk a little bit about that, I know overcapacity was kind of a big, big focus for us, but why don't we talk maybe a little bit about the forced labor component as well?

SPEAKER_01 7:11

Yeah, absolutely. I think that as we already pointed out, the overcapacity has been our main focus, but I think that we also really need to keep in mind the forced labor aspect of it because this is really a hidden production subsidy for a lot of these countries. And of course, we're not going to have the same forced labor issues here in the United States as you would have in China or a lot of the other countries that are developing. And it is becoming a hidden production subsidy for them. And it's estimated that about $236 billion in illegal profits are generated from this forced labor. And this is up 37% since 2014. So this isn't an issue that's going away. If anything, this is an issue that's getting more and more dire, and it's becoming a production subsidy for any of these cheap underpriced goods that are coming into the US, undermining U.S. workers and U.S. companies that have good conditions and that's coming in utilizing and exploiting this forced labor. And we're seeing this across a lot of the same sectors. And that's why we linked these in the two investigations that the overcapacity and the forced labor very much are linked with a lot of these industries. And so if you take solar, for example, 90% of global polysilicon production happens in China. But half of that overall comes from the province in China where we have the exploitation of the Uyghurs. And so this is very much linked that you have the polysilicon really concentrated in these areas that not only have excess capacity from China, but it's being definitely supported by this forced labor aspect. And that's helping to drive down prices, it's helping to kick American companies out of business, and it's really becoming a big problem. And even though this is starting at China with these forced labors, it's still, as we're saying with overcome excess overcapacity, it's still going through these other countries. That the polysilicon that's taken using Uyghur forced labor in China is often processed into sales in Vietnam or Malaysia, and it's going then to the United States. And so this is a whole of supply chain issue we need to look at. And we need to have a broad look at this to make sure that we're not supporting the this forced labor that's becoming a direct production subsidy for a lot of these countries.

SPEAKER_00 9:20

Yeah, I think the labor component of manufacturing is just so important to, I mean, if the, you know, we're looking at this through the lens of just the forced labor angle, but in if you just look at the, you know, kind of zoom out and understand how countries are treating their labor force as a way to kind of promote uh industrial overcapacity and juice their manufacturing competitiveness. Sure, I mean, one option is forced labor, the other is to, you know, lagging wage growth. So wages lag uh productivity. The company, these countries can become more industrially productive, but their way the manufacturing wages are suppressed. Uh, and that that serves to like limit or inhibit domestic consumption, which then leaves you with this excess production that you know no one's consuming domestically, so you have to send it abroad. And again, we talked China, obviously, they're the big you know looming concern here, but you know, these are practices that are in some way, shape, or form you know practices practice in other what we call surplus saber countries like Germany, like Japan, like South Korea, for example. Um, and again, I'm not I'm not implying that forced labor is you know present in the same I'm not I'm gonna try to kind of link them all. I'm just talking about specifically things that, you know, again, i it impact the labor force and keep wages low, limit their rights to like collectively bargain, for example. I mean, this has been an issue in Mexico as as well. And even like the International Labor Organization has uh implicated Mexico's tomato growers, for example, as uh kind of uh, you know, as a as an industry where labor, for example, labor rights are not adhered to. And uh you wonder how these countries, you know, can have their wage rates so much lower than ours. Well, some of it might just be what you know traditional economists might call competitive or excuse me, comparative advantage. Uh, won't get into specifics there, but but other other ways are are done to deliberately keep wages low. And again, it it does act as a production subsidy, as you mentioned. So I think this is this is a really good opportunity for us to be able to put our comments on record and speak to the ways and really shed light on the ways that uh other countries are are promoting their manufacturing competitiveness, really unfairly, I'd say. Um, and it really hurts us. Um, so you know, why don't we maybe pivot to the third topic, the um, you know, the the International Trade Commission's investigation into the implications of re revoking China's permanent normal trading relations status where they're like, you know, what they call most favored nation status. Maybe we can talk a little bit about what that policy was, you know, a little bit of the history of it if you want to go there, uh, and talk about you know what the effect has been. Perhaps we can start there and then talk about what our comments um, you know, kind of revolt around, if you want to start there.

SPEAKER_01 11:59

Yeah, so just to give a bit of a broad picture of what exactly we're talking about here, there in the tariff structure of the United States, there are two columns. There's column one tariffs, which is the permanent normal trade relations status, which is the vast majority of countries in the world have this lower tariff rate. And then in column two, we have a higher tariff rate for countries that are not considered in this permanent normal trade relations status. And really the only ones in this column two at this point are countries like Russia or North Korea or Iran. And so the proposal is to take China and put them in this column two rate, which is slightly higher statutory rates on all of the different HTS categories for tariffs and products coming into the US and measure what the effect of that would be. And China was in this column two territory for the longest time, up until the early 2000s. They were in this column two tariff rate and we were purposely let them into the WTO and we gave them this permanent normal trade relations status in the early 2000s. And what the studies have shown since then is that this direct import and trade exposure to China, this trade competitiveness, has resulted in 2 to 2.4 million net jobs lost in the United States due to this uh production and these employments then being shipped overseas. And the overall benefits for prices at the same time, the main benefit that they said that this sort of trade liberalization is going to have has been measured to be 0.1% lower inflation from 1996 to 2005. And so that's the history of going into this. And so that's why there's been increasing calls for really revoking this permanent normal trade relations status with China, because we've had all these job losses. We haven't really seen the huge amount of price uh price declines or anything like that. Even if you look at cars that used to be made in the US, are they cheaper than they were in into the 2000s? Not really. And so what we looked at for our investigation was what exactly would this mean? What is is the exact tariff difference of going from column one to column two? And what we found is that if you take all of the different HTS categories, all the different import categories for goods that we import from China currently, and you applied the column two tariff rates to the current picture, you'd get on average a 38.9% tariff increase for Chinese products. And so this is this is going to be higher for certain goods like electronics or machinery, things like that are going to be the most affected. But the 38.9% is an average. And then what we also did was we plugged in this tariff increase to our GTAP FP model, which is our modified GTAP trade model to simulate what happens when you put tariffs on different goods coming into the US and what that does for employment and production, taking into account what tariffs are meant to do. They're meant to encourage investment and production in the US, which of course leads to jobs and GDP gains. And what we found after running our model simulation was that moving China to column two would generate $274 billion in GDP gains and 1.2 million jobs. And it also increases household income by 1.9%, which is about 1,600 per household over like over the year. And so these are really good gains, and it really shows that our trade relationship with China can be addressed with these sort of trade measures. And making sure that China is not getting a preferential status for the column one rates when they've shown that they've had these excess capacity, these forced labor issues, is really something we need to move forward with. And the benefits for American industry are enormous.

SPEAKER_00 15:45

Yeah, the I think in a previous podcast when we did or a previous um episode of our the big three, I I think I'd mentioned like the column one, column two distinction is the grown-ups versus the kitty table. And so the grown-ups, like when we when we gave China a seat at the grown-ups table, we basically just gave them the free pass into the US market, just driving like an open road into the US market. And uh, we just like matadors waved them in. Uh and then the you know, the set the column two, I mean, the the kitty table. I mean, you you've got Belarus, North Korea, yeah, like maybe Cuba, I think Russia, you know, some of the most the biggest uh like you know malcontents in the in the international trading order. Um and you know, some might think, man, that's a real uh that that's a real slight to the country, the the world's second biggest economy and the most prolific industrial producer uh in the world today. But it you know, I think it it does maybe it probably is appropriate. I mean, given the just the damage that it wreck wreaked on the United States, but also the fact that once China was admitted into the World Trading Organization at our invitation, as you mentioned, uh they it's not like they sat there and and complied with the rules and they were playing, you know, pla playing by the rules that were set up by you know the United States and others. It was essentially just learning how to game the system and and and through you know industrial policies that were not endorsed by uh WTO actions or simply just uh skirting the rules when the United States and other countries would bring uh you know violations to the WTO's attention, China would find ways to just you know skirt around and and find loopholes to exploit. So um, yeah, I mean it's it's so many studies, of course. The China shock where we're all pretty familiar with the devastation that was wreaked by that. Um and you know, you hope that that there's something that we can finally start to, I mean, God, it's it's just 25, 26 years after the fact. It's just my God, it's it's amazing that we're even finally at the point where we're willing to even consider what this looks like. Uh it's just it's just so devastating what the impact on these communities were. And I'll just say, like, you know, you know, when the China Shock study was first released, I think they almost undercounted the devastation, underestimated the underestimated the devastation that was that was wrought on communities. I mean, I think they estimated, you know, maybe between two and two point four million jobs lost, something in that range, which was already bad enough. But they found when they did a second follow-up study, the communities that lost all those jobs, sure, in terms of employment numbers, you know, you know, from the 10-year period that they looked at, jobs did recover, but the same people who lost their manufacturing jobs weren't the ones who filled those jobs in the service sector. It was, you know, immigrants, it was just like college educated folks, like college, college folks, just a different demographic largely than the one that was displaced by those manufacturing jobs. And those folks often succumbed to like things of diseases of despair, like the opioid epidemic, or they they claimed uh, you know, welfare state, you know, state benefits, is uh unemployment insurance and things like that. Um, they never really recovered. And and the ones who did get jobs found jobs that they they got were were paying much lower uh wages than they were earning before. So it just completely dislocated it uh people from their communities and just devastated whole whole uh areas of the United States. So, you know, again, it's finally good that we're we're at least willing to, you know, start pivoting back and and thinking, you know, man, what do we do to kind of redress this kind of issue? Um so I I don't know. I mean, was there was there more, I guess, that you wanted to talk about maybe on on this episode uh on this episode and and maybe uh you know think about what we uh what our you know what the kind of cap on this whole discussion might be?

SPEAKER_01 19:25

Yeah, I think that covers it pretty well, but I I will just say for the job numbers, for things like the import competition with China and what that cost, it's really important to note that these manufacturing jobs are often the pillars of their economic communities that are that many, many other jobs rely on. So, for example, the import competition with China was estimated to have a direct impact of two to two point foon jobs. But these aren't the only jobs that are impacted because these sort of factories, these manufacturers, they also support countless local jobs. They support local tax revenue for school districts, for police departments, it supports local service industry, these these the manufacturing workers are going to restaurants, they're going to museums, they're going to support the whole local community. And that's really what we found whenever we have the rust belt now. It's like it's not just those direct factory jobs, it's the whole communities that they underpinned. And so it's really it's hard to underestimate the damage that we've had from this sort of import competition. And I think all three of these investigations are very much linked that the permanent normal trade relations with China kind of gave them the lower tariff rates to be able to bring a lot of these goods into the US, but that actual export capacity and that export surge was very much supported by the excess capacity, the manufacturing, the subsidies all coming from China and now from a lot of other countries, as well as the forced labor that supports it. And so I think all three of these investigations are very much linked and hopefully they'll be able to chart a better course for what the United States can do for its own manufacturing industry moving forward.

SPEAKER_00 21:03

Yeah, it's interesting because, you know, when when people look at uh just manufacturing employment losses, they think uh, well, I mean, that's a natural part of development. I mean, all developed company countries eventually lose their manufacturing prowess or their their share of manufacturing as a as a contributor to GDP in favor of the services sector. Um I don't want to sit sit here and simply just say like all manufacturing job losses are created equal, because that seems to be what the takeaway is, and it's not because you can lose your job because maybe the industries become more productive. And in those instances, well, you would expect wages to rise, and that's a good thing. That's what we want. And if people like leave the manufacturing sector as a result of that, they might be able to find, you know, similar jobs or something that pays comparable to what they were earning before. Uh, but but in this case, what we saw was mostly displacement. I mean, it was simply just, you know, we're gonna try to produce or promote, sorry, the the cheapest uh goods that we can find for consumers. Uh and pedal them to them in exchange. And we're just going to forget about like the impact on wages and the livelihoods of so many people who could have otherwise produced that stuff domestically. And we're just going to allow it to be undercut by cheap subsidized production from overseas. And so, yeah, I would argue that most of those manufacturing job losses were because of displacement as opposed to like productivity gains, which I think is often missing from these discussions. And you know, when those people lost their jobs, it's like you're forced into the non-tradable services economy. This isn't just a natural development, like a kind of seamless handoff from one sector to another. It's just a forced, like almost violent displacement. And that is what is missing on all these economic models, by the way, in addition to so much other stuff. But these people aren't seen as people, they're seen as just like numbers on a spreadsheet. And we'll just, we're just going to put this policy together. I mean, just it's just so detached, I think, from reality. And I think that's I really that's why I think I really like what we do at CPA because we do try to put the human element, like we do speak to the the actual individual impact, and to the extent that we can do that, I think that's that's a real benefit that we provide to people in this discussion. Um, but look, I mean, I think we could definitely talk all day about this. I I imagine there's plenty more meat on the bone here to talk about these macroeconomic distortions uh that are uh you know put out there by by so many different countries. But I think for now, maybe we'll put a pin in this discussion uh till next time. But um, so thank you all for joining us. Um, you know, learn more about our work at prosperous america.org. Be sure to find us on YouTube, uh, and you can check us out on the big three. Uh well you can check out the big three on Apple, Spotify, Google, or wherever you get your podcast. Uh till then, we'll see you then see you soon. Take care.