Podcast Transcript — China's Industrial Catalog and the Global Trade Ripple Effect
On Monday, March 2, the Association of Foreign Press Correspondents (AFPC-USA), hosted a podcast, in partnership with the Hinrich Foundation, titled, “China's Industrial Catalog and the Global Trade Ripple Effect.”
China now produces more than 30% of the world’s manufactured goods—more than the United States, Germany, and South Korea combined. Some Chinese scholars argue the country should push that share to 45%, framing sheer industrial scale as both a shield against pressure from the United States and a source of “narrative power” in the global economy, writes Mariko Watanabe, Professor with the Faculty of Economics at Gakushuin University, where her research specializes in applied microeconomics, the Chinese economy, firms, and institutions.
These arguments, she writes in research for the Hinrich Foundation, highlight how scale itself is treated as a strategic asset. But size can also carry risks: overwhelming productive capacity can distort markets and strain trade relations, creating systemic challenges not only for China but for the global economy as a whole.
The podcast episode was hosted by Roseanne Gerin, an assistant editor at the newsletter International Trade Today, who has worked in journalism for more than 25 years.
This podcast episode was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode. Learning takeaways for this discussion can be found HERE.
Roseanne Gerin: Welcome to the Foreign Press Podcast, an educational program from the Association of Foreign Press Correspondents in the USA, in partnership with the Hinrich Foundation — an Asia-based philanthropic organization dedicated to advancing mutually beneficial and sustainable global trade. AFPC-USA is solely responsible for the content of this episode.
I’m Roseanne Gerin, an assistant editor at the newsletter International Trade Today.
Today, we’re joined by Professor Mariko Watanabe of Gakushuin University to discuss her recent article for the Hinrich Foundation, “China’s industrial policy a recipe for overcapacity.”
Professor Watanabe is a leading scholar of applied microeconomics, with deep expertise on the Chinese economy, firm behavior, and institutional development. Her research examines how China’s policy architecture shapes industrial outcomes, and in this article, she offers a clear-eyed assessment of how catalog-based industrial planning — once a powerful engine of growth — has evolved into a system generating structural distortions at home and mounting frictions abroad.
Before we dive in, here’s why her analysis matters now. China today produces more than 30% of the world’s manufactured goods, and its latest industrial catalog signals an ambition to expand that share even further. But the very scale that once propelled China’s rise is now creating systemic overcapacity, deflation across nearly all industrial sectors, and spillover effects that are reshaping global trade — from steel and solar panels to electric vehicles (EVs).
As Professor Watanabe argues, this is no longer an industry-specific issue, but a structural outcome of China’s growth model — one that current international rules are ill-equipped to manage.
Professor Watanabe, thank you for joining us to unpack this important and timely analysis.
Mariko Watanabe: Thank you very much. Thank you very much for having me.
Mariko Watanabe
Roseanne Gerin: Great. Let's start with the big picture. China now produces more than 30% of the world's manufactured goods. How did China reach this level of industrial dominance and what does that scale mean for the global economy?
Mariko Watanabe: The first thing I want to stress is that the size of their manufacturing capacity is a kind of accomplishment of their efforts for the last 40 years. But what I need to stress most is that the state’s capacity to organize a well-designed development plan — which used to be employed in Japan and Korea — has reached some levels, but at the same time that strategy itself has caused a very huge problem both domestically and internationally.
Roseanne Gerin: And some Chinese scholars are even advocating for China to reach 45% of global manufacturing capacity. What does that ambition tell us about how scale is being framed inside China as a geopolitical asset or even a strategic weapon?
Mariko Watanabe: Actually, very recently they adjusted to improve their own development plan to feed their own nation, but in the last 10 years, the US and China’s international relationship became more intensified. They regarded their manufacturing capacity as some kind of geopolitical asset to protect them from external pressures.
Roseanne Gerin: At the same time, you argue that this sheer scale has created a serious structural problem: economy-wide overcapacity. When did you first see signs that overcapacity was becoming systemic rather than sector specific?
Mariko Watanabe: In 2024 — two years ago — the depression situation appeared overall in sectors, even in the official statistics.
Roseanne Gerin: And to understand how China arrived at this point, we need to look at the policy mechanism driving these outcomes. That brings us to the catalog system. At the heart of your analysis, you identified China's “Catalogue of Industrial Guidance” — the Chinese government's central planning list that directs resources into priority industries — as the root cause of this overcapacity. For listeners unfamiliar with it, how does this catalog work, and why is it so influential?
Mariko Watanabe: China built this system gradually, and it started when they declared their socialist market economy in 1992, and the first version of industry catalog [Catalogue for Guiding Industry Restructuring] was published in 2005 and afterwards they were more focused on directing their resources on industrial development. And at that time in 2006, the first kind of overcapacity in the shipbuilding industry had appeared. Since then, I can say that they have become more elaborate in their capacity to organize in industry, and they published the industrial guidance afterwards in 2011 and 2019. The latest version was published in 2024.
Roseanne Gerin: How does the catalog shape the behavior of local governments, especially those that may lack technical expertise but still feel compelled to invest heavily in the sectors Beijing designates?
Mariko Watanabe: Actually, this catalog is more and more applicable to specific industries to promote, abolish, or keep them stable. For example, some kind of materials or some machinery or some environment regulation or something — all this was listed in the catalog. When I talked to local government officials, they regarded this planning as a very good reference as to how to invest or where to invest to promote their own local economies, even though they didn't know anything about exactly what that kind of industry that meant or what materials or which machinery. They did not know anything about that, but they believed that the government gave them a very good reference to invest in this way. All the local governments nationwide started to think then about how to invest from this reference list of the industry catalogs.
Roseanne Gerin: You describe a dynamic where firms pile into the same industries — EVs, solar panels, steel — leading to massive output even when demand doesn’t keep up. What makes this pattern so persistent?
Mariko Watanabe: Persistent. For example, if you are building up some EV industries outside China, that kind of investment is done by traditional automakers because they have good experience, an accumulation of knowledge, and some capabilities. But in China, this catalog helps them to organize investing in some specific industry that was directed by the government. Some start to think about importing technology from abroad if they don’t have it. That is partly due to the Chinese people's very high capacity to do some business. But at the same time, even the entrepreneurs or government officials with no professional knowledge can enter into the industries, so I think the catalog helped them with some kind of unuseful, unnecessary investment in industry.
Roseanne Gerin: Prices in these sectors keep falling despite rising production. What does that tell us about the underlying distortions created by the catalog system?
Mariko Watanabe: For example, in the EV industry, they currently have two excellent companies in China — BYD and CATL, but these two companies keep very high substantial shares of the production in the world economy. But at the same time, China still has 57 other companies that produce EV batteries. It appears that from that overcapacity, they can produce very ordinary products, but they do not have sufficient capacity to keep up or to upgrade the industry. They do not have enough R&D [research and development] capacity, but they can still keep on working in that industry. So, I think you can see that over-entry in the industry is not a good symptom of the Chinese economy’s industries.
Roseanne Gerin: So, that’s the machinery behind the expansion. Let’s turn to the consequences — because the effects aren’t just technical. They’re showing up across China’s economy and in markets around the world. Before framing this as a security issue, you emphasized that it's fundamentally a market failure. How have price signals broken down inside China's industrial system?
Mariko Watanabe: Actually, market failure refers to several concepts. But what I stress here is some kind of externality of the scale, particularly the externality due to the industrial linkages. Because of this catalog system, China established a very good industrial-wise input-output relationship that is very perfect compared to other economies, even those of Japan, Germany or Korea. Most countries can establish some kind of industrial relations in an input-output system — partly, not perfectly. But partly due to the size of [the] Chinese economy and partly due to the government cultural system, China easily established some kind of very broad and perfect industrial-wise input-output relationship externalities. That is one thing that’s very good for it, economically speaking. It doesn’t sound like a bad thing, but because of this externality, other economies, even those of Japan or Korea, may be deprived of room for the development of their own industries. So, there can be some kind of externality issues. China itself regards this as not a bad thing, but for the other economies or competitors or markets for imported Chinese goods, it has a huge negative impact due to the breakdown of their own industrial bases. That is called the production geolocation externality in international economics. That provides a huge negative impact to the outside the world, but China does not regard it.
Roseanne Gerin: So, as you said for other countries, you note that the damage is sudden and structural — cheap Chinese goods flooding in and undercutting domestic industries. Which sectors or regions have felt this most acutely?
Mariko Watanabe: There's an economic analysis. It first started with the shipbuilding industry in 2006 and 10 years afterwards. And currently in the EV industry that China has started to develop in the last 10 years ago in 2016 — the 13th Five-Year Plan, they listed the EV industry as their promotion target. And afterwards they built up some industrial relationships or some clusters, but until very recently after COVID, Europe did their own industrial bases, and they imported some parts from China, but the automobiles themselves were generated in the EU [European Union]. But suddenly in 2021, China started to gradually export their EV vehicles itself because the internal over-competition generated the [inaudible] as an overproduction. Almost all the companies in the industry faced a negative deficit, so they started to export because of the problem of too much internal competition. They called it “involution” in China.
Roseanne Gerin: For China itself, you describe a paradox: its industrial strength is suppressing its own purchasing power. How does overproduction contribute to the concept of “immiserizing growth” — or growth that makes a country poorer instead of richer?
Mariko Watanabe: Yes, because their competitiveness is hugely reliant on scale economies due to some kind of externality due to the industrial inputs of the relationship. But the more they produce their products, the cheaper their prices become because of the scale economy. They produce very good things at very cheap prices, then they export them to other countries. They can contribute or they can export worldwide very good products at cheap prices. But what they can earn is very limited because the price of the production is very cheap. So, their purchasing power does not rise because they export goods at very low prices and import things at luxury prices from outside. Their terms of trade are very negative for them. In addition to this trade relationship, the exchange rate itself is to some extent artificially lowered, so Chinese people cannot achieve the appropriate purchasing power despite that their production power and capability is No. 1 in the world. But their purchasing power is very limited. Superficially, it doesn't produce anything. But for the Chinese people, their purchasing power or their economic welfare is very limited because of these limited terms of trade.
Roseanne Gerin: You make a striking point that both China and its trading partners are losing under the current model. Why does that mutual loss create space for negotiation or a rules-based solution?
Mariko Watanabe: I'd like to suggest that because of China flooding exports for EVs or solar panels for something that was done at cost as the basis of their deficit [inaudible] domestic competition. As for international rules or very basic WTO [World Trade Organization] rule principles, you cannot export products at a deficit based on the deficit situation of the home countries. So, first China needs to stop flooding exports to the world. Actually, they do not have good facilities or some good mechanism to protect from this kind of exportation of the negative deficit. And I dare say that what the Trump administration did — the Trump tariffs — are a kind of response to the overproduction of China. I partly agree with what the Trump administration did, but it is not effective or realistic that only the United States government decides on defining its pro-tariff level one-sidedly. So, we need to organize or improve our effective tariff system or trade maintenance system — so-called safeguards or anti-dumping or counter-subsidies. These facilities inside the WTO should be more elaborate and improved to deal with China's overproduction problem. That was one of my proposals.
Roseanne Gerin: And of course, these economic pressures don’t exist in a vacuum. They’re now deeply intertwined with geopolitics, especially the dynamics between the United States and China. You write that industrial policy has become a geopolitical trap, entangling China in a US-China rivalry that creates a kind of “chicken game” of capacity expansion. Why does Beijing feel it must keep expanding production even when it clearly undermines its own national welfare?
Mariko Watanabe: It damages their national welfare, but at the same time they regard it as very unsafe because of the pressure of the United States’ Trump administration. And they are externally damaging themselves. So, they regard manufacturing capacity as something they can use as a weapon to protect themselves. We need to ease these kind of tensions beforehand, and the third-party countries like Japan, Canada, and the EU, had better to propose or prepare the third route of how to deal with these issues in a rules-based manner.
Roseanne Gerin: Chinese exports — like steel, solar panels, and EVs — are now flooding markets not only in advanced economies but also in Vietnam, Indonesia, Mexico, and Türkiye. How are emerging markets experiencing these spillovers differently?
Mariko Watanabe: For example, in Vietnam, they are now becoming a kind of emerging manufacturing country, and they’ve laid their economic level by exporting to the world. They also established their own steel industries for their own economic welfare. But flooding exports from China have very seriously damaged their domestic steel industry, so they feel they're very dangerous. Vietnam is also already fighting for the WTO to protect them. So, the smaller the country is, the bigger the damage. But the smaller ones do not have enough voice to directly to say something against bigger economies like the United States or China. In that case, particularly for emerging countries, a rules-based solution is highly desirable. Some middle powers like Japan, the EU, Canada, or Australia, should represent these voices of advancing economies.
Roseanne Gerin: How is the geopolitical trap that you referred to leading to the fragmentation of global supply chains?
Mariko Watanabe: From the perspectives of China or the United States, which are very huge, it’s ok for them to protect themselves. But I think it, as I said, could become some kind of “chicken game” — which is bigger. China has just pursued building up its own capacity, but they are now suffering from overproduction capacity. If the two bigger economies competed with each other like that, then I think countries all over the world would suffer from some kind of overproduction situation, and so we would not have better economic welfare. We need to elaborate or share the profit from the scale. If one country or a bigger country monopolizes the profit from the scale, it would become very disastrous for both parties and the third parties. The rules-based system and WTO itself were originally designed to pass these facilities. We had better go back to how to improve them or how to remedy what the current system still has.
Roseanne Gerin: Given this mix of economic strain and geopolitical tension, the natural question is what can actually be done. Let's talk about the kind of reforms both inside China and internationally that might address the root causes. You believe that the core fix isn't simply cutting subsidies but preventing economies with overwhelming scale from monopolizing the gains from that scale. What would that kind of reform look like in practice?
Mariko Watanabe: Currently, the tension is growing, so I think very ordinary negotiation about just improving the WTO system might not be effective. Some action to coordinate cooperate on some critical minerals to share with some countries outside China, it might be one power that sets the negotiation between the China and the outside. That kind of movement in this direction might be unavoidable at this stage, but it's also very costly. The final step is that we have to see how to reform the WTO system, particularly focusing on how to protect the invasion due to some damage due to the scale. Specifically speaking, the current safeguards of anti-dumping and countervailing duties — this system should be modified to effectively protect from the flooding exports from China due to their fierce domestic competition.
Roseanne Gerin: Now, inside China, you say the country needs to rebalance towards domestic consumption, more household security, less investment-driven production. What are the political and structural barriers to that shift?
Mariko Watanabe: First, I think from the perspective of Beijing, the first pressure is, as I said, the external pressure from the United States or other countries. But at the same time there's the philosophy of the Communist Party, originally which is not pursuing the welfare of the people, but to protect their own state. The state is more important than the nation's welfare. The Chinese government needs to change their philosophy to how to protect their state from outside pressure or to pursue the welfare of their own nation. But traditionally speaking, the Communist Party is not accustomed to thinking like that, and with no political pressure due to some election. But economically speaking, I think now is the time for the government to change their philosophy, but it's really very hard by the nature of their political stance.
Roseanne Gerin: And internationally, you argue that addressing overcapacity will require multilateral cooperation and a retooled World [Trade] Organization as you've already discussed with things such as modifying the countervailing duties. But what other specific reforms would make the WTO more effective in this area?
Mariko Watanabe: These kinds of economic tensions Japan experienced in the 1980s. At that time most of the Japanese economists were seriously working on issues about how to resolve the conflict between the United States and Japan at that time. And according to their research, the serious root of the issue was economic scale. Their solution was a counter-tariff or some anti-dumping or safeguarding production. They stressed that building up a system to share the profit from the scale, so that the system would not let one country monopolize the profit from the scale. If one country monopolized the profit from the scale economy, that could easily turn into some political power, or an abuse of power could have happened. The better way was to globally share the profit of the scale. And at that time what the Japanese government proposed doing was setting the tariff of information technology to zero. That proposal became the agreement of information technology — ITA under the WTO. And because of that, all the trade is under a zero tariff for information technology goods now.
Because of that, for example, if China produced an iPhone designed by the United States and it was processed in Malaysia and Vietnam, the scale economy regarding the iPhone is globally shared between Japan, the United States, China, Malaysia, or Vietnam. In this way, we do not experience any overproduction problem or any economic conflict. So, referring to our experiments, I think we should establish a better way to prevent a particular country from monopolizing their production power inside themselves. In the case of China, the problem is that they are geographically so huge, and population-wise they are big. The state is the government. The country easily monopolizes its capacity. They currently regard it where this power will become some geopolitical asset, but this idea is very dangerous for the economy. We need to let China understand this kind of abuse of the power of scale is very dangerous for both them and us.
We are now in a very bad economic equilibrium, so we need to think about the process as to how to persuade them to open up their country. But further, the final target is that kind of zero tariff or some good system of open economy. But at [this] time, it’s getting more political. The second-best way to resolve this problem is that we, other than the Chinese economy, also have the power of the same scale. The CPTPP [Comprehensive and Progressive Agreement for Trans-Pacific Partnership] and EU [EU-ASEAN Free Trade Agreement] — these types of FTAs are coordinated to build up a scale economy without integrating the Chinese or the United States’ economy. In that case, the [Global] South powers are big enough to negotiate with China and the United States, so I think that this is a second, more pragmatic way of thinking at this stage.
Roseanne Gerin: That also raises the question of how these global reforms affect countries that aren’t major powers but still feel the impact of overcapacity. What kinds of remedies do middle‑income countries need to avoid being squeezed between two giant economies?
Mariko Watanabe: This is really hard to say and not a very good instant answer, but I think, first, even at this stage, the WTO is still functioning to some extent. For most of the emerging economies, the fight at the WTO is the first option to do and to let China or the United States sit in on some kind of negotiation, particularly for China. I’m not talking particularly about the United States, but particularly about China. They announce themselves as some protector of free trade rule systems, so that means China also respects the decision of the WTO system or MPIA [Multi-Party Interim Appeal Arbitration Arrangement]. For the relatively larger middle powers like the EU, Japan, or Canada, it would be better to protect the smaller countries to protect their rights or their decision to fight against the WTO system and to build up some kind of political decision or commitment on these issues.
Roseanne Gerin: And before we end, are there any closing thoughts you have on this topic that you'd like to share with our listeners?
Mariko Watanabe: Currently, everything is messed up now, but I think the very chaotic situation may not last a long time. I feel that as a Japanese, this has to come from the third-party economies — not China, not the United States. Some kind of rules or some kind of globalization is a very important asset for the third-party countries. Although it looks very stupid to talk about a rules-based economy during this very chaotic situation, this way is a better option, not a worse option, than messing up and just fighting against a tiger and an elephant. I want to stress that third-party countries should unite and build up our own scale to keep our voices heard.
Roseanne Gerin: Professor Watanabe, thank you for sharing your insights into China's catalog-based industrial policy and the broader implications of systemic overcapacity for the global economy. Your analysis brings much needed clarity to a complex and fast-moving issue.
And to our audience, thanks for listening. I'm Roseanne Gerin, and this has been the Foreign Press Podcast brought to you by the Association of Foreign Press Correspondents in the USA in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode.
