Textile trade dispute: Can China really refute 'overcapacity' accusation?

In an unprecedented document published at the end of July, China directly contests Western accusations of industrial 'overcapacity'.

While the text primarily targets electric vehicles, batteries and advanced technologies, its reasoning also applies to the textile industry. Beijing rejects the idea that a trade surplus or high production capacity is sufficient to prove market distortion.

This position comes as China's textile and apparel manufacturers remain among the most powerful in the world. Their Asian competitors are already feeling the pressure from Chinese exports. The word has become one of the most sensitive in global trade: overcapacity.

For several years, the US and, to a lesser extent, Europe have accused China of producing more than its domestic market can absorb in several sectors. They claim China then sells this surplus abroad at prices that could undermine local producers.

The issue has long concerned steel and solar panels. It has gradually extended to electric vehicles, batteries, industrial equipment and technologies related to the energy transition. Now, Beijing is seeking to address this accusation on a matter of principle.

On July 28, the Chinese Ministry of Commerce published a document entitled “China’s Position on the So-called Excess Capacity Issue”. The text asserts that the concept lacks a single international definition and is not included, as such, in World Trade Organization agreements.

EcoTextile News decrypts this new doctrine in an article published on August 10 by Stephen Frost, titled 'China rejects excess capacity textile claims'. The publication highlights that although the Chinese document focuses on industrial sectors currently at the heart of trade tensions, its reasoning has direct implications for textiles and fashion. These implications are far from secondary.

Beijing first contests very definition of 'overcapacity'

For Beijing, the primary argument is that there is no universal threshold for declaring an industry has 'too much' production capacity. The balance between supply and demand shifts with economic cycles, technological advancements and the geography of value chains.

The Chinese document presents global capacity as a dynamic system: balance, imbalance and then rebalancing. Excess capacity at one point may become necessary a few years later if demand grows or new markets emerge.

This reasoning is particularly important for the textile industry. A Chinese factory producing for a Vietnamese, Bangladeshi or Pakistani client is not necessarily meeting 'Chinese' demand. It is participating in a globalised value chain.

This is precisely one of the arguments put forward by Beijing. China points out that its exports of textile machinery and industrial equipment have contributed to the development of several major apparel-producing countries. According to the document, Chinese exports of textile machinery to developing countries exceeded 30 billion dollars between 2012 and 2024, notably contributing to the development of the textile industries in Vietnam, Pakistan and Bangladesh.

In other words, Beijing wants to shift the debate. What appears to be excess Chinese capacity can also be seen as productive capacity integrated into an international value chain.

Textile is a particularly interesting case

This is where the analysis by EcoTextile News deserves further exploration. The Chinese textile sector is not just another supplier. It remains one of the main production hubs in the global chain, from fibres and yarns to fabrics, machinery and a portion of garment manufacturing.

Chinese figures show that there is indeed a capacity margin. According to the National Bureau of Statistics of China, the capacity utilisation rate of the textile industry stood at 77.5 percent in 2025, compared to 78.5 percent a year earlier. In the fourth quarter, it reached 77.1 percent.

To be precise, a 77.5 percent utilisation rate does not automatically mean there is an 'overcapacity' of 22.5 percent. A factory does not necessarily operate at 100 percent capacity at all times. Maintenance shutdowns, production line changes, seasonality, product diversity and commercial constraints make this calculation much more complex.

The figure is nevertheless interesting. It shows that the Chinese textile industry has a significant capacity reserve, even as the utilisation rate has decreased by one percentage point in a year.

The debate cannot be dismissed by simply stating that the concept of overcapacity does not exist. The real question is whether this available capacity constitutes an economic problem, a normal productive reserve or a potential source of pressure on international markets.

Beijing primarily rejects 'exports = overcapacity' equation

China directly challenges the idea that a large trade surplus is proof of excessive production capacity.

Its argument is that a country can be highly competitive in certain sectors and export massively without producing 'excessively'.

The Chinese ministry cites several European sectors as examples: automotive, pharmaceuticals and cosmetics. It points out that in 2025, the European Union had respective surpluses of 92.2 billion, 214.6 billion and 11.6 billion dollars in these sectors.

The argument is politically effective. Economically, however, it is not enough to close the debate. A trade surplus is not synonymous with overcapacity. However, overcapacity can contribute to generating significant exports when insufficient domestic demand forces producers to seek foreign markets.

The two phenomena are therefore not equivalent. It is precisely this distinction that is likely to shape the next trade battle.

Real issue: what happens when supply outpaces demand?

This is where the debate becomes much more concrete for the textile industry. If an industry has significant capacity, but global demand grows at the same pace, the problem is limited.

If, on the other hand, capacity increases faster than demand, manufacturers must find other outlets. They can lower their prices; export more; gain market share abroad; or they can relocate part of their production.

These are the mechanisms that are currently worrying several economies. Southeast Asia already provides examples of this.

The Financial Times recently noted that several countries in the region are under increasing pressure from Chinese exports, including in the industrial and textile chains. In Indonesia, the textile and apparel industry has reportedly lost around 250,000 jobs since 2022, with competition from Chinese products being one of the contributing factors.

The phenomenon is therefore more complex than a simple opposition between China and Western economies. The issue of Chinese capacity also affects emerging countries that have built their industrial development by integrating into global value chains.

Chinese dilemma: developing its neighbours while competing with them

This is probably one of the most interesting takeaways from the document. Beijing presents its industry as an accelerator for the development of emerging countries.

China supplies the machinery, components, raw materials and equipment that enable Vietnam, Bangladesh and Pakistan to produce and export more.

This integration also creates a dependency. Manufacturers in these countries can gain a competitive edge with Chinese equipment while also becoming more exposed to competition from Chinese companies in international markets.

The case of textiles is particularly revealing. China is no longer necessarily content with just selling clothes. It also provides the industrial infrastructure that allows other countries to manufacture them. This is a much more powerful model than a simple supplier-client relationship.

This industrial power remains difficult to bypass

Recent news surrounding Shein provides a particularly telling illustration.

According to Reuters, Shein has scaled back its industrial expansion project in Vietnam after a disappointing experience. The company had initially planned to significantly develop its logistics and production capabilities in the country to reduce its exposure to China.

By mid-2026, however, its Vietnamese presence had been significantly reduced. A portion of its suppliers had returned to China, where costs, flexibility and speed of production remain particularly competitive.

The Shein case is obviously not representative of the entire textile industry, but it illustrates an important reality. The geographical diversification of production chains is more difficult when it involves replacing an entire industrial ecosystem.

China does not just have factories; it has suppliers, machinery, materials, subcontractors, logisticians, skills and the ability to produce quickly on a large scale. This industrial depth is its main advantage.

Response to rising protectionism

The Chinese document must also be read in its political context. Beijing explicitly accuses certain countries of turning the 'overcapacity' issue into a protectionist tool.

The Chinese ministry claims that some governments use this concept to justify trade restrictions and protect their domestic industries.

This position comes as the US has launched a Section 301 investigation into Chinese industrial capacity. The European Union is also considering new trade instruments to address imbalances related to Chinese production. The Chinese ministry warned in May that European measures based on 'overcapacity' could lead Beijing to take countermeasures.

The battle is therefore no longer just economic. It is gradually becoming a battle over the rules that determine what constitutes acceptable competition.

For European textiles, stakes are considerable

For the European fashion and textile industry, the issue deserves close attention.

The European Union remains extremely dependent on Chinese imports. In 2025, it imported 559.4 billion euros worth of Chinese goods, compared to 199.6 billion euros in exports to China, resulting in a deficit of 359.8 billion euros. European imports from China increased by 6.4 percent year-over-year.

These figures cover all goods, not just textiles. Nevertheless, they give an indication of the depth of the trade relationship.

In fashion, this dependency is particularly complex to reduce. European brands can move certain manufacturing stages to Vietnam, Bangladesh, India, Pakistan or Turkey. Many of these countries, however, remain tied to China for materials, yarns, fabrics, machinery or certain components.

Reducing dependency on China is therefore not just about moving a factory. It sometimes requires moving an entire ecosystem.

Risk of a new fragmentation of value chains

This is where the Chinese position takes on a broader dimension. Beijing defends a vision in which globalisation allows industrial capacities to be distributed among several countries according to their respective advantages.

Its detractors argue that such an organisation can also lead to an excessive concentration of capacity. This creates unsustainable competition for producers who do not have the same scale. Both interpretations can be true simultaneously. China may have contributed to the industrial development of some countries while also putting increasing pressure on their own manufacturers.

This is what makes the subject particularly delicate for the textile industry. A policy aimed at limiting Chinese imports may protect some local industries. However, it can also increase costs for brands and consumers and disrupt highly integrated supply chains.

Conversely, a lack of response could accelerate the disappearance of local industrial capacity. The choice is therefore not between 'free trade' and 'protectionism' in the simple sense. It concerns the level of industrial dependency an economy is willing to maintain.

China is also changing its position in global textile chain

Finally, it would be wrong to view China as an economy that simply specialises in low-cost products.

The Ministry of Commerce's document itself highlights that the share of labour-intensive products in Chinese exports has decreased, falling from 20.7 percent in 2012 to 15.1 percent in 2025. This is an interesting indicator, showing that China is seeking to move upmarket while maintaining an extremely broad industrial base.

In textiles, this means its influence may gradually shift: less towards the finished product and more towards machinery, materials, production technologies and industrial infrastructure. This movement is much harder to compete with.

Chinese document does not resolve overcapacity question

This is ultimately the main conclusion to be drawn from the publication analysed by EcoTextile News.

Beijing provides a coherent political and economic response to an accusation it considers to be instrumentalised. It rightly points out, on a conceptual level, that a trade surplus is not in itself proof of overcapacity and that there is no single international definition of the term.

This is not enough to prove that all of China's industrial capacity is economically sustainable. Official Chinese data itself shows a capacity utilisation rate of 77.5 percent in the textile industry in 2025, down year-over-year.

The relevant question, therefore, may not be: “Does China have too much capacity?” Instead, it is: “Where is the productive capacity needed for global demand today, who is financing it, at what price and with what consequences for other producers?”

This is a far more complex debate. For the textile industry, it could become decisive. Behind the semantic quarrel over 'overcapacity' lies the future geography of the global fashion industry: who will produce; who will supply the machinery and materials; who will capture the value; and above all, which countries will still have a sufficiently solid industrial base tomorrow to decide their own textile future.