China's industrial overcapacity (the production of steel, electric vehicles and solar panels far above what China consumes) produced a global steel surplus of 640 million tons in 2025, according to the Organisation for Economic Co-operation and Development (OECD), and is pushing governments such as Mexico's to raise new trade-defense tariffs.

What it is / what is at stake

Overcapacity occurs when the installed capacity to manufacture a good persistently exceeds what the domestic market can buy. In China, local governments and state banks spent years financing the expansion of steel, battery, solar panel and electric vehicle plants with cheap credit, subsidized land and tax breaks, while domestic consumption did not grow at the same pace. The result is a volume of production that seeks an outlet in the export market, often at prices below the cost faced by manufacturers in other countries.

The scale of the phenomenon was documented in the Organisation for Economic Co-operation and Development's annual steel report, published in June 2026: global excess steel capacity, which already stood at 640 million tons in 2025, will rise to 745 million tons in 2028, because producers plan to add 139 million tons of capacity while global demand will grow by only 34 million tons over that period. China accounts for most of the problem: it plans to add up to 38.6 million tons of capacity by 2028, the largest increase projected by any single country, and in 2024 an average Chinese steel mill received subsidies 15 times higher, relative to its assets, than those of producers in other countries, according to the same organization.

The phenomenon is not limited to steel. The European Commission documented a similar pattern in electric vehicles: its president, Ursula von der Leyen, warned that global markets are flooded with cheaper Chinese electric cars, driven by state subsidies that the European Union considered a threat to its own manufacturers.

How we got here / how it works

The origin of today's surplus goes back to the accelerated industrialization strategy China sustained for more than a decade, when local governments competed with one another to attract investment in sectors considered strategic (steel, solar energy, batteries and electric vehicles) with cheap credit and direct subsidies. While that capacity expanded, Chinese domestic demand slowed because of the real estate crisis and weaker household consumption, leaving factories with more product than the domestic market could absorb.

The natural outlet for that surplus was exports. According to the OECD, China exported a record 131 million tons of steel in 2025, 153% more than in 2020 and a volume greater than the entire annual steel production of the European Union. When other countries impose tariffs to curb those exports, part of the surplus seeks circumvention routes: Chinese exports of semi-finished steel to Southeast Asia, which is then reprocessed and re-exported, grew 300% according to the same report.

Faced with that pattern, governments turn to three classic trade-defense instruments. The first are anti-dumping duties, applied when a company exports at a price lower than the one it charges in its own market. The second are countervailing duties, aimed at neutralizing the effect of state subsidies. The third are safeguards, which allow tariffs to be raised in the face of a sudden surge in imports without the need to prove unfair pricing.

The European Union applied this logic to Chinese electric cars: after an anti-subsidy investigation opened in October 2023, the European Commission imposed company-specific tariffs in July 2024, ranging from 17.4% for BYD to 37.6% for SAIC, with 19.9% for Geely in between, according to ESG Today. The Commission built on an already tested precedent: between 2013 and 2018 it had applied anti-dumping and countervailing duties to Chinese solar panels, cells and wafers, after European manufacturers reported a similar pattern of overproduction and subsidized prices.

Why it matters for Mexico

In Mexico, the government of President Claudia Sheinbaum published a decree in the Diario Oficial de la Federación raising tariffs on 1,400 products from 11 countries without a trade agreement with Mexico, among them China, South Korea, India, Indonesia, Russia, Thailand and Turkey, according to El CEO. The rates range from 5% to 50%, with the ceiling applied to passenger cars, new electric vehicles (code 8703.80.01) and flat-rolled stainless steel products. The measure took effect on January 1, 2026.

Economy Secretary Marcelo Ebrard described the package as "a piece of the strategy" to protect national productive sectors, while Sheinbaum herself specified that the decree "is not aimed at China" but at countries without a trade agreement in force with Mexico. China is, however, the country most affected in terms of volume: it is Mexico's second-largest supplier of imports, with 19.9% of the total so far in 2025, according to the same source.

The Chinese government responded through its Foreign Ministry spokesman, Lin Jian, who said on September 11, 2025 that China "will resolutely protect its rights and interests" and called the measure discriminatory, according to El Financiero.

Mexico's automotive sector already reflects the effect of overcapacity even before the tariff fully takes effect. According to the Mexican Association of Automotive Distributors (AMDA), Asian brands imported inventory in advance, with coverage of up to a year in some cases, to cushion the new tariff cost, according to Forbes México. Ebrard warned that, if the sale of inventory at low prices to gain market share continues, the Mexican automotive industry could lose around 320,000 jobs.

What comes next

The immediate calendar to watch has two fronts. In Mexico, the 50% tariff on cars began to apply on January 1, 2026, but AMDA's executive president, Guillermo Rosales Zárate, anticipated that there will be no consumer price increases because, in his words, "at least in the first half I think there will be no price increases," given that automakers have already covered that period with prior inventory. The real effect of the tariff on prices and sales will not be known until that cushion runs out.

On the multilateral front, the OECD reviews its overcapacity projections every year: the 2025 edition had estimated a surplus of 721 million tons for 2027, a figure that the 2026 edition revised upward to 745 million tons for 2028, which suggests that the problem is not being corrected at the speed international bodies anticipated. The organization's secretary general, Mathias Cormann, called for addressing "root causes, including harmful subsidies and other non-market practices."

Continued diplomatic friction is also foreseeable: China has already signaled that it will seek to protect its trade interests against each new tariff measure, which opens the door to complaints before the World Trade Organization or to selective adjustments in its own trade policy.

Frequently asked questions

**What is Chinese industrial overcapacity?** It is the production of goods such as steel, electric cars and solar panels far above what the Chinese market consumes, driven by state subsidies and cheap credit, which generates an exportable surplus at low prices.

**How much tariff does a Chinese car pay in Mexico starting in 2026?** Since January 1, 2026, passenger cars and new electric vehicles imported from countries without a trade agreement with Mexico, including China, pay a 50% tariff, according to the decree published in the Diario Oficial de la Federación.

**What tariffs does the European Union apply to Chinese electric cars?** Since July 2024, the European Commission has charged company-specific tariffs: 17.4% for BYD, 19.9% for Geely and 37.6% for SAIC, following an anti-subsidy investigation begun in October 2023.

**How large is the world's excess steel capacity?** According to the OECD, the global steel surplus was 640 million tons in 2025 and is projected to reach 745 million tons in 2028, driven in large part by capacity expansion in China.

This article was written with the assistance of artificial intelligence based on verified sources and reviewed by a human editor before publication.