G20 Trade Talks Expose Deepening Divide Over China’s Industrial Overcapacity

The September 30–October 1 G20 Trade Ministers’ Meeting, hosted by the United States in Milwaukee, was organized around four major themes: the weaponization of food through coercive trade measures, structural excess capacity and production, the Most-Favored-Nation principle, and forced labor in global supply chains. Ministers managed to reach consensus on the first issue, agreeing that food and agricultural products should not be used to exert political or economic pressure. However, attempts to produce common positions on industrial overcapacity and forced labor failed. U.S. Trade Representative Jamieson Greer said that nearly all participating countries acknowledged excess capacity as a serious problem and considered existing trade remedies inadequate, even though they could not agree on a collective response.

China’s manufacturing model was an important part of that debate. The concern among Washington, Brussels and several other industrial economies is that extensive investment, subsidies and weak domestic demand can leave Chinese producers with more output than the domestic market absorbs, increasing their reliance on exports. The pressure is becoming particularly visible in steel, automobiles, machinery and chemicals. European Commission data show that EU imports from China reached about €571 billion in 2025, producing a trade deficit of roughly €360 billion. The Commission has also seen growing demand from European industries for protection against import competition, opening 27 new trade-defense investigations in 2026 after already recording unusually high numbers in the previous two years.

Steel provides the clearest example of how governments may respond even without a G20 consensus. Immediately before the broader trade ministerial, members of the Global Forum on Steel Excess Capacity adopted the “Milwaukee Framework,” which calls for stronger action against market-distorting subsidies, better tracing of the origin of steel imports and greater use of trade-defense instruments where necessary. The OECD estimates that global steel excess capacity reached around 640 million tonnes in 2025 and could rise to 745 million tonnes by 2028. China is not a member of the forum, but its role remains central to the discussion because it is the world’s largest steel producer. OECD analysis has also found unusually high levels of support to Chinese steel producers relative to firms elsewhere, reinforcing demands in some economies for stronger safeguards.

The dispute comes at a sensitive point for China’s economy. Domestic consumption and property investment remain relatively weak, while manufacturing and exports continue to provide important support to growth. Chinese exports jumped 25% year-on-year in August, pushing the monthly trade surplus to about US$119 billion. The IMF has argued that prolonged weakness in domestic demand, combined with industrial-policy support, has increased China’s reliance on manufactured exports and created spillovers for trading partners. It expects Chinese economic growth to moderate to around 4.5% in 2026 after 5% growth in 2025, while encouraging Beijing to shift more decisively toward consumption-led growth. Chinese authorities reject the idea that strong exports automatically demonstrate overcapacity, arguing that production should be assessed against global rather than purely domestic demand and warning that the concept is increasingly being used to justify protectionist measures.

For financial markets and Chinese exporters, the Milwaukee meeting therefore matters less because of what the G20 formally agreed than because of what it revealed about the direction of global trade policy. A comprehensive international agreement targeting Chinese production remains difficult, but smaller coalitions, national trade investigations and sector-specific barriers are expanding. Chinese companies may consequently face higher costs to maintain overseas market share, pushing more manufacturers toward localized production, overseas investment and supply-chain restructuring. At the same time, the growing resistance to export-led industrial expansion adds pressure on Beijing to strengthen household consumption and absorb a greater share of Chinese production domestically. The emerging risk is a more fragmented global trading system in which Chinese manufacturing remains highly competitive, but access to foreign markets becomes increasingly dependent on tariffs, local-production requirements and bilateral negotiations.