Excess Capacity

Excess Capacity and International Trade Economy

In relation to international trade economy, Christopher Mark (1993) provided the following definition of Excess Capacity: Occurs when a firm or industry is operating below cost-minimizing levels of output. “Permanent excess capacity” is said to exist in industries requiring very large physical plants for which the size of the domestic market may be inadequate to fully absorb the output –limiting firms in the industry to production levels where economies of scale will not be fully exploited. Such conditions may set the stage for international trade conflict, since firms experiencing excess capacity may resort to unfair trade practices (Sec.l) to expand markets for their output in other countries. At the same time, excess-capacity firms generally have higher unit costs than necessary , making them vulnerable to predation by foreign competitors.