Trade and China

Theoretically, free trade is beneficial as it is providing consumers with increased access to less expensive and potentially higher quality foreign goods and the lowering of prices as governments reduce or eliminate tariffs. However, there is no such thing as free trade nowadays as most countries or trade blocs impose some kind of tariffs. In the case of the two largest economies in the world, the U.S. and China, trade agreements are not in good shape, and it is getting worse. There is an ongoing trade war trade war that began with Trump, and continued Biden recently unveiled a new set of tariffs on Chinese goods, including a quadrupling of the tariff on electric vehicles (EVs) that brings the rate to 100%. It did not take long for China to retaliate by launching an anti-dumping probe into chemical imports from the U.S., the European Union, Japan, and Taiwan.

It appears that the U.S. and China are now in a full-blown economic war, which will have far-reaching geopolitical consequences. The latest tariffs also amount to an admission by the Biden administration that past measures have failed to prevent China from galloping ahead, and, by targeting EVs, they undermine the broader climate-change agenda. Bottom line is that the U.S. car industry would have no chance competing against China’s much cheaper cars and to protect the U.S. car industry, Biden took the protective tariff measure. All they will do is prevent cheaper, often better, green technologies from reaching US consumers, but this is an election year and there is probably more protectionism to come.

China’s government subsidies are not necessarily the driving force behind the country’s soaring exports, reflected in a near-doubling of China’s trade surplus since 2017. The main factor is the significantly undervalued renminbi, caused partly by U.S. restrictions on investment in China.  Every time one set of protectionist measures against China disappoints, the U.S. escalates its economic war in the hope that additional restrictions will prove more effective. Yet by slapping massive tariffs on Chinese electric vehicles, America has laid bare its own hypocrisy and economic vulnerabilities. Trump have even promised a 200% tariff on Chinese cars made in Mexico if he is elected in November. has gripped the country in recent years.

The announcement is significant for three reasons. First, the latest tariffs, which include steep increases for several other products, ranging from semiconductors to needles and syringes are the final nail in the coffin of U.S.-China trade cooperation. Gone is any pretense that America is merely erecting a high fence around a small yard or trying to manage national-security risks without endangering bilateral economic cooperation. Second, the tariffs signal defeat. Trailing in the polls as this year’s election approaches, the democratic administration feels obliged to join the anti-China, anti-trade fervor that has emerged as one of the very few unifying issues in a polarized country. Moreover, the tariffs, combined with U.S. complaints that China is producing too much and putting pressure on the global economic system, speak to a deep-seated anxiety about America’s international competitiveness. By escalating the trade war, the administration is effectively admitting that these previous policies have not delivered, and that China is galloping ahead despite facing headwinds.

Third, and perhaps most importantly, EV tariffs seriously undermine the broader climate-change agenda. Experts agree that time is of the essence in reducing greenhouse-gas emissions. With every passing year of inaction, the costs of climate change increase, bringing us closer to dangerous planetary tipping points. Absent carbon pricing, which has proven politically infeasible in the US, the decarbonization of transportation has long been a worthwhile second-best alternative. China is by far the most price-competitive EV producer, owing to aggressive consumer subsidies that started in 2010, big investments in charging infrastructure, and domestic content requirements that favor batteries from Chinese producers.

With these policies, China has been able to benefit from network externalities and learning-by-doing. From a climate perspective, availing ourselves of cheaply produced Chinese EVs would have been a step in the right direction. But now, tariffs will delay EV adoption and could imperil the entire EV market. In the best-case scenario, U.S. and European producers will catch up, but only after many years. In the worst-case scenario, US consumers will simply give up on EVs, repelled by the higher costs associated with manufacturing them in Western countries.

China’s overproduction, subsidize and cheap currency, is pushing export despite tariffs, impacting many countries around the world. It is hardly free trade as the centralized communist system in China manipulate the system and over time will impact global trade with an increased level of protectionism. The International Monetary Fund promotes open, stable, and transparent trade policies, but in the end of the day, China does not represent these values. It is no longer a matter of free trade, but rather fair trade.

The U.S. will have no choice but to secure economic independence and invest more in domestic production, identify non-Chinese sources of critical inputs and deregulate the manufacturing sector. The argument from the U.S. government is that China is cheating in the trade system by subsidizing and setting their currency too low, and therefore tariffs are needed to protect the domestic industries. This is partially true. It is also true that American workers are too expansive, too inefficient and that U.S. products are no competitive globally. The trade war will certainly continue, and it is already the beginning of the end for globalization.