U.S. – China trade war

An economic conflict or trade war between the U.S. and China has been ongoing since January 2018, when president Trump began setting tariffs and other trade barriers on China with the goal of forcing it to make changes to what the U.S. says are longstanding unfair trade practices and intellectual property theft. The U.S. policies have remained intact during the Biden administration, but recently this changed when the Biden administration added steep new tariffs, escalating the trade war with China.

President Biden announced that his administration would quadruple the existing tariffs on imported Chinese electric vehicles, EVs, to 100 percent. The main reason is that the U.S. car industry could not compete with Chinese EV cars here in the U.S., so the only solution to increase prices on Chinese cars. Biden will also hike tariffs on steel, aluminum, medical equipment, semiconductors, solar cells, and lithium batteries. The Chinese government instantly protested and threatened action of its own. China threatens to impose 25% fee on cars, which would pose a significant risk for the U.S. car industry. China is also considering a possible embargo on high-earth metals for U.S. military industry. In addition, China’s Ministry of Commerce has launched an anti-dumping investigation into imports of polyvinyl chloride, a type of engineering plastic, from the U.S., in an attempt to protect local Chinese manufacturers.

One could argue that the China’s leaders have no one to blame but themselves for the ongoing trade war with the U.S.. China joined a global trading system and then gamed that system. The result will now be increased protectionism which raises costs, hurts consumers, shields unworthy companies from competition, and punishes worthier ones. Disputes over trade will only intensify the rivalry between the world’s two great powers.

Chinese leader Xi Jinping has failed to reform his economy in ways that would have made this trade war less likely. Biden targeted EVs for a reason. Beijing’s leaders wanted to dominate that industry and threw the weight of the state behind Chinese companies. The program was undeniably successful. China is at the forefront of the EV industry, while the U.S., with the exception of Tesla, has barely gotten out of the parking lot. But electrical automotive is also a sector in which China’s government has played such a heavy role, and created so much manufacturing capacity, that other governments believe their own industries are at risk.

Both that prowess and that excess were on display recently at the Beijing Auto Show. The exhibition included no fewer than 278 EV models. That’s indicative of a market jammed with 139 EV brands. China’s auto industry now has the capacity to produce almost twice as many vehicles as Chinese consumers are buying. Although oversupply in the EV sector, where demand is still growing, is not as severe as in the legacy business, Chinese automakers are still adding assembly lines. China now has the largest domestic car market in the world, but even Chinese consumers cannot sustain so many factories, especially as the country’s economy slows. So automakers are off-loading their surplus products into the global marketplace. China vied with Japan for the title of world’s largest car exporter last year.

This hefty outflow of Chinese cars has earned unwelcome attention from policy makers in the U.S. and Europe. They contend that the Chinese government unduly supports and promotes China’s bloated automobile sector, as a consequence, their own automakers are threatened by a deluge of cheap Chinese vehicles.

The fact that some Chinese EV companies have developed highly competitive products and technology, and benefit from real cost advantages in a relatively low-wage economy, is true. Yet the government’s role in building and sustaining that sector is undeniable as well. Chinese economic planners wished to accelerate the EV sector’s development, so, almost a decade ago, they targeted electric vehicles for special state assistance through their Made in China 2025 industrial program. The assistance was controversial from the start because American and European business leaders and policy makers feared that Beijing’s backing for its favored industries would distort global markets as government subsidies tend to do. Tax breaks, low-interest loans, subsidies to make EVs more affordable, and other aid followed.

As the automobile industry in China was revving up, the economy was slowing down. Passenger-car sales are still below where they were in 2017 thanks to a stumbling economy, the ravages of the pandemic, and other factors. This problem is not confined to cars. China’s steel industry has maintained its output even though demand at home has been declining.

As a reaction to the Chinese onslaught, governments around the world are stepping in to protect their own industries. The European Commission is currently conducting an investigation into China’s subsidizing of electric vehicles with an eye to imposing its own tariffs on their import. EU will apply a duty of 15 to 30 percent on EVs, but even this may not be sufficient to deter Chinese automakers. The Biden administration’s move to a 100 percent EV tariff no doubt reflects similar thinking as they are trying to stop Chinese cars. Chile has already slapped tariffs on some Chinese steel products, while Brazil imposed quotas and duties to stave off an influx of cheap steel, mainly from China.

Beijing could fend off these restrictions by reforming its domestic market. The flip side of China’s excessive supply is weak demand. This is caused not just by slowing growth, but also by its entire economic model. Beijing’s policy has a side effect of subsidizing China’s industry even more than it appears, by both directly and indirectly transferring wealth from families to factories: Rather than encouraging spending on goods like in the U.S., all of the economic incentives are to make capital investment in manufacturing. China’s economic model favors producers over consumers, which holds down household incomes and limits their spending. Lacking customers at home, Chinese industry is forced to seek them abroad.

Chinese leaders have done little to encourage a transition, perhaps because the necessary liberalizing reforms could weaken the Communist Party’s control over the economy and society. That leaves China’s industrial giants little option but to spew their excess into the global marketplace, in an effort to sustain growth and employment. The outcome is that China sells to the world more goods than it buys from it.

Xi Jinping seems set on making matters worse. His principal economic goal of achieving self-sufficiency aims to reduce what China purchases from other countries and substitute goods made by foreign companies with Chinese alternatives. In Xi’s thinking, economic growth is going to come from churning out a lot of products and exporting it to the world. The big point is that China is not just exporting too many products, it is also exporting its economic problems. Xi intends to maintain Chinese jobs and factories at the expense of other countries’ workers and companies, to avoid necessary but potentially disruptive reform at home.

Facing political pressure at home, politicians around the world are forced to defend their economies from Xi’s strategy, even if that leads to trade wars that sour relations with Beijing. This is not a good outcome for the global economy or for geopolitical stability. But at this point, there is no solution in sight as both the U.S. and China are focused on their own domestic agendas. As a result, the trade war will continue and could potentially even escalate.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *