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US-China trade

China Shock 2.0: What the West should and should not worry about

Published 30 April 2024

Governments these days must contend with four competing pressures: consumer demand for low-priced goods; affordable environmental goods; protecting against cheaper imports; and de-risking from Chinese dependency without triggering retaliation. The struggle is real, but the solution needs careful choices.

In some of the more superstitious quarters of British lore, black and green stripes are considered unlucky for football success. Few major English teams blazon them on soccer kits without attracting unkind comment.

The curse, imaginary or otherwise, now appears to have reached trade policy, as major governments especially in the West attempt to reconcile protection of their “black goods,” a synonym for their struggling manufacturing industries, with the need to import affordable green goods to attain climate and environment goals.

In Western eyes

“Aux urnes, citoyens!”is a 1932 French comedy – in English, “To the polls, citizens!” – about an industrialist who is induced to run for a parliamentary seat and lands as a result in all manner of ridiculous outcomes. Elections abound this year across the globe – except, of course, in China, which almost a century after Jean Hémard’s movie finds itself at the center of global tensions at once ridiculous and deadly serious.

In election years, politicians will channel voter indignation aux urnes, blaming anything foreign to deflect attention from homegrown failings.

So across the North Atlantic and beyond, we see increased soul-searching and on-the-hoof policy-making aimed at reducing dependence on unfairly subsidized Chinese imports, especially on climate-saving equipment such as solar panels, wind turbines, and electric vehicles (EVs). Slowing growth in China’s domestic market1 has led, as night follows day, to a growing export of subsidized overcapacity and potentially deflation to the rest of the world.

Between 2019 and 2023, Chinese exports of electric vehicles grew from 0.5% of Europe’s EV market to 9.5% and are projected to reach 25% in 2025. China now exports more cars than Japan. Exports of solar panels, designated as a strategic industry by Beijing along with EVs and lithium batteries, have similarly exploded, increasing by 35% from 2023 compared to 2022, and representing over 80% of global production. These numbers, like Shakira’s hips, don’t lie.

The result? Undermining domestic production and, in Western eyes, the creation of risky dependencies, a worry amplified during the pandemic. Having encouraged China since 1980 to be the workshop of the world, Western governments now agonize about what the Wall Street Journal and some others have dubbed “China Shock 2.0”.

Calibrating China strategy

For the US, and to a lesser extent Europe, reducing reliance on Chinese technology is a matter of national security. Five years ago, the US decided on national security grounds to prop up its steel and auto industries (located mainly in blue states) with tariffs on imported steel and aluminium, a bludgeon that caught even the EU in its broad sweep. Those duties are still in place. For some six years now, Washington has ratcheted up a campaign to deny China access to high technology, notably semiconductors, spending more than US$100 billion in subsidies, tax credits, and grants to develop domestic capacity, reduce dependence on Chinese manufactured imports, and curb the export of American technology to China.

Europe, politically about half as far from the US as it is from China, tries to accommodate its old transatlantic ally but without irritating China too much. So more hesitantly Brussels followed, including opening last autumn antidumping investigations on Chinese EV imports and last week anti-subsidy investigations into Chinese solar panels; and, through the EU-US Trade and Technology Council, aims to reorganize semiconductor production to prevent Chinese market dominance by 2035.

One can predict the outcome of this rash of dumping and subsidy investigations. They will find dumping or subsidization, often channelled via Chinese state-supported banks or provincial government land grants which escape the WTO’s outdated periscopes; and will impose duties on Chinese imports to try to level the playing field for domestic competitors.

But the duties will have to be calibrated: first, because the US and EU cannot yet entirely replace Chinese imports by domestic substitutes or from allied economies; second, because excessive measures would invite Chinese retaliation (as happened last year after the opening of the European case against EVs); and, three, because the more intelligent policymakers are cognizant of the global consequences for economic and ultimately political stability if they were to shut off their markets to China too sharply.

For much of the developing world, there is not yet the same antipathy to Chinese goods. Africa is not stemming the Chinese tide, since it does not compete on tech products and needs them for its own economic development. China is an El Dorado for Brazilian agriculture. Even India, a geostrategic rival to Beijing and even more so in an election year, shows no sign of reducing the influx of Chinese solar panels or semiconductor devices, where New Delhi has not yet consolidated enough quality domestic or foreign investment.

The impossible quartenity

What a change from the past! As a Hong Kong government official in the 1980s, my day job was to challenge EU and US antidumping measures against the then-British territory’s exports of photograph albums, 5¼" floppy disks, and ladies’ tights. There were fewer variables at play with these cases so they were easier to manage. 

In 2024, policymaking has become far more complex. Governments must now contend with four potentially competing pressures. In the green corner, there are two: consumer demand for low-priced goods in belt-tightening times; and aiding the green transition by ensuring access to affordable environmental goods. In the black corner: protecting domestic industry against cheaper imports; and derisking from Chinese dependency without triggering retaliation: a struggle recognized by French President Macron in his magisterial Sorbonne speech last week.

How does this four-way tug-of-war affect decision-making in key sectors?

Solar eclipse

For solar panels, EU and US priority over the last decade was access to affordable technology rather than protecting domestic producers. The EU under Chinese pressure in 2013 dropped a planned 64% anti-dumping duty on Chinese panel imports, allowing increased Chinese market domination. Only after years of complaints from its industry has the EU opened a new anti-subsidy investigation. But it is too late – Europe’s industry has all but disappeared. Brussels locked the stable door after the horse had bolted. The European Commission’s decade of fobbing off domestic industry pressure recalls the British comedy Monty Python’s ‘Cheese Shop’ sketch, where an increasingly disgruntled customer is told by the shop proprietor why every cheese he wants is unavailable, including broken-down delivery vans and the proprietor’s cat having eaten the Camembert.

The best solution now for European companies is to invest in Chinese and growing Southeast Asian production.2

The EU and US did not consider solar a strategic industry. A half-hearted impulse to protect domestic production was outweighed by the need for competitively priced green technology. I expect the same is true for Chinese wind turbines, now belatedly subject to a European industrial anti-subsidy investigation.

My prediction? The EU and US will continue to import solar panels from Asia, perhaps marginally less from China, to the extent that production expands in Southeast Asia.

Goodbye, Mr. Chips

King Canute, of tide-halting ambitions, would have understood. The choice is between accepting a competitive China that supplies consumers with cheap and increasingly well-made semiconductor devices versus reducing dependency and subsidizing domestic production to buy time. The EU and US are opting for the latter. Protection of domestic industry and economic security go hand in hand in a clearly more strategic sector, essential to defense, quantum computing, and artificial intelligence.

But even this is not unambiguous. The EU in its meetings with Chinese and US officials in recent weeks has sent mixed signals about the extent to which they wish to or can decouple, faced with divisions on China policy inside the EU camp.3 The European Commission’s Executive Vice-President Margrethe Vestager in Washington in April pledged solidarity with the US but nuanced it by calling for a systematic rather than a “thwack a mole” (sic) approach to policymaking.

Much more than Cars (and Girls)

Cars and Girls was a great song by the northern English 1980s pop band Prefab Sprout. EVs present an equally difficult choice in the tension between black and green goals. China’s share of the US and EU EV market is growing rapidly. From 0.5% of the EU market in 2019, Chinese EVs now have 9.3% and will hit 15% by end-2025. Europe absorbs 40% of Chinese EV exports.4 Its 10% import tariff is scarcely an impediment.

The US, armed with a 27.5% tariff, is less penetrated. China exports just US$370 million of EVs to the US compared to US$7.5 billion to the EU.

The US under the Trump administration regarded its auto industry as fundamental to economic (read: national) security. This did not change under Joe Biden. The EU pace Germany and BMW has not gone so far and, given the higher penetration of foreign cars and direct investment on the Continent, faces less pressure from Big Oil, a valuable Chinese export market that needs nurturing, and greater European commitment to carbon neutrality. Brussels is unlikely to erect serious barriers to Chinese EV imports. Anti-dumping duties will surely be imposed to provide some space to domestic producers – but still allow the level of imports necessary to reduce fossil fuel use. Europe will certainly not regard Chinese EVs as an economic or national security risk.

The way governments treat Chinese EV imports in future will be determined by their degree of commitment to carbon neutrality. In the last two years, both the US and EU have prioritized domestic jobs and short-term economic competitiveness over the allegedly unaffordable cost of climate action, a policy choice which leads inevitably into duties on Chinese EVs, wind turbines, and solar panels. Emphasizing competitiveness and China-bashing at the expense of climate action or consumer choices are partly election-driven.

But, were I a betting man, I would still invest in Chinese EVs, necessary for the green transition and meeting consumer needs; and because – unless one is a conspiracy theorist about malware programmed in EVs – they carry no dramatic national security risk. Of course, conspiracy theories never die – they just go to live with Elvis.

The Big Toe theory of trade policy

So we will see in the next decade a continued jostle between these four policy priorities, varying sector to sector. Governments will make mistakes due to short-termism, internal division, and electoral pressures. Analysts, the public, and readers are advised to scrutinize every policy decision by applying my four policy dictates to the matrix.

But the real challenges posed by China to North Atlantic hegemony comes less from the traditional goods trade and more from China’s stealthy domination of AI, services, and infrastructural investment.

The West should worry less about solar panels and EV imports, and more about Chinese-owned European and US ports, equipped with Chinese-made cranes that not only unload but can also track imports and exports of everything from tech to arms.

They should worry more about Chinese control of rail, nuclear, and water industries across Europe, rather than wind turbines or smart watches. They should worry more about China’s use of AI to influence and control access to information, election processes, public sentiment, and consumer behavior, and less about taxing or banning solar panels with parts made in Xinjiang.

They should understand the implications of China’s decision to use the green agenda to turn its Belt and Road Initiative into a pipeline for environmental goods and services that double as geostrategic infrastructure.

And they should understand that the biggest threat to national security is not Chinese imports but climate change.

But I don’t hold my breath. On present performance, governments seem only able to understand trade if, as my dad used to say, it involves things that hurt your big toe when they fall on your feet.

[1] IMF (2023) reports 5.4% growth in 2023 slowing further to 3.5% by 2028.
[2] Indonesia, Thailand, and even Laos now compete with China, thanks to lower labor costs.
[3] There are some double standards here. The economist Mariana Mazzucato and others have demonstrated that much of the US and Silicon Valley’s so-called entrepreneurialism was thanks to massive government subsidies over 30 years, unaccounted for in the WTO.
[4] Atlantic Council (2023); Reuters (2024), Statista (2024)

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John Clarke

John Clarke is the former Director for International Relations at DG Agriculture in the European Commission.

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