We use an advanced model of the global economy to consider a set of scenarios consistent with the proposal to impose a minimum 60% tariff against Chinese imports and blanket minimum 10% tariff against all other US imports. The model’s structure, which includes imperfect competition in increasing-returns industries, is documented in Balistreri, Böhringer, and Rutherford (2024). The basis for the tariff rates is a proposal from former President Donald Trump. We consider these scenarios with and without symmetric retaliation by our trade partners. Our central finding is that a global trade war between the United States and the rest of the world at these tariff rates would cost the US economy over $910 billion at a global efficiency loss of $360 billion. Thus, on net, US trade partners gain $550 billion. Canada is the only other country that loses from a US go-it-alone trade war because of its exceptionally close trade relationship with the United States.

We provide context in terms of the current trade conflict, primarily between the United States and China, and enumerate a set of scenarios based on the proposed blanket tariffs. Results suggest the United States is the biggest loser in a comprehensive trade war with the rest of the world. We also consider a potential transatlantic alliance, where Europe joins the United States in tariffs against China. Transatlantic cooperation reduces US losses and leads to sharp losses for China, highlighting the benefits of cooperation relative to the proposed go-it-alone strategy.

State of Play

The 2018 US-China trade war was a major economic conflict initiated by the United States that targeted alleged unfair trade practices by China, such as intellectual property theft, forced technology transfers, industrial subsidies, and currency manipulation. The conflict escalated through rounds of tariff impositions, retaliatory measures, and negotiations, significantly affecting global markets and supply chains.

The United States imposed tariffs on over $250 billion worth of Chinese goods, targeting industries like technology, machinery, and consumer products. China responded with tariffs on about $110 billion of US goods, affecting agriculture, automobiles, and other sectors.

Multiple rounds of negotiations occurred between 2018 and 2019. The two countries reached a temporary truce with the “Phase One” trade deal in January 2020, where China agreed to purchase more US goods, particularly agricultural products, and address some intellectual property concerns. China did not, however, meet any of the additional purchase commitments. China made some progress toward greater intellectual property protection in certain areas yet continues to tolerate flagrant intellectual property theft in others. Both economies have suffered from reduced market access and higher costs for businesses and consumers. The conflict also disrupted global supply chains, particularly in consumer technology products, and hit US farmers hard due to China’s retaliatory tariffs.

Also, in 2018 the United States imposed a 25% tariff on steel and a 10% tariff on aluminum imports, affecting a wide range of countries, including EU members, South Korea, and Japan. The US administration justified the tariffs on the grounds that a robust domestic steel and aluminum industry was necessary to ensure the availability of critical materials for defense and infrastructure projects despite a memorandum from the Secretary of Defense stating that the “[Department of Defense (DoD)] does not believe that [steel and aluminum imports] impact the ability of DoD programs to acquire the steel and aluminum necessary to meet national defense requirements”.

The steel and aluminum tariffs sparked significant backlash, leading to retaliatory tariffs by several countries. Eventually, the United States negotiated managed trade deals with some countries, such as Canada, Mexico, and the EU. Australia escaped relatively unscathed, but other 3 countries were forced to negotiate exemptions or quota systems, such as South Korea, Brazil, and Argentina.

The tariffs increased costs for US manufacturers that rely on imported steel and aluminum, leading to higher prices for US manufacturers, and consumer goods like cars and appliances. US steel and aluminum producers saw benefits in terms of higher domestic prices. The overall effect on jobs was mixed, with some gains in the metal industries but larger losses in sectors reliant on metal imports and in the sectors that were targets of retaliation, namely US agriculture.

In sum, the 2018 trade war generated losses for China and the US economy. The Biden-Harris administration kept the punitive tariffs on China and the steel and aluminum (national-security) tariffs in place, which remains a point of contention in US trade policy.

Recent proposals

In 2024, during his campaign for a second term, former President Donald Trump proposed imposing a 60% tariff against imports from China and a 10% tariff against imports from everyone else in an apparent effort to increase the number of manufacturing jobs in the United States and boost domestic industries. Most economists would agree that tariffs at this scale will backfire by undermining US economic performance.

Results

The results show both the United States and China suffer losses from the 2018 tariffs, with US losses equivalent to $81.3 billion and $63.3 billion for China. Imposing a 60% tariff on China and 10% tariff on everyone else unequivocally leads to additional losses for the United States. As a technical note, the economic model evaluates policies based on changes in household welfare, so we can interpret the $81.3 billion loss for the United States as the dollar value of the extra consumption that private households could have had in the absence of the tariffs.

United States

Specifically, with a 60% tariff on China, US losses grow to $560.7 billion; and, if China retaliates, US losses are $665.4 billion. If the United States were to impose the 60% tariff on China and a 10% tariff on everyone else, US losses are $511.0 billion; and, if everyone retaliates in kind, US losses grow to a shocking $911.8 billion.

China

China suffers across almost all scenarios, and China’s losses are greatest when the United States and EU cooperate. Specifically, if the United States were to impose the 60% tariff on China, China’s estimated losses are equivalent to $70.6 billion. But if China retaliates, their losses reduce to $50 billion because the retaliation shifts the terms-of-trade in their favor. As with any large country, tariffs increase export prices relative to (net-of-tariff) import prices. If the United States were to impose the 10% tariff on other countries, China’s losses shrink to $26.2 billion, reflecting a further improvement in the terms of trade as European and other goods become relatively less expensive due to less US demand. When everyone retaliates against the United States, the closest scenario here to a US-led go-it-alone global trade war, China actually gains $38.2 billion. As discussed in the introduction, a global trade war between the United States and the rest of the world creates significant opportunities for China in terms of new export opportunities in Europe and less expensive non-US imports. China suffers the most when the United States and EU cooperate. Specifically, welfare losses for China are between $26.2 billion and $70.6 billion when the US pursues a go-it-alone strategy. When the United States and EU cooperate, China’s welfare losses reach $261.3 billion to $464.1 billion.

European Union

The EU economy gains from the US-led trade wars mostly because of trade diversion. That is, with the United States and China imposing tariffs on each other, the EU has greater access to lower priced imports from China, and effectively gets preferential treatment for its goods in both the US and Chinese markets. The EU benefits the most ($234.6 billion) when they let the United States go it alone, under the “ALL6010” scenario. In that scenario, the United States imposes tariffs against China and all other countries, and everyone retaliates in kind against the United States, which is the closest scenario to a US-led global trade war. EU importers benefit from lower prices and EU exporters benefit from greater preferential market access.

Other countries

Other countries such as Canada, Mexico, South Korea, and the rest of the world mostly experience net gains from a US-China trade war. Canada and Mexico, however, experience losses when the United States imposes 10% tariffs on all other countries and they retaliate in kind, reflecting the tightly knitted supply chains across North America.

Specifically, Canada and Mexico experience a loss when the United States imposes tariffs on China and all other countries. When other countries retaliate, Mexico goes back to a net gain while Canada continues at a loss. This is attributed to the fact that, although both Mexico and Canada have strong ties to US markets, Canada’s trade with the United States is biased toward increasing-returns-to-scale sectors. In this regard, shrinking trade between the United States and Canada implies a greater cost for Canada. South Korea and other OECD countries gain from the US-China trade war scenarios—South Korea’s net gains reach $48.9 billion

US-EU Cooperation

Transatlantic cooperation on tariffs against China, as a punitive measure for intellectual-property violations and other unfair-trade practices, are more effective in terms of greater losses for China and easing the burden on the United States. Specifically, if the United States and EU were to cooperate and impose tariffs against China simultaneously, with the United States imposing 60% tariffs and the EU imposing a minimum of 25% tariffs, US losses reduce to $435.6 billion and China’s losses increase to $261.3 billion. If China retaliates against the United States and EU in kind, US losses remain mostly the same, but China’s losses increase to $464.1 billion.

EU cooperation, however, comes at a cost for the EU’s economy. The EU goes from a $234.6 billion gain (in “ALL6010”) to a $77.8–$103.8 billion gain in the cooperation scenarios.

These results highlight three important nuances of US-EU cooperation: (a) securing EU cooperation eases US economic losses from the trade wars; (b) US-EU cooperation sharply increases the net losses to the Chinese economy; and, (c) cooperating with the United States comes at a cost for the EU and reduces their net gains from the trade wars.

Conclusion

In conclusion, the analysis presented here reveals that escalating US tariffs, particularly the proposed 60% tariff against China and 10% tariff against all other trade partners, would impose substantial economic costs on the United States. We show that while China and other US trade partners may experience some losses, the United States would bear most of the global efficiency cost, with potential economic losses surpassing $910 billion if all countries retaliate. Interestingly, many of the US’s trading partners, including the EU, South Korea, and other OECD countries, stand to benefit from trade diversion as US goods become less competitive globally

The findings further underscore that transatlantic cooperation in imposing tariffs against China would mitigate some of the US’s losses while amplifying the economic pain for China. This cooperation comes at a cost, however, for the EU in terms of the forgone benefits of letting the United States go it alone. Overall, the results highlight the complexities and far-reaching consequences of a “fortress America” protectionist trade policy, where, in the context of a global trade war, the United States stands to lose the most, both in terms of economic welfare and global competitiveness.

To read the article as it was published on the Yeutter Institute webpage, click here.

To read the full article, click here.

The post Waging a Global Trade War Alone: The Cost of Blanket Tariffs on Friend and Foe appeared first on WITA.

As the clean energy transition accelerates, critical minerals such as cobalt, lithium, and rare earth elements have become buzzwords in business, international relations, and sustainability.

Yet amid the scramble for these well-known resources, another metal – antimony – has quietly emerged as another keenly contested resource. With China’s recent announcement of export restrictions on this metal, the challenges of balancing supply and demand are intensifying, raising concerns over supply chain vulnerabilities and fuelling a new form of competition among great powers.

Antimony, a lustrous silvery-grey metalloid, is scarce in nature and unevenly distributed globally. It is, however, critical for producing high-tech and defence products, including flame-retardant materials, certain semiconductors, and superhard materials. As with many critical minerals, China dominates the global antimony supply chain. The country holds the world’s largest deposit, accounting for approximately 32% of global antimony resources, yet it produces more than 48% of global output.

China’s move to restrict the export of antimony, ostensibly to safeguard “national security and interests”, is set to take effect on 15 September. While these restrictions are not explicitly targeted at any specific country, the geopolitical implications are significant. China has gradually reduced its antimony production over the past few years to limit strategic stockpiling. As a result, the announcement has driven up prices, potentially disrupting global supply chains. The impact is particularly acute for the United States, which sourced 63% of its antimony imports from China.

China’s export control of this critical metal might appear a calculated move within the broader framework of resource nationalism. Beyond safeguarding strategic resources and preventing over-exploitation, these controls reinforce China’s leadership in the global antimony industry, enhancing its influence over the international allocation of this critical mineral. This move, thus, is not just about acquiring and protecting resources; it is also about denying rivals a strategic advantage.

Antimony is one of the few elements classified as a “critical” or “strategic” mineral by countries including the United States, China, Australia, and Russia, as well as the European Union, underscoring its special geopolitical value. Following similar restrictions on germanium, gallium, graphite, and rare earths, China’s export control of antimony marks another move to leverage its dominance in global supply chains. This action serves as a response to US efforts to limit the availability to China of critical technologies such as high-end chips .

China’s anitimony announcement has not gone unnoticed by markets. In Australia, the response has been notably positive. Larvotto Resources, a leading exploration and pre-development company focused on high-demand commodities including antimony, saw its share price surge as it possesses the rights to operate the Hillgrove Gold-Antimony Project, the eighth-largest in the world. The assumption is that Australia will fill the market gap left by China. In an effort to counter China’s dominance in critical mineral supply chains, the United States had forged partnerships with resource-rich countries including Australia.

However, China’s export restrictions target antimony oxides with a purity of 99.99% or higher, as well as other high-purity antimony compounds (99.999%). Producing such high-purity chemical compounds requires advanced processing technologies, and export controls with this high-purity threshold are likely aimed at restricting the export of high value-added antimony products and advanced processing technologies. These ultra-pure products are used in specialised industries, including high-end electronics, optics, and defence applications.

Australia’s ability to mitigate the risks associated with China’s dominance remains limited. China is a net importer of antimony metal. Currently, 86% of Australia’s antimony exports are sent to China for processing. Investing in processing capacity and infrastructure for lower-grade antimony products may offer limited strategic value for the United States, as these products will still be available under China’s restrictions. Conversely, developing high value-added processing technologies to produce high-purity antimony products carries significant risks, particularly if China decides to retaliate in trade or lift these restrictions. In the latter case, even if alternative processing technologies become available in Australia, the market – including the United States – may still turn to China for more cost-efficient products, potentially rendering Australia’s investments obsolete.

Navigating these dynamic complexities and maintaining an independent policy in the face of great power competition will be a true test of political acumen for Australian policymakers.

The competition over antimony is merely the latest manifestation in the great power rivalry that centres on technological supremacy. Each side is manoeuvring to secure critical materials and technologies, define future systems, and outpace the other in innovation.

The underlying issue is a deepening lack of trust between these global powers. This mistrust fuels the tug-of-war over resources, with nations viewing control over materials as crucial for maintaining technological dominance.

However, this relentless pursuit of supremacy comes with significant downsides: fragmented global supply chains, rising resource nationalism, and intensified trade restrictions. Cooperation gives way to competition, and technological progress risks becoming a zero-sum game.

To read the article as it was published on the The Interpreter webpage, click here.

The post Antimony: The Hidden Metal Fuelling Global Competition appeared first on WITA.

European Union countervailing duties (CVD) on certain types of electric vehicles (EVs) from China went into effect provisionally on 5 July. The duties are being imposed based on a European Commission finding that China’s EV subsidies represent potential injury to EU industry as it transitions away from the internal combustion engine. EU imports of EVs from China are surging, but still represent a small share of EU car sales. Most imports from China originate from joint ventures of EU and Chinese manufacturers, and from Tesla, which is the largest importer. 

In the meantime, China is starting its own investigation into some EU exports, such as cognac. The EU has initiated consultations with the government of China to resolve the dispute, as it must do under the World Trade Organisation Subsidies and Countervailing Measures Agreement. Under WTO rules, China cannot retaliate unless it challenges the EU measure and a dispute settlement panel rules in its favour.

The CVDs range from 17.4 percent to 37.6 percent of the import price, on top of the EU’s 10 percent tariff on imported vehicles. They represent a formidable barrier in an industry where average profit margins are typically in the range of 4 percent to 8 percent. The CVDs will affect all EVs imported from China regardless of whether the original equipment manufacturer (OEM) is Chinese, American or European. Here, we offer an economic and political (as opposed to legal) analysis of the CVDs.

Methodology behind the CVDs

The Commission methodology for identifying subsidies and countervailing them is well established. Reflecting the importance of the EV sector, the regulation implementing the CVDs is the result of a comprehensive investigation, encompassing extensive consultations with Chinese firms, EU firms, the Chinese government and Chinese trade associations. Identifying subsidisation in China’s opaque system is challenging, especially since, as the regulation documents repeatedly, the Chinese government and several of the Chinese entities covered were uncooperative. 

The regulation details how the Chinese government has prioritised the EV value chain (materials, batteries, vehicles) since 2010. Of course, the EU and the US are also prioritising EVs in their quest for decarbonisation. However, the Chinese state and Communist Party hold large sway over the Chinese economy, including state-owned and private corporations and powerful industry associations. Thus, the Chinese government adopts a ‘whole of society’ deployment of plans and instruments, including subsidies, as part of its industrial policy.

To determine whether imports from China are subsidised, the Commission chose a sample of three Chinese OEMs to conduct its investigation, namely BYD, Geely and SAIC. It set the CVD for all other cooperating firms at the average of the three. Curiously, Tesla, the largest exporter from China to the EU, was not chosen and has asked for a separate investigation.   

We assess how the four main sources of countervailable duties –below market supply, preferential financing, grants and land usage – are calculated. Though it is evident that that various forms of non-market incentives in the Chinese EV sector exist, they may be significantly less than suggested by the Commission’s methodology. 

• Below market provision of batteries and their inputs. The reference used to compute the subsidy are the differences between the export and domestic prices of batteries (for SAIC and Geely) and of lithium iron phosphate (a key battery input, relevant for BYD which produces its own batteries). But many exporting firms price to market (Parker, 2016), and the fact that the export price of these inputs is higher than the domestic price is not necessarily because of subsidies. The markets for EVs, batteries and minerals in China are known to be exceptionally competitive and in a price war, while in the EU car prices and consumer purchasing power are much higher.

• Preferential financing. Using its standard methods to try to establish a market-based rate as a counterfactual to the preferential financing received, the Commission assigned a credit rating of B to the three sampled Chinese firms and attributed a correspondingly higher spread compared to prevailing market rates to their borrowing and equity. The B rating, far below investment grade, is extremely low for large, modestly profitable firms, such as the sampled Chinese OEMs. For example, almost no firm in the S&P 500 is rated B or below. Moreover, credit ratings are available for Geely from the major international agencies, and they are higher than B.

• Preferential financing. Using its standard methods to try to establish a market-based rate as a counterfactual to the preferential financing received, the Commission assigned a credit rating of B to the three sampled Chinese firms and attributed a correspondingly higher spread compared to prevailing market rates to their borrowing and equity. The B rating, far below investment grade, is extremely low for large, modestly profitable firms, such as the sampled Chinese OEMs. For example, almost no firm in the S&P 500 is rated B or below. Moreover, credit ratings are available for Geely from the major international agencies, and they are higher than B.

• Grants. The government of China provides a subsidy to manufacturers for each vehicle sold. In economic terms, both consumer and producer subsidies have the effect of increasing the incentive to produce. However, the Chinese subsidy, unlike the EU subsidy, is not available to importers and the Commission is correct in arguing that it is countervailable for that reason. Still, the scheme was discontinued as of December 2022, and even though some benefits continue to accrue to Chinese producers because payments are staggered, its distortive effects are fading by now. The Commission Regulation states that some Chinese provinces are introducing their own schemes but does not provide evidence of this.

• Land use. Land in China is owned by the state. Provinces subsidise EV producers by allowing them use of land at below market price. The Commission uses the price of land use – rent – in Taiwan as the reference point. However, Taiwan is far more densely populated than China and its income per capita is three times higher. Land prices tend to be correlated with income and density, so the reference price appears too high.

The risk of injury

Adopting a kind of ‘infant industry’ argument normally associated with developing countries, the Commission Regulation argues that the EU EV sector is too young to withstand Chinese competition. But while some of the key success factors in EVs (eg battery technology) are different from the combustion-engine vehicle sector, the value chains of the two sectors have many common elements. This is most evident in the popularity of various types of hybrid vehicles. It is well known, of course, that the EU’s OEMs are among the world’s most successful.

To make a historical analogy, in the 1970s and 1980s, Japanese and then Korean OEMs appeared to threaten the European automotive industry, but they became established in the EU market only over decades and after large investments. European OEMs adjusted to them by greatly increasing productivity and quality and by adding innovative features. Chinese OEMs still have a minuscule share of the EU automobile market, while EU OEMs are in the process of rapidly developing their own lower priced EVs and investing in battery technology and manufacture, often in joint ventures with Chinese producers.

The post The European Union’s Proposed Duties on Chinese Electric Vehicles and Their Implications appeared first on WITA.

In addition to the three EV manufacturers mentioned, other EV producers in China that cooperated with the EU investigators received a weighted average duty of 21 percent. All other producers that did not cooperate were hit with the top 38.1 percent. These anti-subsidy duties come on top of the European Union’s regular 10 percent tariff on EV imports from China.

These new EU anti-subsidy tariffs are on par with those imposed following previous EU anti-subsidy investigations concerning imported goods from China. Rhodium Group estimates that collaborating Chinese firms in earlier investigations have faced new duties of an average of 19.7 percent. Meanwhile, in earlier EU anti-subsidy investigations, the exports of non-cooperating firms, such as coated organic steel products, received new duties of 44.7 percent, while Chinese exported truck and bus tires to the European Union in some cases were subjected to new duties of over 50 percent.

Imposing the lowest tariff on BYD, a leading firm that is opening a production facility inside the European Union, gives the company an advantage in the EU market. Its stock price has predictably benefitted. Similar circumstances pertain to Geely, which also has EU production facilities and enjoyed a relatively low additional tariff. By contrast, SAIC, which is the largest Chinese owned EV exporter to the European Union via its MG brand, has no current or planned EU production location. Its tariff will probably encourage it to locate EV production inside the European Union. As discussed in a previous blog, these circumstances add up to something functionally akin to Japan setting up auto production in the United States to avoid tariffs threatened in the 1980s.

Assuming that all EU-owned EV producers in China, as well as Tesla, cooperated with the EU investigation, they too face relatively low additional tariffs of 21 percent for EV exports to the European Union. And as researched by Rhodium, some China-based EV producers will suffer commercially from tariffs at this level. Rhodium estimated approximate differentials in profit rates for sales of EVs produced in China in both the Chinese and German EV markets, relying on available EV model manufacturer suggested retail prices. China-based EV producers like BMW, Tesla, and probably other foreign EV producers operating in China, as well as the Chinese company that makes the Nio, will face significant challenges for their future export profitability relative to their sales in China. The 21 percent tariff exceeds these firms’ estimated profit margin for sales in the German market, making exports from China unprofitable. However, these producers, of which most have EU-located production facilities, now instead have a commercial incentive to relocate EV production to Europe. It should here be noted, though, that the Commission in its announcement made clear that Tesla “may receive an individually calculated duty rate” later, and hence possibly face lower future commercial headwinds from these tariffs.

All told, the Commission has acted carefully after mounting a substantial anti-subsidy investigation, involving over 100 location visits and dozens of Commission staff, as discussed in an earlier blog post. New tariffs signal the political willingness—within World Trade Organization (WTO) rules—to confront Chinese EV trade practices while providing incentives for Chinese EV producers to locate production inside the European Union. And applying the lowest tariffs on BYD, the EV market leader in China and clearly the biggest commercial threat to EU car companies, points to the Commission following the facts of the case rather than being guided by crude protectionist instincts. This approach could set the stage for further cooperation in the future.

The Commission’s tariff announcement was for “provisional tariffs” on EV exports from China to the European Union, while “definitive tariffs” must now be set within four months. Definitive anti-subsidy tariffs, however, must be approved by a majority of the EU member states in the EU Council. Some member states may try to get the Commission to revoke or alter the proposed tariff levels to promote smoother trade relations with China in the auto sector. The final political review of the tariffs will also provide individual EV producers in China with the opportunity to seek their own (like Tesla) individually calculated (lower) definitive duty rate.

But the Commission’s cautious and fact-driven approach fostering more investment in Europe will make it harder for EU member states to challenge its decision. Perhaps the scope of the application of the top 38.1 percent tariff to non-cooperative firms can be negotiated at the margin, but it seems unlikely that the lower tariffs around the 20 percent level will be altered.

Will China respond to the European Union’s careful approach? Some retaliatory action against specifically targeted EU exports to China may be inevitable. These actions could affect EU agricultural imports as well as internal combustion engine (ICE) vehicles with large engines, or even aircraft, although given the global duopoly of Airbus and Boeing, the European Union is unlikely to punish the former to the benefit of the latter. China will also not want to antagonize German and other European car manufacturers that are among its allies in the fight against these new EV tariffs. Targeting the EU car industry for retaliation might be self-destructive. Various politically sensitive agricultural products hence seem a more likely trade outcome. China has now initiated an investigation into EU exports of pork and pork by-products to China.

Obviously, China has various other political and financial tools to retaliate. It could delay or redirect planned investments selectively to European countries backing the tariffs. Beijing is likely to take its time before responding to measure various countries’ reactions.

For China, the commercial bottom line is that the European market is important, especially because the US market has been closed off by the Biden administration’s tariffs, while Turkey (40 percent) and Brazil (35 percent by 2026) have recently introduced new EV tariffs that are even higher than EU levels. Beijing has every incentive to avoid an escalatory trade war with the European Union in the EV sector.

Finally, because the European Union followed WTO rules in its investigation of Chinese subsidies, it is signaling that it is not following the “rogue” path of the Biden administration justifying its EV tariff action on national security grounds. So perhaps Beijing will hold its fire also for political reasons.

The Chinese government might take this dispute in the EV sector to the WTO, perhaps as part of its Multi-Party Interim Appeal Arbitration Arrangement, to which both China and the European Union are parties. Such a move would help China to be seen as playing by the rules, unlike the United States, and it could even signal a potential settlement of the EU-China dispute on EVs.

To read the full blog piece as published by the Peterson Institute for International Economics, click here.

The post The EU Chooses Engagement, Not Confrontation, in Its EV Dispute With China appeared first on WITA.

Unlike President Trump’s across-the-board import tax increases on Chinese goods in 2018 and 2019, the tariff increases announced on 14 May 2024 by the Biden Administration will affect just 14 product categories. The Biden Administration prefers selective decoupling from China, which is restricted to a limited number of sensitive sectors. Just $18bn of Chinese imports are expected to be affected, less than 5% of total Chinese annual imports to the United States.

This isn’t another Trump-style tariff war

The very fact that President Biden felt he had to take this high-profile measure is a testament to three factors:

• The tightness of November’s US presidential election.
• Biden’s desire to shore up his base vote in key swing states comprised mainly of trade union members working in traditional manufacturing sectors, and their families.
• How few friends China has in Washington, D.C.

In terms of corporate impact, there are two drivers: timing and the scale of current sourcing from China.

Some goods shipped from China — including aluminum, cranes, electric vehicles, face masks, lithium-ion batteries, and steel — will face higher import tariffs this year. The disruption could be felt very soon, and procurement managers will already be reviewing sourcing alternatives.

Higher tariffs on semiconductors won’t be rolled out until 2025, providing a strong incentive to bring forward any plans to import from China. Ironically, this may create the very export surge from China that the Biden Administration says it wants to prevent. However, China is not a big supplier of semiconductors to the USA in the first place.

Natural graphite, magnets, and medical gloves shipments from China won’t get hit with higher tariffs until 2026. This will delay any supply chain responses, especially if President Biden is re-elected and if there are doubts that he will follow through on these tariff measures.

As mentioned above, the other consideration is the amount of sourcing from China in the first place. In the case of EVs, China already faces 25% tariffs, and few are currently shipped to the USA.

In summary, the near-term disruption for supply chains will be concentrated on a small number of products. This is not welcome for the firms affected, but Biden’s May 2024 tariff moves do not presage widespread upheaval. Indeed, some analysts have argued that Biden’s recent tariffs amount to election-year window dressing and were designed to look tough but disrupt little. Optics matter. To date, Chinese retaliation has been uncharacteristically modest, reinforcing assessments that Biden’s May tariff move was electoral smoke and mirrors.

So, is Biden’s move no big deal? 

Not so fast. Where Trump was erratic and transactional in his dealings with China, Biden’s team has been methodical and persistent. Current US Administration officials deemphasize decoupling from the Chinese economies but reckon there needs to be “a small yard and a high fence.” By this, they mean that some sectors and technologies are — or should become — off-limits to Chinese buyers, firms, and investors. A ramping up of restrictions on inbound and outbound investments and technology sales involving all or selected Chinese firms has been the hallmark of Biden’s first-term trade policy.

Indeed, the May 2024 tariff measures apply to some sensitive sectors where China is effectively excluded from US markets. Those tariff measures often involve eye-watering increases in import taxes (up to 100% in some cases and far in excess of what Trump imposed), which is a testament to the height of the fence Biden seeks.

If the Biden team could state once and for all the commercial deals it is prepared to allow and those it doesn’t, then executives could plan. However, technology evolves over time — as do Chinese tactics to circumvent US controls — and, not unreasonably, Washington, D.C., reserves the right to change the terms of commercial engagement with China.

This raises fears that the yard will expand over time and the fence will get higher — even if Biden wins re-election. Such situations clearly call for scenario planning. After all, Trump’s plans for higher tariffs on China’s imports are well known.

The other big unknown is how China will ultimately respond. The Biden team informed Beijing weeks in advance of its tariff hikes — probably on the grounds that no one likes surprises. So far, Beijing has turned the other cheek and has not hit back. Many trade policy analysts reckon China won’t retaliate too forcefully or publicly for fear of increasing the odds Biden will lose being re-elected. The argument that clinches it for many observers is surely that President Xi and his new team don’t want to see Trump return to the US Presidency, not least because of the latter’s threat to impose an additional 60% across-the-board tariffs on US imports from China.

I am not so sanguine. President Xi’s newish team is widely regarded as very nationalistic and may want to burnish these credentials by striking back against US exports at a time of their choosing. Moreover, given Donald Trump’s self-professed admiration for “strong men” (a group that includes Xi), the Chinese may estimate that for all Trump’s bluster, they can reach a deal with him that is preferable to anything Biden’s team is likely to offer. We will see how long Beijing holds its punches.

Is this episode over? Are any other trade policy threats on the horizon?

Biden’s team probably hopes it has done enough to protect its standard bearer against accusations of going soft on China, but that doesn’t mean that trade diplomacy is over for the year. US policy has been to systematically cultivate support from other Western governments for its approach to Chinese commercial relations. In this regard, developments at the G7 are what to watch.

Created in the 1970s and expanded, the G7 is a club of Europe’s four largest economies (France, Germany, Italy, and the UK), as well as Japan, Canada, and the United States. Their government leaders and ministers meet often. In fact, for some time now, US officials have sought to persuade counterparts in the G7 that Chinese industrial policies, subsidies, and outright trade restrictions are a first-order threat to Western living standards.

If last week’s G7 Finance Ministers and Central Bankers’ communiqué is anything to go by, the US has succeeded. The third paragraph of this declaration states: “We will enhance cooperation to address non-market policies and practices and distortive policies, including those leading to overcapacity through a wide range of policy tools and rules to ensure a global level playing field. While reaffirming our interest in a balanced and reciprocal collaboration, we express concerns about China’s comprehensive use of non-market policies and practices that undermine our workers, industries, and economic resilience.”

The way the G7 works is that prominent statements found high up in the Finance Ministers’ communiqué tend to find their way into their Leaders’ Declaration. Ultimately, the question is whether the G7 will back these words with deeds. A similar declaration in June 2023 by the US and five allies (three are G7 members) went nowhere — or, at best, can be viewed as coalition-building. Given the divisions in Europe between firms and governments over the merits of decoupling with China, concerted action by the G7 against China this year is far from assured.

Still, the fractures in the world economy are widening. Executives who operate or source from Chinese firms in sectors where there is said to be excess capacity in China should be on alert. Those sectors include, at minimum, aluminum, cement, construction, electric vehicles, solar panels, and steel. That Chinese exports blocked from the US can be deflected to other foreign markets means executives from Western Europe, Japan, and emerging markets need to keep trade policy developments on their radar as well.

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

To read the full column as it was published by IMD, click here.

The post Election Smoke & Mirrors: Assessing Biden’s Recent Tariff Moves Against China appeared first on WITA.

Why 10 percent? Why all countries? There is no other reasonable explanation than that Trump considers all trade to be “unfair” in some respect, or at least disadvantageous.

This isn’t normally the way presidents act when it comes to tariffs. Additional tariffs are generally imposed very selectively, under trade remedy statutes crafted by Congress. They are actions taken pursuant to a finding that a particular product is involved in a specified unfair trade act, or it may be that the new tariff is a surgical retaliatory measure to open a market for a specified American product.

Many uncertainties surround Trump’s proposals.

We don’t know why 10 percent was chosen or why it would remain at 10 percent once imposed, but we do take Trump at his word on tariff matters—think about his fulfilling his pledge on day one of his time in office to withdraw the United States from the Transpacific Partnership (TPP) negotiated by President Barack Obama with Asia Pacific countries. He also already applied tariffs at a level of his choosing, first to steel and aluminum imports, and then to most imports from China, which netted out to 19 percent, a third of what he is promising now.

But didn’t President Biden just put on massive tariffs on Chinese goods? It is true he kept his predecessor’s blanket China tariff and then added some very high selective tariffs of his own. The new Biden tariffs place 50 percent tariffs on semiconductor imports from China. But that trade is modest, just under $1 billion a year. This compares with US chip imports from all sources that amount to about $6 billion each month.

The number of Chinese EVs being imported into the United States is even harder to detect (most press articles on the new tariffs on EVs contain no data), but only about 2,000 of these vehicles entered the United States from China in 2024 Q1. The EV tariff is a pre-emptive strike against these imports, not because they caused injury to the domestic automobile industry, but because they might prevent the industry being served by domestic American companies. The 100 percent tariff could be circumvented. Transplants could come in, but the United States, as opposed to France, has not put out the welcome mat for Chinese car investment. The bottom line is this new Biden measure affects $18 billion in trade coverage at present, as compared with total US merchandise imports of $ 3.826 trillion in 2023.

There is no reason to assume that the US tariff would not be met with additional foreign tariffs. The European Union, Canada, and Mexico retaliated immediately when Trump put on the steel and aluminum tariffs in 2018. Does the United States then go another round of escalating tariffs at that point? Or does it all get sorted out, as it did pretty much in that case? Even so, it is high stakes game, and what is at stake is the health of the US economy and that of the rest of the world.

The indiscriminate imposition of tariffs would no longer be confined to a trade war with China, if that is where the United States is headed, but a war against trade itself. It is time to remember some largely forgotten economic history. Fifty years ago, in 1970 when the Congress was considering import quota legislation, trade speeches were larded with allusions to the dangers of Smoot-Hawley level tariffs and “beggar-thy-neighbor” policies. Everyone knew then what those terms meant. The 1930 Tariff Act was a bidding war of members of Congress trying to give import protection to their constituents. The Congress, which under Article I of the US Constitution has authority over commerce, raised tariffs on imports to an average of 47 percent. This caused immediate retaliation from about a dozen countries, including Canada and Mexico. A year later, Great Britain abandoned its free trade policy, authorizing its Board of Trade to impose tariffs of up to 100 percent of value. The Board imposed tariffs of up to 50 percent immediately. Economists agree that high tariffs broadened and deepened the Great Depression, when US unemployment reached 25 percent and we nearly lost our democracy.

These are not yet the conditions we face today. US tariffs average around 3 percent, and unemployment is under 4 percent. Despite the headline-grabbing numbers for the high Biden tariffs, this is not Smoot-Hawley.

Unlike the Biden tariffs, the Trump plan is for increased tariffs on all products from all countries. It is not just America First; it is America Alone. Politicians and the public, here and abroad, are getting used to the idea of having higher tariffs, de-sensitized to the fact that high tariffs ought not to be the new normal. They are in fact added taxes on us, and having them will have real costs.

Beyond this, there is a risk of contagion. US treasury secretary Janet Yellen has invited other countries to follow the United States in its imposition of China tariffs. Given that there is an undeclared US trade war with China, this is not surprising, although it is not normal for modern secretaries of the treasury to be tariff proponents. Europe is also expected to act by putting into place much milder tariffs on EVs from China. This is likely be followed by a Chinese response in kind, already being bruited about, affecting luxury autos. Where would this end?

The impact of an unlimited trade war between the United States and China is one thing. China accounts for 16.5 percent of US imports, still relatively small compared with the nation’s experience in 1930. But the next administration, depending on the outcome of the election, could be working on building tariff walls, this time against world trade.

Only trade experts can readily tell that the two, Trump and Biden, are not using tariffs in the same way. The American public and foreigners looking on can be excused if they don’t see a difference. In the 1930s, President Franklin D. Roosevelt led the way back from Smoot-Hawley and blanket trade protection. A second Trump administration, freed from an awareness of history, may lead the world toward experimenting with blanket protection, tight-rope walking over an economic abyss. If Biden, sometimes compared to Roosevelt because of his federal programs, is given a second chance, he will need to be clear that his trade policies will be designed to be good for America and good for America’s friends abroad. The American president was formerly seen as “leader of the free world.” That honor requires a trade policy that other nations can emulate, that can be both to their advantage and ours.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics.

To read the full blog piece published by the Peterson Institute for International Economics, click here.

The post Trump’s Proposed Blanket Tariffs Would Risk a Global Trade War appeared first on WITA.

Most of these products are already subject to high duties or extensive trade-remedy measures, so the amount of imports from China covered by the new tariffs, including EVs, is small at $18 billion. In fact, the US imports essentially no EVs from China. However, it is a sector of great concern to the European Union, which in October 2023 opened an anti-subsidy investigation into Chinese EVs, which may trigger countervailing duties. The US move may therefore have implications for the pending EU decision on countervailing duties on China.

An extraordinary decision, driven by domestic politics

The US decision on Chinese EVs is extraordinary in four respects:

• First, the 100 percent tariff is prohibitive. Ostensibly justified by China’s own subsidies, it would imply that half of the cost of Chinese EVs is paid for by government funds, far beyond the range of other estimates.
• Second, unlike previous protection episodes, such as when the US was responding to the threat of Japanese car manufacturers, there are virtually no Chinese car imports today, and US manufacturers, especially General Motors, already have large footprints in China, whereas they were marginal in Japan. Though GM sales in China have declined recently, for more than a decade until 2023, China was a profit engine and the company’s top sales market.
• Third, the EV tariffs depart from the US emphasis on national security to adopt anti-China measures (unless one believes that EVs are meandering Chinese spies), suggesting that all sectors are now in play.
• Fourth, the measure runs counter to the Biden Administration’s green transition goals, which include large tax breaks for EVs, intended to lower the cost for consumers of green alternatives.

The decision on EVs and its timing are strictly political and reflect the extraordinary power of the United Auto Workers union in swing states in the run-up to the US presidential election. The decision is nevertheless a surprise in the light of recent efforts at China-US rapprochement, including exchanges at senior military level, and talks on AI and climate change. China will be affronted and many China-dependent US firms, which had hoped for tariff reductions, will be disappointed. The decision is, however, consistent with US Trade Representative Katherine Tai’s “Worker Centric” trade policy which claims to place workers’ interests ahead of those of firms.

Global impact

The immediate economic impact of the tariffs will be minimal at the macro level, whether on quantities, prices, or exchange rates; $18 billion is tiny relative to the size of the two economies, and even the $500 billion that China exported to the US in 2023. Even so, they will hurt some Chinese companies and US importers. The effect on US consumers and prices will be minimal and take the form of lost future opportunities rather than immediate cost, especially in relation to EVs.

China’s retaliation (it always retaliates) will be proportionate and limited. If the past is a guide, retaliation will affect mainly some US agricultural exports, which can be sourced easily elsewhere, and US exporters will be compensated for their losses in China. But even if the Chinese government does not retaliate against US car exports and investments in China (which it continues to court), the Chinese consumer is unlikely to respond well to America’s extreme measure on EVs when he or she chooses the next car to buy.

Perhaps more worrying is the further escalation of tensions with China that the tariffs represent – a dangerous trend with many repercussions. It may undermine any Chinese willingness to play a moderating influence on the war in Ukraine. The tariffs also quash any notion that the US intends to abide by World Trade Organisation rules. These two considerations, by themselves, increase policy uncertainty globally and are bound to have a dampening effect on international trade and investment.

The US approach diverges from that of the EU, which is building a case for countervailing duties under WTO rules. Although the outcome may also be new tariffs, in the EU there will have been due process based on evidence. But politically, prohibitive US tariffs place enormous pressure on the EU to apply its own. Even though there is no immediate threat of trade diversion, EU firms such as Stellantis, and unions that lobby for tariffs, will argue that Chinese EV exporters, cut off from the US market, will focus on the huge EU market instead. Though EU firms are still the largest exporters of EVs from China to the EU by a wide margin, the share of Chinese indigenous manufacturers is rising rapidly.

The adverse effect on trade relations of the new tariffs will extend beyond trade under the WTO to encompass trade under regional agreements. This is because US politicians are determined to avoid China-sourced products coming in through the back door – strict rules of origin are already there to prevent that – and to prevent the products of Chinese-invested companies from entering. In their view, even if batteries, EVs and semiconductors are manufactured by a Chinese-invested company in a US trading partner, and are entitled to tariff-free treatment under a regional agreement, they should be discouraged. This also applies to Chinese companies producing in the US. Mexico and Morocco are two examples of US regional trade agreement (RTA) partners that host Chinese manufacturers of batteries and soon of EVs, where frictions are bound to rise.

Even though the EU remains more open to Chinese producers on its territory than the US (eg BYD in Hungary, CATL in Germany and Hungary), it will face a similar challenge with its RTA partners if, as expected, it applies its own tariffs on Chinese EVs. These tensions among parties to RTAs, together with China’s retaliation against EU and US EV tariffs, is likely to mark this episode as a classic example of protectionist contagion.

A separation of Chinese and US value chains?

The EV value chain is destined to increase greatly in importance to mitigate climate change. From the standpoint of US industrial policy, a big question raised by the prohibitive tariffs on Chinese EVs and by the accompanying resistance against hosting Chinese producers is whether a US EV/battery value chain entirely separate from China is sustainable and realistic. The US is undoubtedly capable of developing such a chain, but can it do so at reasonable cost and without falling behind in quality and efficiency? On the answer to this question rests the calculation of long-term consumer losses from the tariffs against the counterfactual, the speed of the US green transition, the burden on government finance from the possibility of more subsidies, and even the solvency of US car companies.

Even a cursory examination of China’s current competitive advantage in EVs suggests that the answer to the question is no. China produces almost twice as many EVs as the EU and US combined, the share of EVs in new car registrations is rising rapidly, and it has reportedly moved ahead at the combined quality/price/technology frontier. The latest BYD Model, the Seagull, sells in China at slightly less than $10,000, and has been highlighted as an illustration of China’s competitiveness. Tesla founder Elon Musk has been openly pessimistic about the West’s ability to compete with Chinese cars.

China’s cost advantage arises from a combination of scale, advanced and lower-cost battery technology, availability of IT and AI expertise, lower labour costs, and intense competition in the Chinese market, with dozens of domestic and foreign producers active. Central and provincial government subsidies still play a role, and their extent is what the EU investigation will evaluate. The only available and presumably reliable numbers on subsidies received are those declared by Chinese publicly traded companies such as BYD, and are small relative to turnover or value added.

China’s EV exports increased by over 60 percent in 2023 to reach 1.2 million units, directed mainly at Europe, Mexico and several emerging markets in Asia. Since the biggest Chinese EV manufacturers and their battery suppliers have developed distinctive assets (brand, technology and design), they are new able to set up manufacturing and distribution channels overseas, in markets including Thailand, Indonesia, Australia, Morocco, Mexico and Hungary. Chinese EV manufacturers are also rapidly gaining market share in China, where competitors are increasingly struggling.

As EVs become even more established worldwide, the scale advantage of the most successful Chinese producers over US-based producers will only increase, as will their capacity to target individual markets with customized products on a common platform. Finally, it is important to note that the largest US car companies, Ford and General Motors, are not in the best shape to compete in the intensifying EV market. Standard and Poor’s rates Ford’s and GM’s long-term debt at BB+ and BBB respectively, just below and just above investment-grade. The market capitalisations of BYD and Xiaomi, the two largest Chinese EV producers, are $86 billion and $62 billion respectively, while those of GM and Ford are both around $50 billion.

The EU’s strategy

Should the EU adjust its policies in the light of the new Biden tariffs, and if so, how? Note that since there will be no surge of Chinese EVs diverted from the US market, it is not a given that the EU needs to alter its course.

The EU’s trade strategy on EVs must pursue six main objectives: 1) a fair deal for EU manufacturers insofar as they are affected by China’s subsidies in excess of subsidies they receive at home, and one that is in line with WTO rules; 2) stand up for the interests of EU car exporters and manufacturers in China, which are also recipients of various subsidies; 3) the long-run health and competitiveness of the EU car industry; 4) protect the interests of consumers, especially those with low incomes, who would benefit greatly from cheaper cars; 5) ensure the speed of the green transition; 6) maintain a cooperative and constructive relationship with China for both economic and geopolitical reasons. To progress towards all six objectives simultaneously is a challenge, but can be done:

• The EU’s stated objective should be to arrive at competitive neutrality in the EV sector, enhancing and not preventing fair competition that will promote productivity growth and innovation. Accordingly, the countervailing duty margin on Chinese EVs should be computed objectively and realistically; it should be defined and documented in a way that is entirely robust to legal challenge at the WTO. It should also take account of subsidies at home to reduce the EU’s vulnerability to a Chinese counter: if the net subsidy is found to be zero, the countervailing duty margin should be zero, and the countervailing duty, if any, should be set at the minimum level consistent with the findings. The duty should be accompanied by a proposal to set up a China-EU working party with a mission to identify and monitor EV subsidies, and to reduce them with a view to eliminating the duty margin over a defined period.
• To ensure the long-term vibrancy and competitiveness of its car industry, to safeguard the interests of its consumers, to sustain the green transition, and to maintain good relations with China, the EU should adopt an open-door policy on Chinese inward investment in its EV and battery sectors, while insisting on continued fair treatment of its firms that have already established footholds in the Chinese market. The EU may need to prepare, ultimately, to confront US restrictions on China-invested cars produced in Europe, such as Geely-owned Volvos.
• It is possible that, once embarked on this course, the EU may nevertheless face an excessively rapid penetration of imported Chinese EVs sometime in the future. Should that happen, the EU may resort to a WTO-compatible safeguard measure. The advantage of the safeguard course is that the increase in tariffs would be time bound (three years). Safeguard tariffs must, however, apply to all imports, not only those from China.

Uri Dadush is a Non-resident fellow at Bruegel, based in Washington DC, and a Research Professor at the School of Public Policy at the University of Maryland where he teaches courses on trade policy and on macroeconomic analysis and policy.

To read the full analysis as published by the Bruegel, click here.

The post Rippling Out: Biden’s Tariffs on Chinese Electric Vehicles and Their Impact on Europe appeared first on WITA.

The EU’s anti-subsidy probe

In the biggest EU trade case against China ever, the Commission initiated an anti-subsidy investigation into EV imports from China in October 2023. Should it determine that China-based producers have benefited from subsidies in ways that harm EU-based manufacturers, it could place provisional countervailing duties on China-origin EV imports anytime from now until July 3, and final duties by early November. In March 2024, the Commission asked European customs authorities to track imports of EVs from China, a signal that it could impose provisional duties in the near future.

The EV probe stands out for several reasons. First, the Commission initiated the investigation ex officio, without a formal complaint from industry, which is a rarity in such cases. Second, there is a divide within Europe’s car industry—which accounts for 7% of the EU’s GDP and 8.5% of its manufacturing employment—on the desirability of the probe. German carmakers, which are heavily reliant on the Chinese market, oppose it out of fear that Beijing could retaliate against them, while French counterparts, which are far less exposed to China, support it. Third, the probe is based on the threat that cheap EV imports from China could cause damage to European manufacturers in the future, rather than an assessment that this damage is already taking place. Finally, the probe is perhaps the most political case of its kind in recent memory. Commission President Ursula von der Leyen chose to announce it in her annual state of the union speech last September. And the Commission has focused its investigation on three China-based carmakers—BYD, Geely, and SAIC—rather than western carmakers like Tesla, which exports more EVs from China to the EU than any other producer.

EU imports of EVs from China ballooned from $1.6 billion in 2020 to $11.5 billion in 2023, accounting for 37% of all EV imports in the bloc. While the market share of China-produced EV models in the European market has only increased slightly to 19%, the share of Chinese and Chinese-owned brands has increased substantially in the last two years. This suggests that Chinese companies are gaining momentum in the European market. BYD has said that it is aiming to secure a 5% share of EV sales in Europe by 2026 and to be among the top five automotive companies in Europe in the medium term.

Based on an analysis of previous instances of countervailing duties (CVDs) imposed by the EU on Chinese imports and on conversations with experts, we expect the Commission to consider duties on Chinese EVs in the 15-30% range. This is based on the following factors:

• The average of the highest duty level imposed in previous anti-subsidy cases against China stands at 24.4%. In rare instances, CVDs have been as high as 40-50%, however these were concentrated on industries with a high degree of direct state-ownership, such as steel, and focused on non-cooperating Chinese entities. In contrast, the EV sector is primarily privately owned in China.
• The three companies (BYD, Geely, and SAIC) that the Commission has chosen to focus on in its investigation have signaled their willingness to cooperate. This means that they are providing information to the Commission. For non-cooperating firms the Commission estimates duties based on public information, which in the past has resulted in higher duties.

The Commission will calculate individual duties for BYD, Geely, and SAIC, while other exporters such as Tesla will receive a duty based on the weighted average of the duties imposed on the Chinese brands that the Commission deems to have cooperated. Theoretically, the Commission could also opt to impose other remedies, for instance a minimum import price or fixed price, but given the highly complex nature of modern EVs, this is an unlikely and unpractical prospect.

Price analysis of China-based exporters

Currently, the electric vehicle markets in Europe and China are characterized by major price discrepancies which have encouraged producers to export their cars from China to Europe. Intense competition in a saturated Chinese market has led to a price war there and forced manufacturers to boost efficiencies in the pursuit of ever-lower production costs. Volkswagen’s ID.4 model, for example, sells for nearly 50% more in Europe than it does in China. For Chinese producers like BYD, the price gulf is even larger, as they try to compensate for the profit squeeze in China by charging higher prices for their products in the EU. But with exports picking up, some of these price differences are likely to erode over time. Increasingly, Chinese and foreign manufacturers are taking advantage of China’s cheaper labor and energy prices, its more developed battery ecosystem and government subsidies to produce in China for the European and third markets.

Should the EU impose countervailing duties on Chinese EV imports, it would seriously affect incentives for China-based producers to export to Europe. Our price analysis reveals that exports to the EU by China-based producers are very profitable. BYD makes around €14,300 in profit on each SEAL U model sold in the EU, compared to €1,300 on units sold in China. This means that BYD earns €13,000 more on every Seal U model sold in the EU (the “EU premium”). Our analysis is based on the suggested retail prices (MSRPs) of the various manufacturers in China and Germany, and calculates profits after shipping, tariffs, distribution and VAT.

It should be noted that BYD’s relatively low sales numbers in Europe suggest that the prices it is charging in the European market may be too high, especially in light of the fact that it is still a relatively unknown brand. With such a high EU premium, however, the company has ample space to adjust pricing.

In order to substantially reduce the incentive for BYD to export models like the SEAL U to the EU, duties would need to be set at a level that erases the €13,000 premium that the company currently enjoys in Europe. This would bring profit margins in the EU in line with those that BYD enjoys in China. In reality, this is not the goal of the anti-subsidy investigation. It is not meant to render EVs produced in China and sold on the EU market unprofitable, but rather determine whether China’s export competitiveness is based on subsidies. Even if duties were set at a high enough level to erase the EU premium, BYD might decide that exporting to Europe makes sense, given slowing demand and competitive pressures in the Chinese market. One cannot dismiss the possibility that Chinese EV producers would be willing to forgo profits in the short-term and sell at a loss in order to gain market share in the world’s second biggest EV market.

A 30% duty imposed on BYD for the Seal U would fall far short of leveling the playing field between the EU and China as far as the company’s profits on the car are concerned. According to our calculations, a 30% duty would still leave the company with a 15% (€4,700) EU premium in relation to its China profits, meaning that exports to Europe would remain highly attractive. Moreover, duties at this level would provide BYD with space to lower its prices in order to gain market share in Europe. Our analysis of several other models sold in China and Germany indicates that even after a 30% duty, many Chinese EV models would still enjoy a strong EU profit premium.

In short, much steeper duties of around 45%, or even 55% for fiercely competitive producers like BYD, would probably be necessary in order to render exports to the European market unappealing on commercial grounds.

Duties at the 15-30% level could, however, wipe out the business model for foreign players like BMW or Tesla, which are using China as a base for exporting to Europe. For BMW’s iX3 SUV, for example, the EU premium (after accounting for related costs such as shipping) is only 9%, meaning that if duties are above 9%, the company would make less money on sales in Europe than in China. This also means that duties set at the higher end of our range could undermine plans by companies such as BMW, Honda and Volkswagen to expand the use of China as an export hub for the EU market going forward.

The price gap between foreign and Chinese producers is likely due to two main factors: Chinese producers receive more subsidies than foreign producers, although both benefit from Chinese government support, and Chinese companies are more vertically integrated and can procure products at lower prices than their foreign competitors.

Chinese producers will likely need to export

While duties would make exporting to the EU less attractive, several factors suggest that China’s EV export push will continue to gain momentum in the coming years:

Slowing growth and tighter profit margins at home: While China’s new energy vehicle (NEV) market has expanded rapidly, with sales surging by 97% in 2022 and 38% in 2023, growth is expected to decelerate significantly due to the higher base and China’s economic slowdown. Cui Dongshu, the Secretary General of China’s passenger vehicle association, forecasts that NEV sales growth will drop to 22% in 2024. Moreover, intense competition has led to a price war, resulting in profit margins in the auto sector plummeting from 8.7% in 2015 to 4.3% in 2023. Both of these trends are making exports much more appealing to China-based producers.

New production capacity coming online: Bolstered by robust profits and government backing, Chinese EV manufacturers have made substantial investments in new production facilities. This additional capacity will hit the market soon. BYD’s new plants illustrate this: By 2026, BYD’s production capacity in China will reach 6.55 million EVs up from 2.9 million at the end of 2023. To fully utilize all this capacity BYD would need to more than double its domestic EV sales—a challenging feat given the anticipated slowdown in China’s overall EV sales. Even to maintain capacity utilization at 80%, BYD would need to increase domestic sales by 81% by 2026.

New shipping capacity coming online: China’s EV exports have been hindered by a scarcity of affordable car shipping vessels. In 2023, charter prices for such carriers skyrocketed by 700% compared to 2019, exacerbated by Houthi attacks in the Red Sea, further straining shipping capacity and inflating costs. However, Chinese carmakers and shipping companies have responded by placing orders for numerous new ships. Based on these orders, they will have capacity to ship an estimated 560,000 cars annually to Europe in 2025, based on six trips a year (in 2023 the EU imported 472,000 EVs from China). Capacity could surge to as much as 1.7 million cars in 2026. In the unlikely case that all ships were used for transporting cars to Europe, the volumes exported from China would likely be enough to capture 50% of the EU’s EV market. Notably, the decision to purchase rather than rent car-carrying ships underscores the long-term goal of Chinese EV producers to export large quantities of cars.

Lack of other attractive export markets: The EU, the world’s second biggest EV market, is likely to remain the primary destination for China-made EVs. With its plans for a de facto ban on internal combustion engine (ICE) vehicles from 2035, and various support mechanisms in place, the EU presents a highly attractive market—especially compared to the US, which already has high tariffs on Chinese EVs in place and is planning further measures to restrict Chinese carmakers. Exports to other markets will be challenging for other reasons: either they are smaller, lag behind in EV adoption or will be served by local production, often because of local content requirements (ASEAN, Brazil, India and Mexico).

Ambitious targets for the European market: BYD has set an ambitious goal to capture a 5% market share in Europe even before its Hungary plant commences operations in 2026. This would entail selling approximately 130,000 EVs in Europe in 2025, a massive increase from the 16,000 sold in 2023. Looking ahead to 2030, the company aims to account for 10% of Europe’s EV market, corresponding to an estimated 920,000 vehicles, with a portion produced in its Hungary plant and the majority likely imported from China. These targets are consistent with those communicated by Shenzhen’s municipal government, where BYD is headquartered. The city wants to increase NEV exports from 71,000 in 2023 (January to November) to 400,000 in 2024 and to 600,000 in 2025. It released a 24-point plan to achieve these goals in November 2023. Similarly, SAIC-owned MG, having sold nearly 232,000 vehicles in Europe last year, plans to sell more than 300,000 cars this year.

EU officials might consider additional tools

If duties fail to slow Chinese exporters, at a time when China continues to incentivize firms to export, the Commission may feel the need to explore alternative measures. Competition Commissioner Margrethe Vestager floated this idea in a speech at Princeton University in April, calling for the introduction of “trustworthiness” criteria at G7 level based on factors like environmental footprint, labor rights, cybersecurity, and data security. A range of options are on the table:

Cybersecurity: The EU could attempt to tighten cybersecurity requirements to restrict market access for Chinese EV producers. Similar to the 5G Toolbox it published in January 2020, the EU could establish policy guidelines for member states that designate Chinese EVs as a cybersecurity risk due to the integration of cameras and sensors in cars and Beijing’s close oversight of China-based producers. Although most EVs will be privately purchased, member states could also decide to include “trustworthiness” criteria in public tender documents.

This approach would, however, face numerous obstacles, as the uneven implementation of the 5G Toolbox illustrates. National security remains primarily a member state prerogative, and convincing all members that Chinese EVs pose a national security risk will be challenging, particularly as some fear retaliation against their own products in China. A fragmented solution that restricts Chinese EVs in some countries but not others, would be problematic given the Schengen Zone’s open borders. Unlike 5G, where the costs to replace untrusted equipment would be shouldered by telecommunications operators, cybersecurity-related restrictions on connected vehicles would directly affect consumers.

Moreover, the notion that cybersecurity measures would serve as a panacea is tempered by the availability of Chinese smartphones in the EU, which arguably pose a greater risk but enjoy substantial market share with Xiaomi and Huawei ranking as the third and fourth biggest smartphone brands in 2023. While some member states, such as Belgium and Lithuania, have expressed cybersecurity-related concerns about Chinese phones, others disagree. With the automotive industry, the economic stakes are considerably higher.

Conditioning EV purchasing subsidies: Many European member states offer purchasing incentives to spur the adoption of electric vehicles. Member states could follow the lead of France and tweak regulations to restrict Chinese-made EVs based on sustainability criteria. This would place Chinese EVs at a severe competitive disadvantage. However, member states would have to act fast as most subsidy schemes are already on their way to being phased out. Additionally, if countries use environmental standards to penalize Chinese exporters as France is doing, Chinese companies could limit the damage by decarbonizing their production.

Forced labor regulation: A new EU measure banning products made with forced labor could be used to restrict the import of Made in China EVs. A recent report by Human Rights Watch found that many big OEMs including BYD, Tesla and Volkswagen could be procuring aluminum produced with forced labor. US authorities recently impounded cars produced by Volkswagen Group over allegations that they violated the Uyghur Forced Labor Prevention Act. The long lead time that is foreseen for implementation of the EU’s forced labor ban illustrates the limits of using this tool as a near- or medium-term solution for restricting imports.

Reviewing subsidies in procurement and investments: The EU’s new foreign subsidy regulation facilitates the review of large procurement contracts exceeding €250 million. However, it’s unlikely that many EV contracts will surpass this threshold. For instance, BYD secured a contract in December to supply 640 EVs for Austria’s federal government, likely for around €20 million considering MSRPs. Still, the use of EU funds, like REPowerEU, to support BYD in Hungary has prompted concerns that could lead to policy adjustments going forward.

Scaling back Europe’s EV ambitions: In 2022, the EU effectively instituted an internal combustion engine ban by implementing progressively stricter fleet emission targets, compelling manufacturers to elevate the proportion of EVs or incur penalties. Nonetheless, confronted with the considerable expenses associated with the EV transition and the surge in Chinese competition, certain segments of the European automotive industry and conservative parties across Europe have voiced opposition to the target. A review of the 2035 target, slated for 2026, presents an opportunity to recalibrate objectives, potentially buying ICE-focused European incumbents time and curbing the competitiveness of Chinese EV producers.

A more drastic review of WTO rules: In her Princeton speech in April 2024, Vestager voiced the view that the EU needs a more comprehensive approach to tackling Chinese distortions. One such way would be to raise tariffs on China across the board. This is highly unlikely for now, but could gain momentum if the US moves first. The Select Committee on China in the House of Representatives has called for the removal of Permanent Normal Trade Relations status for China, which would increase tariffs for Chinese goods across the board.

What to watch

We expect the Commission to place provisional duties on Chinese EV imports by early July. Going ahead we are also watching for:

Member state pushback: Before the imposition of final duties (by early November 2024) EU member states could try to block the EU’s case in the Trade Defence Instruments Committee. This would require a qualified majority of member states to vote against duties, something that has never been achieved before in an EU anti-subsidy investigation. German politicians and carmakers have signaled that they do not support the case. France, on the other hand, has made clear that it sees the need for EU action. Whether Berlin would risk a fight over the EV case is unclear. But we have seen Germany’s divided coalition government stand in the way of EU measures that were well advanced in recent months, notably refusing to support sustainability due diligence legislation.

Chinese retaliation: In January 2024, China launched an anti-dumping probe into brandy imports from the EU. The move was widely seen as a retaliatory move aimed at France, which was a vocal supporter of the EU’s trade case against Chinese EV imports. Should the EU impose duties, China is likely to do the same on brandy imports. It could also take other steps, for example responding in kind against EU automakers, tightening the regulatory screws on other European companies with a presence in China, or restricting the supply of critical minerals to Europe’s fledgling battery sector. Beijing, which is keen to avoid a tit-for-tat trade conflict with Europe that could further impeded its access to the European market, may wait until final duties are imposed before responding.

Following up with an anti-dumping probe: The EU chose to launch an anti-subsidy investigation into EVs rather than opt for an anti-dumping probe, which would have allowed it to impose higher tariffs. The decision to go down this path was likely driven by the fact that anti-dumping cases have a higher burden of proof and because Chinese producers have not priced their products extremely cheaply in Europe. Should Chinese EV exporters absorb the countervailing duties and subsequently lower their prices to gain market share in the EU, the Commission could follow up with an anti-dumping case at some point in the future.

Chinese EV sales figures in Europe: In recent months, Chinese EV exports to the EU have declined against a backdrop of high shipping costs, policy uncertainty, and major changes to EV purchasing subsidies in France and Germany. A continued decline in Chinese EV sales could reduce the political momentum for additional policy measures beyond the EV duties that are expected before the summer. A renewed surge of Chinese EV exports, by contrast, would increase the likelihood that new tools, including the measures floated by Vestager in her April speech, would be considered.

Chinese EV investment: In contrast to the US, the EU has remained open to Chinese investments in the EV sector. In December 2023, BYD announced plans to build a factory in Hungary. In April 2024, Chery signed a JV deal with Spanish EV Motors to produce cars in Catalonia. Were more Chinese brands to announce plans to invest in local production facilities in Europe, this could alleviate pressures in the bilateral trade relationship. It is also possible, however, that Chinese brands could come under scrutiny if they are producing cars that undercut European rivals. This could trigger cases under the EU’s Foreign Subsidies Regulation. Chinese brands could also face a backlash within Europe if their production facilities remain concentrated in China-friendly countries like Hungary, the country that has attracted the majority of EV-related investments by Chinese firms so far.

To read the full report as published by the Rhodium Group, click here.

To read the full report, click here.

The post Ain’t No Duty High Enough appeared first on WITA.

There are few historical parallels of great power rivals as deeply integrated as the United States and China. They have the world’s two largest economies; they are the world’s largest military spenders; and they both are increasingly in competition with each other. As the world’s two largest exporters, their two-way trade exceeded $750 billion in 2022, even as commercial ties frayed and (not coincidentally) the multilateral trading system came under deep stress.

Indeed, on issue after issue—from AI to social media and from Taiwan to Ukraine—sharp differences in values and interests create friction between Washington and Beijing. These frictions will play out in how we trade; how our technological ecosystems interact; and how we manage military competition. At the same time, U.S.-China relations cannot and should not be based solely on competition. On a range of critical issues—from climate change to illegal narcotics—cooperation will have tangible benefits for Americans and, often, for people in China and the rest of the world.

The principles behind a sound China policy

Smart U.S. policy toward China needs to be based on principles that align with the interests of people and the values of our system. As Washington formulates our approach to competition with the People’s Republic of China (PRC), we should look to policies that are:

• Progressive: Our policy should advance the interests of ordinary Americans by improving their opportunities, wages and working conditions and reducing the risk of conflict and military involvement abroad—burdens of which they would disproportionately bear.
• Principled: We should have confidence in our values and be forthright in speaking when China violates basic human rights. We should not try—and would fail if we did—to emulate the fear and coercion that are the hallmarks of autocrats. We will succeed by being better Americans, at home and abroad.
• Pragmatic: China does many things at home; around the world; and in its relations with the United States that don’t align with our values or are contrary to our interests. But the United States has limited time, attention, and money, so we have to focus on the truly vital. No matter its provenance or pedigree, if a policy has not worked, we should do something else.
  Farsighted: Our children would not forgive us if our approach to China results in a world devastated by climate change or war; U.S. workers immiserated by a race-to-bottom economics; or American values eroded by racism or undemocratic actions.
• Collaborative: Our partners around the world are a major source of American strength. Sustaining that influence requires that we listen to their views, understand their needs, and take into account their concerns.
• Evidence-based: The United States should base our policies on facts rather than fear, hope, or ideological assumptions.
• Humble: Humility about the limits of American power is a hedge against unsustainable commitments abroad. The United States spent 20 years, a trillion dollars, and more than 2,000 American lives in Afghanistan and had little impact on its direction. We have far less influence on China. The United States brings its strongest influence to itself, so that is where we should focus our energies and our resources.

Recurring themes

The extraordinary breadth of the U.S.-China agenda means policymakers need a wide range of tools to respond. But certain themes run through each of the eight baskets:

• U.S. work starts at home. If we are serious about competing with China, we need to get serious about making the investments that will allow us to do so.
• There is no conflict between strong and smart. Even as we compete vigorously, we should not seek confrontation. Indeed, preventing conflict should be a major focus of U.S. diplomacy with Beijing.
• We should be confident in our system. Our democratic values set us apart from China; make us stronger at home; and more attractive as an ally and partner abroad.
• Our concern is the behavior of the Chinese government and Communist Party. As we pursue policies to address Beijing’s actions, we must make clear—in word and deed—that our focus is not ordinary Chinese or people of Chinese heritage.
• We need to talk. Our preeminent positions in the global economy; the complexity of the issues before us; and the consequential risks of misunderstanding require direct, regular U.S.-China senior-level exchanges by the administration and Congress.

The issues

What follows is not an effort to assess every aspect of the U.S.-China relationship; map out every connection between every issue; or respond to every headline. Instead, it is an attempt to define the overarching challenges we face in eight broad areas: trade, technology, climate change, military competition, Taiwan, human rights, China’s role in the world, and a cooperation agenda.

Trade: Decades of U.S. trade diplomacy aimed to right the impacts of China’s unfair trade practices have done little to correct the commercial imbalances, which contributed to deindustrialization in the United States and a hollowing of the American middle class

• China has a long legacy of conducting unfair trade practices such as massive export subsidies and state-sponsored intellectual property theft, as well as illegal activities like its use of forced labor. And we must take those on. But just blaming China obscures the impact of bad U.S. trade and economic policy decisions over the last several decades.
• We must make transformational investments in the U.S. industrial base and workers, focusing on sectors where we want to establish or maintain global leadership.
• Experience shows that China will not “play fair” or change its ways, so modernized enforcement tools will play a key role in a long-term, strategic competition.

Technology: Technology will be at the heart of U.S.-China competition, as semiconductors, AI, and other technologies reshape our economies and our militaries.

• The U.S. government needs to make transformational domestic investments in key technologies and our tech workforce. In addition, the United States needs tools and other resources to protect our existing advantages in critical technologies.
• The United States needs new general technology regulations and must work with foreign partners to set rules for the digital economy in line with democratic values.

Taiwan: Washington can manage Taiwan Strait tensions, even as China’s actions raise risks and concern—through military deterrence; direct engagement with Beijing; and continued diplomatic efforts to pull third countries into the conversation.

• We have an interest in Taiwan’s success given its status as a fellow democracy. Its dominance in advanced semiconductors also means we have a significant economic stake in Taiwan’s security.
• We should reinforce an equilibrium in which Taiwan improves its resiliency even as Beijing continues to believe there is a long-term path to “reunification.” This may leave all sides somewhat dissatisfied, but it is far preferable to the alternative.
• In concrete terms, that means the U.S. government—both the executive branch and Congress—should prioritize effectiveness and impact over symbolism and stunts.

Military competition: China is the only competitor to the United States with the intent and—increasingly—the capacity to reshape the global order. The United States faces the challenge of a rising China from a position of strength, even as China’s military grows.

• We can meet the military challenge without increasing the defense budget by capitalizing on existing strengths, spending smarter, and rethinking procurement.
• We must reinforce our alliances—a key security and geopolitical advantage.
• The United States needs to manage risks by maintaining dialogue with China’s military, including on emerging issues such as cyber and AI.

Human rights: China’s human rights situation has deteriorated markedly under Xi Jinping, even as China touts its “model” of autocratic governance abroad.

• We should shine light on China’s human rights abuses—as our values require us to do—while recognizing our influence on how Beijing treats its citizens may be limited.
• We need to push back firmly against the increasing incidence of transnational repression by Chinese officials, particularly when it happens in the United States.
• If the United States does not lead on human rights internationally, we cede the field to Beijing’s profoundly different—and illiberal—vision.

China’s role in the world: As China’s economic power has grown, so has its ambition to shape the global order to its liking. The United States needs to provide (and invest in) an alternative vision and help our allies and partners resist Chinese bad behavior.

• The United States is right to be concerned about China’s vision for the world and should push back against a Chinese model that makes people less free; drives up debt in the developing world; and undermines American interests.
• Our alliances multiply our influence and reduce the risk of conflict. We should help our partners resist coercion and strengthen their democratic institutions.
• The United States cannot just warn countries not to borrow from China; we need to offer real alternatives. It is impossible to beat something with nothing.

Climate change: The world will not avoid catastrophic climate change if China and the United States—the world’s largest greenhouse gas emitters and technology leaders—do not lead by accelerating climate action. This requires cooperation, even as we compete.

• The United States, with its international political heft, technical expertise, and climate history with China needs to employ all levers to press China for stronger action.
• Policymakers will need to weigh climate, economic, and security benefits and risks of allowing Chinese products in the U.S. clean-energy transition. We need to prioritize the interests of American workers but full decoupling is not an option given China’s dominance over key technologies and supply chains.
• U.S.-China competition can be a positive force if we “race to the top” to meet our domestic—as well as the rest of the world’s—clean energy needs.

Cooperation: As the two most consequential countries in the world—and with certain shared interests—the United States should be confident in cooperating with China, especially when it advances U.S. interests, even as we compete in many areas.

• We cannot allow U.S.-China relations to be defined solely by competition. On issues such as stopping the flow of fentanyl and other illegal drugs, we need to cooperate when we can to advance U.S. national interests and the interests of ordinary Americans.
• Cooperating is a way to advance mutual interests—not to do favors for the other. It is against our interests to refuse to cooperate because we disagree with China about many things.

Meeting the central foreign policy challenge of the 21st century will require the United States to be smart and strong, to invest in itself, and to be ready to talk as well as to compete with China. CAP lays out a framework for policymakers and the public to rally around.

To read the full report as it was published by the Center for American Progress, click here.

The post A Progressive, Principled, and Pragmatic Approach Toward China Policy appeared first on WITA.

The horse is already out of the barn when it comes to China overtaking Europe and America economically and technologically. The key difference is that when America overtook Europe the two were not adversaries. Today China is, with Xi Jinping referring to the need for China to “win the battle” for core technologies. In contrast, too many U.S. and EU officials still cling to the fiction that it’s possible to negotiate with China to achieve fair competition and even cooperation.

While neither the U.S. nor the EU can hope to change China nor outpace its advanced industry growth, they can and should not lose the battle for either advanced industries (e.g., aerospace, high-speed rail, biopharmaceuticals, semiconductors, machinery, software, etc.), and or emerging ones (e.g., AI, quantum computing, synthetic biology). Collectively these are a principal source of geo-economic power and Chinese victory in these sectors would turn the transatlantic partners (the U.S., UK, and European nations) into techno-economic vassal states, dependent on China for key inputs. China has already won steel, shipbuilding, solar panels, and it is gaining high-speed rail, telecom equipment, EV’s, and machine tools.

Not losing this battle is not about figuring out what policies and programs to adopt. There are many reports from think tanks and others laying out such an agenda. Policymakers could easily craft an actionable agenda by inviting experts to a two or three-day brainstorming retreat. The real problem is that policy makers on both sides of the Atlantic do not take the China challenge seriously enough to do so.

As such, the most important task for the transatlantic policy community is to recognize the true nature of the threat and adopt a new conceptual framework. Albert Einstein once stated that “We shall require a substantially new manner of thinking if mankind is to survive.” Today, if the transatlantic community is to survive, elites will need a new manner of thinking. The two most important components are to:

1. Recognize that the EU and U.S. have far more in common than they don’t and that they are collectively in a great-power techno-economic competition with China that is more akin to war than a game of football guided by rules and norms; and

2. Understand that not losing this techno-economic war is the most important non-military task. It is about not losing, rather than winning, because it’s not likely the transatlantic community can gain significant global market share in these industries over China. But it can and should avoid seeing its key sectors slowly decimated by Chinese predatory practices like intellectual property theft, massive subsidies, and closed Chinese markets.

The United States, especially Congress, is further in understanding point 1, in part because since WWII the U.S. has shouldered the global defense of freedom. As such, it’s easier for American policymakers to understand the true nature of adversaries. Many EU policy makers naively cling to the belief that China is a “normal” nation competing for economic competitiveness just like democratic nations do, and that existing rules and institutions (like the World Trade Organization) can effectively address economic conflicts.

Thankfully, as the reality of Chinese innovation mercantilism become clearer, it appears that EU officials are shedding some of their blinders and utopian globalist beliefs. But when EU President Ursula von der Leyen states that: “Global integration and open economies have been a force for good for our businesses, our competitiveness, and our European economy. And that will not change in the future,” it’s clear that the EU has still not caught up to reality. Is it too much to ask for EU policymakers to not lag five years behind the United States in understanding the true nature of the China challenge?

On issue 2, the United States is also ahead, but not by as much. While “Trump” Republicans and many centrist Democrats understand the importance of not losing the techno-economic war to China, many traditional Republicans are worried more about military superiority over China and about maintaining “freedom” and a small government at home. Industrial policy remains anathema to them. For most Democrats, including the Biden administration, competing with China takes a backseat to what they see as the two most important challenges: climate change and racial equity, with the latter requiring significant income redistribution and limits on corporations. Indeed, when President Biden was running for President, he made it very clear that he rejected the notion that China was an economic threat to the United States. In 2019 he stated, “China is going to eat our lunch? Come on, man…. I mean, you know, they’re not bad folks, folks. But guess what? They’re not competition for us.” The administration seems to still believe this as it has done little to confront China’s innovation mercantilism other than its export controls on semiconductors, which it justifies in military terms. If the view is that China does not present a competitive challenge to America, the door is open for hundreds of billions of dollars for domestic spending: building mass transit, insulating houses of low-income Americans, subsidizing costly clean energy, eliminating college debt, and expanding health care. Acknowledging the true nature of the China threat would require way more techno-economic “guns” and way less domestic policy “butter”.

Unfortunately, the dominant views in the EU are even worse, with an almost exclusive focus on clean energy. Winning the solar panel race will not cut it. And when it comes to winning in advanced industries, the EU seems to think winning means designing the most restrictive technology regulations, while at the same time punishing U.S. technology companies.

Sadly, it does not appear that this will change any time soon. Both EU and U.S. officials tell themselves that they can have their green cake and eat it to; that by leading the clean energy transition they can outcompete China. But that is not the case. There are far too many sectors critical to national power that will not be supported by a green industrial policy, including aerospace, semiconductors and advanced computing, machine tools, and biopharmaceuticals. And in the United States the libertarian right and the “equalitarian” left shows no signs of retreat, with the former wanting more military spending and less spending on everything else (including competing with China), and the latter wanting to use regulation and competition policy to tear down large corporations, while ensuring that tax and spending advances social policy goals not competitiveness.

Nonetheless, let’s suppose the ideal happens and conceptual frameworks change that in turn enable real policy innovation. In the United States this would mean that virtually all federal government programs and regulations that affect the economy are restructured and reinvigorated around the goal of not losing to China. To be sure, this is easier said than done. The old “DNA” of federal agencies is deeply entrenched. And powerful special interests resist real change.

Still, one can hope. Let me provide two examples of how change might happen. First, the U.S. science system. The current system dates to after WWII when the academic science community convinced Washington that personal investigator-directed scientific research focused on basic science was the key. Policy makers are told that any changes to this will have dire consequences, not just on the conduct of science but on U.S. technological leadership.

But that system, like so many other U.S. systems, is no longer purpose fit for a world where China is the pacing competitor. In the old model, researchers pick the areas of research. In the new model, the state prioritizes key areas where China is a threat. In the old model, the federal government provided the lion’s share of funding. In the new world, industry funding, incentivized by the federal government, needs to play a key role. In the old world, publications were the key goal. In the new world, transferring knowledge to the domestic private sector is the key goal. In the old world, science was seen as global, so cooperation with Chinese scientists and university students is an unalloyed good. In the new world, science cooperation with China is seen as fraught with risks.

To be sure, Congress is aware of some of these challenges, but unwillingness to see China as an existential threat means that efforts at change have been incremental at best. A case in point is the 2022 CHIPS and Science Act. The Science part created an initiative to fund research in 10 key areas, but because of political pressures and limitations the program was placed in the National Science Foundation (NSF), rather than in an agency more focused on commercial development. And the original industry areas were broadened to include domestic social challenges, like clean water. When it came to funding, the original legislative funding proposals were cut in half, while funding for the traditional NSF science programs doubled. Finally, as NSF implements this program it’s likely that the “working with industry” component will be paid lip service at best.

If Congress took the China challenge truly seriously, it would have done something quite different and far bolder. Congress would have created a National Advanced Industry and Technology Agency dedicated to working closely with industry. It would have appropriated far more money and required that most of the money be spent in university-industry research partnerships to support industries and technologies threatened by China.

We see that same incrementalism regarding the U.S. Export Import Bank (EXIM), an agency established in the 1930s to provide exporters with patient capital. Congress realized that through its massively funded export finance and development banks China was bribing the way for its industries to capture contracts and influence around the world. In response, Congress created within EXIM the China and Transformational Export program, which requires EXIM to invest 25 percent of its lending authority in deals that compete with China in ten designated technologies. Certainly, a useful step.

But if Congress took the China challenge truly seriously it would have picked technologies critical to America’s future (water treatment is not one), provided significantly more lending authority to the Bank, and allowed a loss rate of at least 10 percent (instead of mandating that the Bank earn at least a 2 percent rate of return). It also would have changed the core mission of the Bank from job creation to winning the global battle for advanced industries with China. This would include lowering the domestic content requirements to enable the Bank to fund a greater number of projects that contain less American labor, but that still challenge Chinese expansion.

In other words, U.S. efforts have been incremental. If China is truly seen as the existential threat to the West, we’d see a new approach to not just science and export financing, but to many areas of economic policy. We would see a trade policy that prioritizes market opening for advanced industries (rather than supporting all industries, including agriculture and financial services, equally) and revised and improved trade protection tools to limit market access of unfairly supported Chinese companies. We would see a much more generous R&D tax credit and a new investment tax credit. We would see a regulatory system with two tracks, one for domestic-serving industries and a more-flexible one for sectors competing globally, especially with China. Congress would transform the Small Business Administration into the New (high-growth) Business Administration. We would see a workforce development system focused more on generating skills needed for advanced industries, and less on subsidizing English literature degrees.

The EU is no different. There is no broad-based commitment to outcompete China, even if EU officials naively believe that its green strategy will do the trick. And there is an unwillingness to invest. For example, the new German China strategy states: “we will strive to implement this Strategy at no additional cost to the overall federal budget.” Good luck with that because without significantly increased financial support for German innovation and advanced industry companies, Germany will lose.

But even if the EU and the U.S. develop a broad-based consensus on the real nature of the China challenge, domestic action alone will not be enough. We need to join forces. And that has to start with real transatlantic cooperation. Unfortunately, Europe thinks it is competing against both the United States and China, and that it needs strategic independence from both. This is music to Beijing’s ears. During the Obama administration I co-chaired its U.S.-China Innovation Experts Group. At a lunch in Beijing with a high-level Chinese government official I asked how the Chinese government would handle increased resistance to Chinese unfair economic and trade policies. The official said they were not worried about individual countries or even the G20. What really worried them is the G2: a strong alliance between the EU and U.S. It was the threat of the G2 “ganging up” on China that kept him awake at night.

Today, he must be sleeping very soundly, for the trade tensions between the EU and the United States are quite high and the EU refuses to name United States a key ally and China a key adversary. To listen to many EU officials, one could easily get the message that the United States is the EU’s key technology adversary.

The reality is that the United States cannot adequately prevent Chinese global technological dominance without full and unstinting cooperation with the EU. Because if China wins in Europe, its companies will be too powerful for American companies to compete with. But this cooperation will not happen until policy makers accept the two key realities discussed above.

While some in the EU seem to be moving in the direction of recognizing that China is not a “normal” country when it comes to trade and globalization, overall, the EU has a long way to go, especially as Germany keeps resisting EU efforts to get tougher with China and as EU officials still maintain the fiction that it is possible to reform the WTO in ways that can stop China’s mercantilism. They even believe that, “China should play a part commensurate with its economic weight to help achieve this objective.” It boggles the mind to believe that China will allow changes to the WTO that would constrain its widespread manipulation of the global trading system.

Likewise, when the Commission states:

to achieve a maximum benefit from the trade and investment relationship between the EU and China, solutions to long-lasting concerns will have to be found. Ensuring reciprocity, achieving a level-playing field, and addressing asymmetries in the relationship is a matter of priority.

That ship has sailed. The only reciprocity, level-playing field, and addressed asymmetries possible is from the transatlantic side; China will not roll their mercantilism back. EU officials appear to be living in a fantasy world where if only they can have enough meetings and “constructive dialogue” China will start playing fair. Germany continues this delusion in its “Strategy on China” which states: “At the same time, China is an essential partner as regards global challenges. No it is not. The CCP’s coverup made the pandemic worse. And there is no need to “partner” with China on climate change. China will cut emissions when CCP officials see it as in their interests to do so and bribing them to do so lets China win.

At the end of the day, the EU needs to decide whose side it’s on. The EU wants it both ways: to be friendly with China and the United States, and to avoid getting involved with the “U.S. trade war” which most in Europe wrongly see as U.S. protectionism. The reality is that America did not start the “trade war” (China did in the 2000s) and it is not being fought solely for the United States; it’s being fought on behalf of all allied nations. It’s time the EU stopped free-riding on U.S. efforts (though doing so appears to be one of Europe’s few comparative advantages.).

Relatedly, the EU needs to significantly dial down trade tensions with the United States. This is not the place to litigate who is more at fault for deteriorating trade relations, although I would argue that most of the blame lies on the eastern side of the Atlantic. When German Chanceller Olaf Scholz states that European sovereignty “means in essence that we grow more autonomous in all fields; that we assume greater responsibility for our own security,” he is playing directly into the hand of Beijing. When EU Commissioner Theirry Bretton talks about the need for the EU to have digital sovereignty from the United States he is playing into the hands of Beijing. The fact that some EU officials appear to believe that the United States would cut off exports to the EU and therefore it needs strategic “derisking” from America boggles the mind.

While efforts like the EU-US Trade and Technology Council try to address some of the trade irritants, it is best a side show. Until the EU decides which path it wants to take, no bilateral efforts like the TTC will bear real fruit. As such, the EU has three choices. It can seek to continue to engage economically with China and hope to maintain acceptable relations with the United States. The problem with this is, as the German think tank MERICS has shown, the negative impacts of the Made in China 2025 plan are likely to be more damaging to the EU than to the United States. As each year goes by, the ability of EU companies to sell in China will deteriorate and the ability of China to sell in Europe will grow; as Europe is now seeing with electric vehicles. Why the EV export surge should have come as a surprise to EU policy makers is truly amazing.

Second, the EU can continue to go down its path of strategic derisking and digital sovereignty, where it sees both China and the United States as equal risks. That path will make joint efforts to limit China’s techno-economic aggression hard if not impossible, and it will result in tens of billions of Euros wasted to prop up industries for which the EU is better off relying on from the United States and other allies (and vice versa).

Third, deeply aligning with the United States (creating a “G2”), is the only course that will be effective in countering China. This means the United States and the EU dialing back recent protectionist actions, including U.S. steel tariffs (for which both the Trump and Biden administrations have been completely in the wrong on) and EU “digital sovereignty” actions that discriminate against U.S. firms. The two regions should however go much further and resurrect and pass a Transatlantic Trade and Investment Partnership that would eliminate all tariffs on products traded between nations and eliminate most if not all regulatory barriers to trade and investment. On top of this, both regions should establish much closer cooperation in areas of science and technology, foreign development assistance, and commercial counterintelligence against China. And most importantly the two regions should create a “demand alliance” focused on advanced technologies or inputs which would insulate markets from unfairly produced Chinese goods. This approach is based on reciprocity: the PRC constantly manipulates its market as a tool of statecraft. Joint policies to support this agenda would include tariffs to impose a price floor on Chinese product dumping—in sectors such as critical minerals—to enable market-based firms to compete, as well as long-term import restrictions on companies that systematically benefit from unfair trade practices, including closed Chinese markets and excessive subsidization.

As much as that is the optimal outcome, its prospects are not good. Too many EU activists are willing to fall on their swords on trivial issues like chlorinated chicken and GMO crops. Will EU leaders have the courage to ignore these radical voices, whose mission is to overthrow market capitalism? Probably not, at least until the threat from Chinese quantum computers becomes clearer than the threat from U.S. chickens.

Even without activists gluing themselves to paintings, close EU-US economic relations have always been stymied by Europe’s chip on its shoulder. Ever since Jean Jacques Servan-Schrieber wrote in his 1968 book The American Challenge, that “The American challenge [U.S. firms like IBM gaining market share and entering Europe] is not ruthless like so many Europe has known in her history, but it may be more dramatic, for it embraces everything” the EU has been in a defensive mode towards America. We see this in Europe’s decade-long campaign to achieve “digital sovereignty” as a remedy to “digital imperialism”. President von der Leyen claimed that “it is not too late to achieve technological sovereignty” in areas including AI, blockchain, and quantum computing. Commissioner for Internal Market and Services Thierry Breton claimed that EU efforts to do this, including limiting access by U.S. firms “is not a protectionist concept, it is simply about having European technological alternatives in vital areas where we are currently dependent.” The EU wants sovereignty, and strangely it sees its democratic ally, the United States, as more of a threat to that sovereignty than the Chinese Communist Party. It is willing to decouple from the United States, but not China.

Maybe there’s a middle way. At one level, who cares if the American farmers can sell chickens to Europe; poultry is not strategic. The real question is can the two regions develop a much more integrated economy in advanced technology industries, like semiconductors, drugs, automobiles, machine tools, digital and others, where they work together to support each other’s advanced industry development while limiting China’s market access and overall techno-economic advance. Only time will tell… But time is running short.

To read the full article as it was published by the Information Technology & Innovation Foundation, click here.

The post A Transatlantic G2 Against Chinese Technology Dominance appeared first on WITA.