Commentary on Political Economy

Tuesday 19 September 2023


The real reas­ons for the west’s pro­tec­tion­ism

Trade freely with China and time is on our side.” That was the con­fid­ent view of George W Bush, the former US pres­id­ent, in the run-up to China join­ing th rld Trade Organ­iz­a­tion in 2001. A gen­er­a­tion later, many in the west have come to the con­clu­sion that time was, in fact, on China’s side.

Bush was mak­ing a polit­ical judg­ment. He believed that a China that integ­rated deeply with the global eco­nomy would become more open and more demo­cratic. But under Xi Jin­ping China has become more closed and author­it­arian. It is also more overtly hos­tile to the US. Mean­while, China’s rapid eco­nomic growth has fun­ded a massive mil­it­ary build-up.

Some US poli­cy­makers now look back to the decision to admit China to the WTO as a mis­take. They believe that the huge boost this gave to Chinese exports also con­trib­uted sig­ni­fic­antly to the dein­dus­tri­al­isa­tion of Amer­ica. Rising inequal­ity in the US then helped to fuel the rise of Don­ald Trump.

That raises an awk­ward ques­tion. What if glob­al­isa­tion, far from pro­mot­ing demo­cracy in China, under­mined demo­cracy in the US? It would be an amus­ing his­tor­ical irony — if we were not liv­ing with the con­sequences.

Fears about the health of US demo­cracy under­pin the embrace of indus­trial policy by the Biden White House. Biden has retained the tar­iffs on China imposed by Trump and added lav­ish sub­sidies designed to rein­dus­tri­al­ise Amer­ica and give the US the lead in the tech­no­lo­gies of the future. The White House sees these policies as cru­cial to the sta­bil­isa­tion of Amer­ican soci­ety and its demo­cratic sys­tem.

Many in Europe were dis­mayed by Amer­ica’s turn towards pro­tec­tion­ism and indus­trial policy. But last week’s announce­ment of an EU invest­ig­a­tion into sub­sidies for China’s elec­tric car industry sug­gests that Europe is start­ing down a sim­ilar path. The US tar­iff on Chinese cars is 27.5 per cent, com­pared with a cur­rent EU tar­iff of 10 per cent. But if the EU determ­ines that China is unfairly sub­sid­ising its car exports, that could rise sharply.

China’s response to the EU invest­ig­a­tions was to accuse Europe of “naked pro­tec­tion­ism”. But some influ­en­tial Amer­ic­ans were more sym­path­etic. Jen­nifer Har­ris, who helped to design US indus­trial policy in the Biden White House, tweeted: “Wel­come Europe. Glad you’re here now.

If Europe does indeed fol­low Amer­ica in becom­ing more pro­tec­tion­ist, it will do so for sim­ilar reas­ons — a fear that Chinese com­pet­i­tion is under­min­ing Europe’s indus­trial base and with it social and polit­ical sta­bil­ity.

The motor industry is the most import­ant man­u­fac­tur­ing sec­tor in Europe, par­tic­u­larly in Ger­many, the core of the EU eco­nomy. It is also one of the few areas where Europe has real world-lead­ing com­pan­ies. Three of the four largest car com­pan­ies in the world by rev­enue — Volk­swa­gen, Stel­lantis and the Mer­cedes-Benz group — are based in the EU.

But Europe’s edge in the global motor industry is fast erod­ing. This year China is set to become the world’s largest exporter of cars. The Chinese are par­tic­u­larly strong in elec­tric vehicles, the cars of the future. This advant­age will be hard to shake because China dom­in­ates the pro­duc­tion of bat­ter­ies and sup­ply of rare earth min­er­als cru­cial to EVs.

The tra­di­tional free mar­ket response is to say that Europeans should be grate­ful if China provides cheap, reli­able EVs to European con­sumers. The fact that these cars will be fun­da­mental to Europe’s green trans­ition provides an added incent­ive to wel­come Chinese EVs. But the social and polit­ical real­ity is more com­plic­ated. The auto­mot­ive sec­tor provides more than 6 per cent of jobs in the EU, accord­ing to the European Com­mis­sion. This is often well-paid work that looms large in the self-image of coun­tries such as Ger­many. See­ing those jobs migrate to China would be polit­ic­ally and socially explos­ive.

Sup­port for the far-right Altern­at­ive for Ger­many is already sur­ging in Ger­many, with many polls show­ing it as the second most pop­u­lar party. Just ima­gine how it would be doing if the domestic car industry began to crumble as Chinese BYDs replaced Ger­man BMWs on the auto­bahns.

However, while pro­tec­tion­ism sounds like an obvi­ous and tempt­ing solu­tion for the EU, real­ity is much more com­plic­ated. Europe still needs Chinese inputs — in the form of bat­ter­ies and min­er­als — to man­u­fac­ture EVs for domestic sale. China is also the world’s largest vehicle mar­ket and the biggest export mar­ket for Mer­cedes and VW. The lat­ter makes at least half its profits there. If Europe slaps high tar­iffs on Chinese EVs, Beijing would almost cer­tainly retali­ate. On the other hand, EU com­pan­ies are already los­ing mar­ket share in China.

These com­plex­it­ies could mean that Europe will not ulti­mately fol­low the Amer­ican route and will have to back down from its pro­tec­tion­ist threats. On the other hand, the polit­ical and social pres­sure to save the European car industry is only likely to grow. The rise of pop­u­list and nation­al­ist parties across Europe will add to that pres­sure.

It is pos­sible that the EU may end up push­ing some sort of messy compro- mise such as “vol­un­tary” export restraints on Chinese EVs. But whatever the even­tual out­come, it is clear that indus­trial policy and pro­tec­tion­ism are once again respect­able — on both sides of the At antic.

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