Signal Berlaymont: The EU-China trade war has started

A trade war between the EU and China is now in full swing. The European Commission announced new tariffs on electric vehicle (EV) imports from China, countering Chinese subsidies. The Commission now wants to add an extra 17 per cent to the EU's existing 36.3 per cent on Chinese EVs. This actually was lower than expected, suggesting the EU's stance had softened. Also, Tesla vehicles manufactured in China will enjoy a more favourable 9 per cent rate, after the EU concluded Tesla received fewer subsidies from the Chinese government. Member states still need to approve the new tariffs.

It is bizarre to see the EU, which is de facto banning combustion engine vehicles from 2035, now making electric vehicles more expensive. It is already banning one industry which European companies dominate, making combustion engine vehicles. But the Commission is now actively trying to make their replacement, EVs, more expensive. Wasn’t the point of the EU to open up trade?

The “Chinese subsidies”argument    

Regardless of the EU's ban on combustion engine vehicles, which hopefully it will scrap soon, its key complaint China is subsidising its EV industry.

First, it should be Chinese people's problem if they pay for cheaper products to be exported to the West.

Second, the EU's tariffs are making imports more expensive for European consumers.

Third, there is now the prospect of retaliation from Beijing. Reportedly, China will now target the EU's exports of large cars to China with higher tariffs. This will particularly hit Germany, which accounts for 36 per cent of China's imports of large internal combustion engine vehicles, and Slovakia, which accounts for 20 per cent. China also decided to open a retaliatory anti-dumping investigation into pork imports from the EU.

Finally, there’s also the issue of circumventing tariffs. Chinese companies have already started opening plants in the EU to avoid the duties, despite EU warnings this only works if the products meet “rules-of-origin” requirements dictating a minimum amount of value must be created in the EU. Another trusted Chinese trick is using another non-targeted country, like Vietnam, as a base to export from.  

Homework for the EU  

There are other examples, like citric acid, of a European industry becoming at risk due to Chinese subsidies, and China then stepping in and controlling that market. Still, the key explanations for European industry's lack of competitiveness lie at home. These are economic policies hostile to innovation, punitive tax rates, regulatory uncertainty, and of course, experimental energy policies in the name of “climate change”.

In short, before imposing tariffs on Chinese imports, Europe should get its own house in order first and restore the EU's competitiveness.

Even before scrapping policies like the European “green deal”, the EU can start by not making things worse. Germany's magazine Wirtschaftswoche just reported "the EU is planning new regulations for calculating the CO2 footprint of electric car batteries”, and points out “the German industry would be massively disadvantaged." You would think Brussels may have noticed Germany's terrible economic performance already, but maybe that’s a little too much to ask.

More than about EVs

The EU's looming trade dispute with China isn't just about EVs. The Commission also announced anti-dumping probes into Chinese-made wind turbines and solar panels, so the scope of what is quickly becoming a trade war may widen further. China, for its part, filed a complaint with the World Trade Organisation, arguing these EU policies “seriously violate WTO rules.”

The EU’s plan for additional tariffs on trade with China follows in the footsteps of both the United States and Canada. The United States has also pushed the EU to restrict its trade with China in other domains, like limiting exports of chipmaking equipment by Dutch company ASML. But the value of these exports from the Netherlands to China is higher than all Chinese-made EV imports into the EU combined. The Dutch government complied to a degree, but policy analysts like Sanne van der Lugt correctly argue ASML needs to be able to do business if it will invest in innovation needed to keep its de facto monopoly in the chips supply chain. That means allowing ASML to sell less sophisticated chipmaking equipment to China, and limiting export restrictions to the most advanced equipment.

Defence   

Whether or not it is a good idea to introduce broad-ranging tariffs to avoid excessive EU economic dependence on China, we should agree the EU's priority should be ending areas of dependence with a military or geostrategic impact. This has been called “derisking”. Here, much work still needs to be done.

As opposed to ordinary economics, where tariffs and barriers to free trade make everyone worse off, when it comes to defence, tariffs or outright import bans may actually be a very good idea. This is the case even if it is not always clear what is a “geostrategic risk” and what isn't. An example is Chinese state support for citric acid, an important product in the food and drug industries. Only two companies in Europe produce this, and at the moment, they face heavy competition from subsidised Chinese citric acid, which is banned in the US. Is this a “strategic” area? Informed people may have different opinions.

Often, the same exports can have both defence and commercial aspects. ASML equipment represents leverage the West could use if China invades Taiwan. This because ASML can disable the world’s most sophisticated chipmaking machines, by no longer providing updates. The Dutch company could do this if China attacks the island that produces the vast majority of the world’s advanced semiconductors.

Meanwhile, China is ‘derisking’

When it comes to “derisking”, it isn't just Europe and the United States that are detaching their economies from China. China equally is derisking from the West.

As far as geostrategic dependencies, China already imposed measures against the West, with new export controls on gallium and germanium last year. These are important materials for semiconductors, but also for military and communications equipment. As a consequence, the price of these minerals in Europe doubled in the last year.

Earlier this month, China announced export restrictions on another key metal, antimony, which is also vital for the defence industry. It is possible to mine antimony in the United States, but the US hasn't done this for over two decades. A major hurdle is permits. One company who found antinomy in 2010 in Idaho hopes to be legally allowed to start mining it from 2028, 18 years later. The situation in Europe isn’t any better.

To become independent from China when it comes to mineral supply chains requires a whole ecosystem of refining, processing, and manufacturing systems. According to mining strategist Christopher Ecclestone, the Chinese companies that dominate the market reduced their prices to less than their production costs decades ago, forcing Western companies out of the industry.

Tom Moerenhout, a critical minerals expert at Columbia University’s Center on Global Energy Policy, said in Foreign Policy “It started with gallium and germanium, so it started with semiconductors. It moved on to graphite, with batteries,” adding that with antimony, “we’re really at the heart of national defense.”

Even in non-defence related trade, China is becoming less dependent on the West, and relatively quickly. Exports from China of intermediate goods used in manufacturing to Saudi Arabia, Malaysia, Vietnam, Egypt, Morocco, Kazakhstan, Indonesia, Argentina, Serbia, and Mexico have tripled since 2013.  

The world is changing fast. It is still not too late for member states and the EU to make up their mind and do the sensible thing. That means continuing to trade with the rest of the world, scrapping tariffs and anti-competitive EU policies, and limiting trade restrictions to genuine security risks.