Weighing EU's China Tariffs from Beijing's Perspective

I was invited to share my views about the EU’s China tariffs on the China in Context podcast, produced by the SOAS China Institute, with the guest host Duncan Wrigley, Chief China Plus Economist at Pantheon Macroeconomics. You are welcome to listen to the embedded podcast episode.

The following is a full transcript of the podcast, recorded June 19 and broadcast July 9.

Duncan Wrigley: Welcome to China In Context. I’m Duncan Wrigley, Chief China Plus Economist at Pantheon Macroeconomics, and guest host for this podcast. A trade war is looming between China and the European Union. The European side has vowed to impose heavy tariffs on imported Chinese electric vehicles, or EVs. It believes that Chinese companies are benefiting from government subsidies, flooding Europe with artificially cheap cars. This, they warn, puts local automotive manufacturers in countries like France and Spain at risk. Meanwhile, some European companies say they are facing barriers to accessing the lucrative Chinese market. Similar disputes have affected other business sectors, such as the production of solar cells. So what are the implications of these disputes? Will they, as the German Chancellor Olaf Scholz has warned, make everything more expensive, and everyone poorer? I’m pleased to welcome a guest who’s well-placed to offer insights on this issue from the Chinese perspective. I’m joined today from Beijing by Zeyu Xu, a senior correspondent with News Agency Xinhua. Good to have you with us today.

Xu Zeyu: Thank you for having me, Duncan. 

Duncan Wrigley: Now, companies like BYD have become good at turning out large quantities of electric vehicles, or EVs, at very competitive prices. The EU accuses China of providing unfair subsidies to its carmakers. But what is really going on?

Xu Zeyu: Well, yeah, I think BYD is a very typical example of, you know, Chinese EV success stories. And it is a story of private enterprises reshaping the future of the industry with persevering and long-standing technological innovation. Many of us know BYD as the world’s top EV maker, but 30 years ago it was, just started out to be a phone battery supplier. And over the past three decades, it overwhelmingly pivoted R&D rather than profit optimization. But their efforts paid off. Like in 2020, the company launched its self-developed blade battery, which amounted to a game changer in the world’s market because it had the highest energy density among all lithium car cells. Even certain Tesla models have switched to BYD’s batteries. So this made BYD the world's top EV maker. And I would say its dramatic rise to the top in business has been built on its business acumen and long-term investment in tech innovation. So we're talking about the allegation of unfair subsidies. I would say that it was the privately owned EV enterprises like BYD that made the biggest difference. And it should be noted that seven out of ten best-selling Chinese EV brands are privately owned.  So it is actually the force of the markets that really plays a role here. And of course, the Chinese government also made a difference, but it basically laid out the, you know, the groundwork, the infrastructure, and it provided some purchase incentives just like Washington and Brussels did right now. So I would say that it seems to me the allegation of unfair subsidies is more of a baseless accusation that is only meant to justify the accusers’ own protectionist motives.

Duncan Wrigley: Now that's a very good point about the strength and acumen of China's private companies. But right now, I wonder if it’s true that Chinese EV makers have overcapacity and that’s the reason why they can keep cutting prices. For example, in China this year, we've seen the retail prices of many EV models being cut by about 10% and prices may drop even further. But what is your view on the situation?

Xu Zeyu: If we take a closer look at the data, I would argue that the so-called “overcapacity” or “overspill” of Chinese EVs has generally been a myth. Over the entire year of 2023, China produced some 9.5 million EVs,  and out of that 9.5 million EVs, more than 9.4 million were purchased by consumers. So there is a robust and growing demand in the market. And I would say that this relative balance between supply and demand can also be reflected by, you know, leading Chinese EV companies’ capacity utilization rate, which stands at over 80 percent, even higher than that of the country’s overall industrial activities. So it should also be noted that around 18 percent of Chinese EVs were shipped overseas. So if you characterize that as an overspill,  we could easily argue that there has been a much more serious problem of “overcapacity” for Germany and Japan over the past few decades, whose, export rates of their home-produced petrol vehicles range from 50 to over 70 percent. And you could say that they should also be blamed for crushing carmaking industries and stealing jobs in emerging economies. So if you put it in perspective, we would know that the Chinese EVs’ “overcapacity” claim has virtually no bearing on facts.

Duncan Wrigley: Well, thank you for that. I guess regardless of the merits of the claim, the facts of the case are that the EU has announced some preliminary tariffs on Chinese EV imports. So the next question, I guess, is how is China going to respond to these tariffs? Do you see a chance that this will escalate from a trade dispute into a full-on trade war?

Xu Zeyu: Yeah, about four to five days after Brussels announced these China EV tariffs, China launched an anti-dumping probe into EU pork and pig products, but the result is still pending.  And it is quite interesting in this new development that China did not choose to hit back at the EU’s carmaking sector, which would be a rather more reciprocal and more damaging retaliation, you know. And right after the announcement of EU’s China tariffs, we have seen a long line of European carmakers rush to make statements denouncing Brussels’ actions, in the fear of Beijing’s possible reprisal, as they are highly reliant on the Chinese market. But they were anxiously waiting for the other shoe to drop, but his shoe didn't drop yet. So I would say Beijing’s reaction so far is quite measured and restrained, in order not to escalate the quarrel into a full-blown trade war, as you said. But China definitely reserved the right to play this trump card if Brussels further pushes it. But for now, there is still room to wiggle. So I would say it is at the end of the day, China knows, and it hopes Europe will also come around and realize that there is no structural difference or inevitable conflict of interests between the two whether in the realms of geopolitics or trade and economic affairs. So I think this message has been sent to Germany and France when President Xi Jinping met with their leaders respectively earlier this year. A full-blown tariff war is going to be a lose-lose scenario.

Duncan Wrigley: Moving on to another big issue in global trade.  The pandemic and recent geopolitical events have led many countries to place a greater priority on supply-chain resilience. To put it simply, they don’t want to become too dependent on a single supplier, or a single country, when it comes to sourcing critical components or raw materials. These kinds of worries have led to talk of de-risking, which could mean cutting business ties to China in some areas. Do you think this is a legitimate consideration when it comes to economic policy?

Xu Zeyu: I think the real question is, whether those who advocate de-risking really want an increasingly fragmented global economy, and whether the world will be safer that way. The people who flirt with this idea of de-risking, you know, are always inclined to believe that de-risking from the world’s second-biggest economy, which is China, is a one-way street. It doesn’t seem to cross their minds that such behaviors will trigger similar reactions on the part of China, and by extension other emerging economies with similar concerns. Beijing will also gather a sense of insecurity from all this hostility and mistrust. And it will feel compelled to reduce its reliance on those who de-risk from it, especially in the high-tech sector. This vicious cycle of disconnection will reduce the level of global interdependence. And that will effectively lower the bar for global conflicts, because by then nobody has to bear the cost of economic consequences. So I would argue that in the name of reducing security risks, de-risking policy actually adds to chances of conflicts. So in this sense, I think the best answer to today’s geopolitical dilemma is to forge a much stronger trade and people-to-people tie, not the other way around.

Duncan Wrigley: Now you mention the importance of high-tech development there. And of course, China is pushing for the development in a whole array of futuristic sectors like self-driving cars, hydrogen fuel cell vehicles and AI. How should other countries manage the economic and business competition from China in such areas?

Xu Zeyu: Well, speaking of tech competition, we have to decide what kind of competition we are talking about. Is it a healthy one on equal footing, with open access to each other’s market? Or are we referring to the one that is based on the Cold-War style zero-sum mentality? Beijing still strives for the former kind, despite the growing geopolitical pressure coming from the other side of the Pacific. Well, as a matter of fact, under the current Chinese policy of “high-level opening up,” Beijing welcomes competition especially from foreign companies, and Beijing sees it as a stimulus to the Chinese enterprises’ innovation. Five years ago, in the heat of the U.S.-China trade war, Tesla got an unprecedented preferential deal from the Chinese government on land procurement and foreign capital’s shareholding ratio when it first established its factory in Shanghai in 2019. And just most recently, Tesla is getting closer to launching its full-self driving, or FSD technology in China, which is set to be another game changer in China’s EV industry. And it got a lot of green light from the Chinese government as well. So it will certainly spur up another round of competition from Tesla’s Chinese counterparts. So you see, even today, there is still room to steer the competition in a mutually beneficial manner. Only that the state actors should de-politicize the economic activities as much as they can, and let the market play a bigger role than politics.

Duncan Wrigley: I like your optimism and hope the kind of competition that will come to pass will be more broadly healthy competition. One final question, how do you see the future for trade relations between China and other parts of the world, such as the United States and the European Union?

Xu Zeyu: Well, Since China joined the WTO in 2001, it has been one of the most unwavering champions of the global free trade. But talking about the China-U.S. trade tie, the most important bilateral economic link today, it has largely hinged upon American domestic politics. Because six years ago, when the trade war first broke out, many of us thought it would just be a short aberration due to Trump’s rise to power. Until Biden came into office and kept his predecessor’s China tariffs intact, we realized that this is going to be for the long haul. So we see there is a strong and intransigent bipartisan consensus on the hawkish China policy in Washington, so we would expect more trade barriers in Washington, more protectionist actions from America in the foreseeable future. However, in the meantime, when Washington treats the free trade principles as a build-your-own-pizza menu, it is devastating the global trade regime that it has helped build and thrived on. It is like throwing out the baby with the bathwater. And the American policy behaviors have set up this wrong example. And, many other countries just followed suit, and I think these EU tariffs on China is one of the examples. And it is no coincidence that trade frictions are becoming commonplace in today’s world. But my guess is that this trade war is not just a watershed moment for China-U.S. trade relations. But I think, you know, future historians will look back and see this moment as the beginning of the end of the American hegemony. Because we have this long line of trade powers in history, you know, the Venice, the Hanseatic League, the Spanish Empire, or the British Empire. All of them managed to translate their economic and trade prowess into regional or even global influence. But when they started to become obsessively protectionist, it often signified their eclipsing competitiveness. And, maybe it will be followed by the demise of their global economic dominance. And I think this should serve as a cautionary tale for Washington, because protectionism is essentially a sign of weakness, whether it goes by the name of “friendshoring” “de-risking” or “overcapacity.”

Duncan Wrigley: Thanks very much for sharing your insights and providing some grand historical perspective on this issue from Beijing. That was Zeyu Xu, a senior correspondent with Xinhua News Agency. I’m Duncan Wrigley, Chief China Plus Economist at Pantheon Macroeconomics. This podcast is produced by the SOAS China Institute and there’s more information about our courses and research on our website, SOAS.ac.uk. But for now, that’s all from us here at the China In Context podcast team.

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Subscribe to Sinical China for more original pieces to help you read Chinese news between the lines. Xu Zeyu, founder of Sinical China, is a senior correspondent with Xinhua News Agency, China’s official newswire. Follow him on X (Twitter) @XuZeyu_Philip