Trade War II

For months now, China has been flooding markets around the world with exports of low-priced, high-tech goods. On Beijing’s orders, China’s banks have primed its manufacturers to increase production dramatically—with the banks issuing about US$670 billion in new industry loans in 2023 alone, compared to $83 billion in 2019. China now spends more on its semiconductor industry than the United States and Europe combined spend on theirs. It produces around 80 percent of the world’s solar panels, nearly 60 percent of electric vehicles, and more than 80 percent of EV batteries. And now, China’s trade surplus in manufactured goods is the largest any country has recorded since the Second World War.

In Washington, the U.S. administration is responding by raising tariffs and other barriers to block Chinese companies from winning control of critical markets—and locking out U.S. firms. On May 14, the White House announced that it’s increasing tariffs on Chinese semiconductor chips and advanced batteries, and boosting the 25 percent tariff on Chinese EVs to 100 percent. It’s also strengthening tariffs on Chinese solar panels, with solar-panel imports—nearly all from China—having climbed 82 percent over the past two years, while prices have dropped 50 percent. Addressing the many forms of state support for Chinese high-tech manufacturers—government subsidies, low-cost financing, land grants, and reduced energy prices—U.S. President Joe Biden said in April, “They’re not competing. They’re cheating.”

European countries have, in recent years, been reluctant to place duties on imported goods, but the EU is now taking steps to control Chinese exports. Brussels is weighing tariffs on China’s EVs and is investigating the legality of its subsidies for solar panels, steel, wind turbines, and medical devices. (In Germany and the Netherlands, solar panels have now become so cheap that people use them to build garden fences.) Xi Jinping, the general secretary of the Chinese Communist Party, visited Europe from May 5-9 partly to make the case against potential trade barriers. But after meeting Xi in Paris, Ursula von der Leyen, the president of the European Commission, said the EU was “ready to make full use of our trade-defense instruments”—adding, “Europe cannot accept market-distorting practices that could lead to deindustrialization here at home.”

Why does a new trade war seem to be breaking out between China and the West?

Alice Han is the China director at the consulting firm Greenmantle, where she leads research on China’s economy, technology, and politics. As Han sees it, Beijing is committed to pursuing continued economic growth through enormous global exports; the U.S. and the EU are committed to preventing it from dominating markets for advanced manufacturing; and electoral politics in America and Europe are meanwhile driving their leaders to take increasingly hawkish positions against China. But crucially, Han says, non-Western countries are also becoming concerned about China’s export surge, giving Washington and Brussels potential allies in their campaign to contain Beijing—not just economically but politically …

Michael Bluhm: What exactly is China doing here?

Alice Han: If we look back to the 1980s, when the Chinese Communist Party’s then-chairman, Deng Xiaoping, reformed China’s economy—and opened it up to the world—much of his plan focused on export-oriented growth. In the past 15 years or so, however, China’s leaders have talked more and more about basing a greater share of the economy on the service sector and household consumption—like in the U.S. But even though they want this shift, China’s political and economic systems haven’t been able to pull it off.

Why not? Because these systems still push the Chinese economy toward manufacturing for export, toward building infrastructure, and toward state investment—often state investment into manufacturing for export and building infrastructure. What Beijing hasn’t managed to do is enact policies that promote consumption, like raising wages or increasing household wealth.

At the same time, China’s economy has run into problems in the past few years—even without the West trying to contain it politically—so Chinese GDP growth has slowed. And these economic problems are driving the government back to its traditional way of stoking demand in the economy: producing exports.

That shift aligns with “Made in China 2025”—a government plan released in 2015 for dominating global production of high-tech manufacturing—which had mostly fallen by the wayside on account of the geopolitical backlash it provoked.

The objectives represented in the plan never changed, though. It’s clear now that Beijing’s top leadership is aiming for Chinese dominance of many critical technologies—semiconductor chips, critical minerals, and EVs being just a few examples.

Whoever ends up in the White House next January, they’re going to extend its aggressive position on China across an array of issues—from technology to trade, to investment, and even to student and scientist exchanges.

The Chinese Communist Party’s broader strategy here has two ultimate aims. One is to maintain a high rate of economic growth, and the other is to ensure China remains a global digital superpower. So the surge of Chinese tech exports is both a reactive response to the headwinds facing China’s economy and a proactive push for China to dominate the world in the tech sector.

Bluhm: How is the U.S. responding?