China must respond to Biden’s new tariffs with an eye on Europe

China has a much better chance of nudging the European Union on free trade. Beijing should hit US cars with stiff tariffs to send a warning signal to Brussels

Andy Xie

Published: 8:30pm, 22 May 2024

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China’s main interest is preserving the system of world trade. It is the largest trading economy by far and its future depends on its trade success. A tit-for-tat trade war with the United States spiralling out of control brings no advantage to China.

Thus, in responding to US President Joe Biden’s new tariffs on Chinese imports, Beijing’s chief objective should be to deter the European Union from following suit. Slapping 100 per cent tariffs on US car imports, which are worth about US$5 billion, should do the trick.

The Biden administration announced stiff tariffs on Chinese semiconductors, solar cells and electric vehicles, even though the US hardly imports EVs from China. Clearly, Biden intends to win support among unions and voters in swing states such as Michigan and Pennsylvania, which are closely associated with the car industry, ahead of the US presidential election in November. At the same time, the new tariffs don’t apply to the internal-combustion-engine cars that US companies manufacture and import from China; evidently, Biden wouldn’t want to upset the carmakers either.

In theory, Chinese carmakers can still export their own combustion-engine cars to the US. But the US Department of Commerce is likely to close this loophole with its investigation into possible security risks posed by “connected vehicles” from China that use hi-tech software and sensors. New US restrictions could then be defined fuzzily so as to be interpreted to apply only to Chinese companies.

To put it another way: Washington doesn’t have a problem with cars produced in Chinese plants for the US market if they are being imported by American carmakers. When the day comes that US companies want to import EVs from China too, you can bet the US government will find a way to accommodate that.

Biden’s other tariffs, such as those on Chinese semiconductors and solar cells, complement the subsidies and tax credits offered by the Chips and Science Act and the Inflation Reduction Act. Yet, the gap between green tech production costs in China and the US is not only vast but it is widening.

The tax credits for US solar manufacturing are not enough to incentivise long-term investment, and the tariffs on Chinese solar cells, which will double to 50 per cent, are meant to protect the industry in the meantime. Even so, it is not clear that they are high enough; the US is quite likely to raise them again.

While the Chips and Science Act has incentivised established players such as Taiwan Semiconductor Manufacturing Co (TSMC)and Samsung to set up cutting-edge factories in the US, China is pushing into older, so-called legacy chips that are needed throughout the global economy, and the more established players could face declining revenue from those chip segments as a result. This could affect their ability to finance chip development, and Biden’s tariffs seek to protect their financial viability.

01:52

US proposes new round of tariffs on China in latest trade war escalation

In effect, the United States is withdrawing from global competition. Driven by industrial decline, which is reflected in its large trade deficit, the US is abandoning the global trading system whose establishment it oversaw after World War II.

The US has plenty of natural resources and can keep its industrial sector going behind a protective wall, even if this leads to inflation, tighter monetary conditions and serious resistance. Washington’s thinking is that the US can’t remain a superpower without a strong industrial sector, and thus protectionism is the only way to revive manufacturing fortunes.

Europe doesn’t have the same ambition or resources as the US. It needs to import raw materials to sustain its economy. It must remain engaged in global trade. Thus China has a much better chance of nudging the European Union on free trade. Beijing should warn Brussels against imposing Biden-style tariffs by increasing its tariffs on US cars to 100 per cent.

At about US$5 billion a year, the US’ car exports to China are not large. American carmakers have been losing market share in China and elsewhere. They are just not competitive. Their car exports to China are dwindling anyway; higher tariffs would merely accelerate an unstoppable long-term trend.

18:59

Why the EU, US are concerned about China’s overcapacity

On the other hand, Europe exports tens of billions of dollars in luxury cars to China. European car brands have high profit margins and are important to manufacturing sectors in many countries. With the sustainability of Europe’s manufacturing base at stake, an implied threat of the imposition of tariffs on European cars would be a power move. China can live without European luxury cars, never mind the grumbling of a few rich people.

However, China should not respond to Biden’s tariffs by restricting exports of materials or equipment that the US green tech industry needs. Sure, this would hamper the Inflation Reduction Act. But slowing the green transition is in no one’s interest. Rather, it is in China’s interests to supply US green tech because it adds to the scale of Chinese green tech.

China’s tariffs on US cars would have an immediate impact, whereas Biden’s tariffs on Chinese EVs are largely psychological. They might make an meaningful difference in November, when Pennsylvania and a handful of battleground states could decide the election.

However, although Donald Trump might have spoken wildly in office, the world has become more chaotic on Biden’s watch. The prospect of Trump returning to the Oval Office might not be so bad.

Andy Xie is an independent economist