European Union member states approved tariffs of up to 45 percent on Chinese-made electric vehicles, or EVs, in a contentious vote today. Just 10 countries voted in favor of the tariffs, while 12 abstained and five voted against, including Germany, the EU’s largest economy and biggest car manufacturer. (Reuters)
Back in 2017, we ran an article on China’s ambitions to become “this century’s Detroit,” capitalizing on the economic opportunity that EVs presented. “China has taken a big but ultimately safe bet on the future of transportation,” Ashley Feng and Sagatom Saha wrote then. “[T]he most likely scenario is that Chinese companies will flood the market to secure a monopoly and push out competitors, as Chinese solar panel companies have done for the past decade.”
Indeed, that is exactly what has happened, and despite Beijing’s ambitions being well-documented, Western carmakers were still caught unprepared to compete with Chinese-made EVs. In many ways, this is simply Economics 101: As heavyweights in an industry grow complacent and less innovative, emerging companies disrupt the status quo and become the new industry leaders.
As Feng and Saha noted, the problem is similar to the one the EU faced a decade ago, when Chinese-made solar panels rapidly came to dominate the industry. In that case, the EU was too slow to act and essentially ended up ceding the market to Chinese producers. Now, the EU seems determined not to make the same mistake, and the tariffs passed today, however contentiously, suggest that Brussels is willing to move aggressively to protect its own manufacturers from unfair trade practices.
Still, there are clear risks to the EU’s approach, not least being the diplomatic implications for EU-China relations. Protective tariffs can also hurt European carmakers that manufacture EVs in China for export back to Europe, in addition to raising costs for consumers. Those carmakers and other European businesses are now also likely to face retaliation from China. And, of course, there’s a very real possibility that the EU waited too long to make this move once again, meaning these tariffs may end up hurting EU consumers without helping EU workers. Put simply, Brussels is relying on a blunt instrument to solve a problem that requires a more sophisticated approach, if it is still even solvable at all.
The fact that the EU is willing to take the risk, then, highlights the broader shift in how the West is approaching global trade. China’s determination to solve its own domestic economic problems by exporting its overcapacity confronts the West with the threat of a China Shock 2.0, only this time in the cutting edge technologies that will shape the green transition, instead of in the lower-end manufactured goods that characterized the first China Shock in the 2000s. The domestic political ramifications of that happening again explain why Brussels and Washington are now adopting a mercantilist and protectionist approach to trade—and specifically trade for the green transition—even at the risk of greater tensions with and retaliation from Beijing.
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