“Trade freely with China and time will be on our side.” George W. Bush, former President of the United States, was so confident in the run-up to China’s entry into the World Trade Organization (WTO) in 2001. A generation later, many Westerners are concluded that now is the time was actually on China’s side.
Bush impeached him. He believed that a China deeply integrated into the global economy would be more open and democratic. But under Xi Jinping, China has become more closed and authoritarian. It is also more openly hostile to the United States. Meanwhile, China’s rapid economic growth has financed enormous military expansion.
Some US politicians now believe the decision to admit China into the WTO was a mistake. They believe that the huge boom in Chinese exports also contributed significantly to the deindustrialization of the United States. Rising inequality in the country, in turn, contributed to the rise of Donald Trump.
This raises an unpleasant question. What if globalization, far from promoting democracy in China, undermined democracy in the United States? It would be a funny historical irony if we didn’t live with the consequences.
Fears about the health of American democracy underpin the White House’s stance on industrial policy. Joe Biden has maintained tariffs imposed by Trump on China and added major subsidies aimed at re-industrializing the US and giving it a leadership role in the technologies of the future. According to a report in the Financial Times, the White House believes this policy is crucial to stabilizing American society and its democratic system.
Many in Europe were dismayed by the US turn to protectionism and industrial policy. But the announcement last week of a European Union (EU) investigation into subsidies to China’s electric vehicle industry suggests Europe is heading down a similar path.
The US tariff on Chinese cars is 27.5%, compared to the current Community tariff of 10%. However, if the EU finds that China is unfairly subsidizing its car exports, this tariff could rise sharply.
China responded to the EU investigation by accusing Europe of “naked protectionism.” But some influential Americans were more sympathetic. Jennifer Harris, who helped shape the Biden administration’s industrial policy, tweeted: “Welcome Europe. I’m glad you’re here.”
If Europe follows in the US’s footsteps and becomes more protectionist, it will do so for similar reasons: fear that Chinese competition will undermine Europe’s industrial base and therefore social and political stability.
The automotive industry is the most important manufacturing sector in Europe, especially in Germany, the core of the EU economy. It is also one of the few sectors where Europe has truly world-leading companies.
Three of the four highest-selling automobile companies in the world – Volkswagen, Stellantis and the Mercedes-Benz Group – are based in the EU.
But Europe’s lead in the global automotive industry is rapidly dwindling. This year China will become the world’s largest automobile exporter. The Chinese are particularly strong in electric vehicles (EVs), the cars of the future. This advantage will be difficult to eliminate as China dominates battery production and supplies of rare earths, which are crucial for electric vehicles.
The traditional free market response is that Europeans should be grateful if China makes cheap and reliable electric vehicles available to European consumers. The fact that these cars are fundamental to Europe’s green transition is further incentive to welcome Chinese electric vehicles. But the social and political reality is more complicated.
According to the European Commission, the automotive sector accounts for more than 6% of jobs in the EU. These are often well-paid jobs that shape the self-image of countries like Germany. The migration of these jobs to China would be politically and socially explosive.
Support for the far-right Alternative for Germany is already growing in the country, with many polls showing it as the second most popular party. Imagine what it would be like if the domestic automobile industry began to crumble as Chinese BYDs replaced German BMWs on the highways.
But while protectionism seems an obvious and tempting solution for the EU, the reality is much more complicated. Europe continues to need Chinese inputs – in the form of batteries and minerals – to produce electric vehicles for domestic sales.
China is also the world’s largest vehicle market and the largest export market for Mercedes and VW. The latter earns at least half of his profits there. If Europe imposes high tariffs on Chinese electric vehicles, Beijing would almost certainly retaliate. Furthermore, EU companies are already losing market share in China and this decline is likely to accelerate.
This complexity could lead to Europe ultimately not following the American path and having to quietly back away from its protectionist threats.
On the other hand, the political and social pressure to save the European auto industry is only likely to increase. The rise of populist and nationalist parties across Europe will increase these pressures.
The EU could end up pushing for a complicated compromise, such as a “voluntary” restriction on Chinese exports of electric vehicles. But whatever the end result, it is clear that industrial policy and protectionism are once again respectable on both sides of the Atlantic.