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https://www.theage.com.au/business/the-economy/the-us-asks-for-help-to-fight-china-threat-20240522-p5jfm1.html

Fresh from quadrupling the tariffs on some key Chinese imports, the US is now trying to enlist Europe’s support in combatting the threat of a flood of cheap manufactured goods from a Chinese industrial base awash with excess capacity.

In a speech in Germany on Thursday, the US Treasury secretary, Janet Yellen urged the European Union to impose restrictions on imports from China, similar to those the US announced last week when it raised the duty on EVs to 102.5 per cent and also hiked the tariffs on Chinese batteries, solar cells, critical minerals and legacy semiconductors. The Biden administration had previously asked its trade office to triple the duties on steel and aluminium from China.

US Treasury Secretary Janet Yellen was at pains to say that the US policies weren’t anti-China policies but that a co-ordinated response was warranted because China’s actions on trade posed a threat to the global economy.CREDIT:BLOOMBERG

“China’s industrial policy may seem remote as we sit here in this room,” Yellen said in her speech at the Frankfurt School of Finance and management, “but if we do not respond strategically and in a united way, the viability of businesses in both our countries and around the world could be at risk.”

She said, noting that the supply chain for critical minerals was overconcentrated in China, that the US wasn’t seeking to couple from China but to diversify and was pursuing a “friendshoring” approach to deepen economic ties with partners and allies to build resilient supply chains that advanced energy and economic security.

“We have also directly engaged with China on areas where the US and Europe, along with many others, are concerned by China’s actions, from its pursuit of economic coercion to macroeconomic imbalances that are leading to industrial overcapacity,” she said.

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The Europeans are also anxious about the implications for their own manufacturing industries of China’s response to weaknesses in its domestic economy, largely due to its property sector’s woes.

China has ramped up its support for strategic sections of its manufacturing base, particularly those that relate to green technologies. With domestic demand faltering, that has led to significant excess capacity in its factories and a swelling tide of cheap exports.

The Europeans are also worried about those exports but, while they have launched investigations of China’s exports of EVs, wind turbines and medical equipment to Europe – and are likely to impose higher tariffs on them – are less overtly protectionist than the Americans.

The European Commission’s president, Ursula von der Leyen, also speaking on Tuesday, said that the EU shared some US concerns about China and its overcapacity but, rather than imposing broad tariffs, it had a different approach – “a much more tailored approach.”

The Europeans appear more concerned than the US about taking actions that may not comply with World Trade Organisation rules, are more heavily engaged in two-way trade with China and, given Europe’s commitment to decarbonisation, are more dependent on China for access to green technologies.

China needs its export strategy to succeed if it is to sustain even a moderate level of economic growth.CREDIT:AP

The EU wants fair competition on a level playing field rather than, as the US is seeking through its punitive tariffs, its efforts to limit China’s technology ambitions and the massive state spending that is flowing from Biden’s Inflation Reduction and Chips legislation, to tilt that field towards its own industries.

Germany, in particular, has been fearful that pushing too hard on penalties for China’s subsidies of its electric vehicles and their components could see Beijing retaliate with restrictions/duties on imports of European cars. BMW and Volkswagen – and other Western carmakers – also have a significant presence within China’s auto industry.

While there are some analysts who have calculated that, to offset China’s subsidies, the EU would have to impose tariffs of up to 50 per cent, there is an expectation that any extra duty (there’s already a 10 per cent tariff) on imported EVs) will be significantly lower and not high enough to lock China out of the market, as the US is seeking to do.

What Yellen is seeking to do in her tour of Europe (she is moving on to Italy next) is to present a bigger threat to China’s exports, hoping that would cause the Chinese leadership to rethink their manufacturing-led growth strategy and dial back the subsidies and the excess production capacity in their manufacturing base.

In the larger economic picture, no one benefits from trade wars.

Between them, the US, Europe and another US ally, Japan, represent about 60 per cent of global GDP. If they co-ordinate their trade strategies China would face a far more difficult economic challenge than it does today.

It’s not just the Western countries that are agitated about China’s new bout of mercantilism although, having experienced the decimation of their low-skilled manufacturing bases in the late early 2000s as China’s export drive gained real momentum, they are the most vocal.

In the “Global South,” where China has invested heavily in building trade and broader economic and geopolitical relationships, Mexico, Brazil and Chile have started putting tariffs on imports of steel from China to protect their domestic industries.

The Latin American countries are likely to be more cautious than the US or Europeans, given that China is the major market for most of the commodities they produce and whose income they are reliant on. China has shown – its 2020 bans on a range of Australian exports is a recent example – that it is prepared to punish dependant trading partners for real or perceived slights.

Yellen was at pains to say that the US policies weren’t anti-China policies but that a co-ordinated response was warranted because China’s actions on trade posed a threat to the global economy.

European Commission president Ursula von der Leyen said that the EU shared some US concerns about China and its overcapacity but it had a different approach.CREDIT:AP

She said China’s ambition of dominating clean energy technologies and other sectors of global trade could also prevent countries, including emerging market economies, from building the industries that could power their growth.

China has hinted that it could retaliate against the US tariffs and any imposed by the EU with tariffs of its own on auto imports and other products. It has already launched an anti-dumping investigation into imports from the US, EU, Japan and Taiwan of a chemical, polyoxymethylene copolymer, widely used in the auto sector.

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An accelerating escalation of trade hostilities, with worse to come if Donald Trump regains the US presidency and follows through on his threat of a 10 per cent universal tariff on all imports and a 60 per cent tariff on those from China, is in no-one’s interests but seems inevitable.

China has committed itself to the domination of key 21st century technologies and, having steadfastly refused to consider any large-scale attempt to stimulate domestic demand, needs its export strategy to succeed if it is to sustain even a moderate level of economic growth.

The US, and to lesser degree Europe and others, are making it clear that to protect their own economies and jobs (and, in Joe Biden’s case, perhaps, his presidency) they will take actions that may, to varying degrees, conflict with China’s ambitions.

That’s not going to help global growth or the longer-term competitiveness of those economies than introduce significant tariffs and subsidies for domestic production and can only add to geopolitical tensions and instability. In the larger economic picture, no one benefits from trade wars.