US President Joe Biden (centre) speaks to union workers after signing orders that increase tariffs on China during an event in the Rose Garden of the White House in Washington on May 14. Biden’s order raises tariffs on a wide range of Chinese imports, including semiconductors, batteries, solar cells and critical minerals in an election-year bid to bolster domestic manufacturing in critical industries. Photo: Bloomberg
Opinion
Outside In
by David Dodwell
Outside In
by David Dodwell
The real reason for the US’ new anti-China tariffs (and it isn’t unfair trade)
In enacting yet another round of tariffs on Chinese exports, the Biden administration has its sights set firmly on its fortunes in November’s election
The US president has to shore up Democrats’ support in rust belt states and clearly thinks American firms and consumers are ready to pay the price tariffs will bring
Forgive my crusty old cynicism, but I find it unlikely that US President Joe Biden’s long list of new tariffs on China’s exports has anything to do with dumping, overcapacity or unfair trade practices.
Rather, in the short term, it has everything to do with November’s presidential election, as well as the unique standing of the US auto industry in the country’s politics and economic soul. In the long term, it has everything to do with recognising shifts in the global economy which from a US perspective – and from that of Europe – point in an unfavourable direction.
Given the political and economic demonisation of China in US politics, which was theatrically demonstrated by Donald Trump during his presidency, Biden and the Democratic Party probably feel they have no option but to exploit the tariff announcement to outflank Trump and the Republican Party. They cannot afford to give their opponents any space to denounce them as soft on China.
Democrats also cannot risk alienating their voters in rust belt states such as Pennsylvania, Michigan and Wisconsin, where efforts to revive US manufacturing are viscerally felt. As the White House said in a fact sheet about the new tariffs released on May 14, Biden will “always have the back of American workers”.
This is especially true of US autoworkers. Remember the lengths to which president Barack Obama went in the wake of the 2007-08 financial crisis, when US auto sales crashed from an annual average of 17 million a year to just over 10 million? Remember the Car Allowance Rebate System, also known as “cash for clunkers”, which was intended to jump-start a recovery?
An old car dropped in an industrial trash bin advertising the Cash for Clunkers programme in Culpeper, Virginia, on August 1, 2009. Americans flocked to auto dealerships to take advantage of government rebates for petrol-guzzling “clunkers” and promptly drained the programme’s US$1 billion in funding. Photo: Reuters
According to the Alliance for Automotive Innovation, the US motor industry supports 9.7 million jobs and accounts for paycheques amounting to US$702 billion. Each auto job is believed to create more than 10 other positions. It drives more than US$1 trillion into the economy and underpins tax revenue amounting to almost US$280 billion.
The US auto manufacturing sector, which includes 20 manufacturers spread across 15 states, accounts for some US$97 billion in exports. The sector is uniquely emblematic of the pride and innovative strength of the US manufacturing economy and the American worker. If Biden and the Democrats cannot secure the support of this base, their hopes of victory this year are in serious trouble.
The threat China’s electric vehicle (EV) sector poses has little to do with subsidies. The real threat – and it is an existential one – arises from China’s early development of a fundamentally different transport supply chain. The shift from internal combustion engines to battery power poses a significant challenge to the US’ long-standing competitive advantage in the motor industry.
As Allianz noted in its Global Auto Outlook in March, China’s dominance in EVs arises from “strong cost advantages thanks to their early mover position, lower labour costs and economies of scale, but they also excel at quality”. Allianz points to the competitiveness within China’s own domestic transport revolution, where 77 car manufacturers are currently slugging it out for market share. Overcapacity might be an inevitable consequence at present, but attrition is likely to take its toll soon enough.
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‘Overtaking on a bend’: how China’s EV industry charged ahead to dominate the global market
‘Overtaking on a bend’: how China’s EV industry charged ahead to dominate the global market
China no longer aspires to play the role of low-cost supplier of low-tech consumer goods, instead allowing these low-income manufacturing jobs to go to other developing economies. Rather, it has opted to go head-to-head with the US and Europe in high-value-added sectors which have long been the West’s domain. This decision has the potential to reconfigure what have been the foundations of the global economy for the past two centuries.
In concrete economic terms, this week’s round of US tariff measures might not add up to all that much. The United States imported about 12,300 Chinese EVs last year with a value of just US$365 million. A 100 per cent tariff on virtually nothing amounts to virtually nothing.
The US is looking out at what is to come, and these tariffs were a loud, pre-emptive signal about its leaders’ determination to protect local manufacturing jobs, bring more supply chains onshore and “de-risk” in any area where China is developing an unduly dominant global position, no matter the cost.
This week’s tariffs show how clearly the US leadership recognises this threat, as well as perhaps how high a price the Biden administration believes American companies and consumers are willing to pay.
The fact that the European Union recognises the same threat explains why it also is in the process of working out how to contend with the challenge China poses. Europe, in particular Germany, is as devoted to its motor industry as the US.
But Europe’s dilemma is more complicated than that of the US. Consider the case of Germany, Europe’s auto powerhouse. It sells US$96 billion worth of vehicles domestically but exports US$156 billion worth, with China as its largest export market. Its average EV cost is about €55,800 (US$60,700), compared to China’s €31,800.
Putting to one side the prospect of Chinese retaliation against protective tariffs from Europe, how would Germany be able to fight off Chinese competitors already selling EVs that are so much cheaper? What are the German exporters’ prospects, in particular in the China market?
Whether the EU chooses to follow Washington’s course is yet to be determined. Next month’s Group of 7 summit is likely to host some energetic debate.
David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades
