How does the EU deal with Chinese trade?

The European Union (EU) recently announced that it will impose tariffs on Chinese electric cars. The move follows an investigation launched by the European Commission in October and an intense counter-offensive by Beijing and some European countries, notably Germany. While they try to portray all this as unfair protectionism, the root cause lies in China's own economic model: overcapacity. In its external communications, China denies the existence of the problem. Internally, however, its leaders talk openly about combating overcapacity in the face of negative domestic consequences. Beijing faces a dilemma. On the one hand, strong support for manufacturing is necessary for economic growth.

Excess capacity

On the other hand, overcapacity, which in the past has decimated entire industrial sectors around the world, is likely to be repeated in some new sector. Some analysts say it's a problem for developing countries, including Latin America, too. Senior European officials and companies have complained for years that they do not have the same access to the Chinese market as their Chinese counterparts in the EU. They have criticised Beijing for heavily subsidising emerging sectors such as renewable energy, which then decimate their European competitors by flooding world markets with their cheap products. Each time this happened, Chinese officials silenced Europe with empty promises.

Now, however, even the most powerful Eurocrats are getting tougher on China, and von der Leyen has decided to seek an investigation into Chinese electric cars. Never before has the European Commission launched such an investigation on its own initiative and without a formal complaint from the industry. However, the move is not without context, as the Commission has launched several investigations into China's unfair trade practices over the past year and a half. One part of the EU is running out of patience.

Electric cars

The problem with Chinese electric cars stems from overcapacity. Essentially, Chinese factories are producing an excessive amount of goods that domestic demand cannot absorb, leading China to export them en masse at prices that are often well below market. This is not the first time this has happened. In repeated cycles, the world has seen China's overcapacity destroy global steel markets, the European solar industry, and many others. China's strategy to increase domestic demand in the post-Kowitz era coincides with overcapacity in electric vehicle manufacturing, which is one of three key sectors for the Chinese government (along with lithium batteries and solar cells).

Chinese English-language media, think tanks and like-minded academics immediately parried this argument, saying that the Chinese overcapacity theory is a fiction and that Western tariffs on electric cars are nothing more than protectionism. But it is Chinese leaders who are talking about industrial overcapacity because it can spawn many unsustainable businesses and lead to deflation, undermining the banking sector and local governments' fiscal policies. Chinese Premier Li Qiang warned in March that China needs to prevent overcapacity by strengthening industrial policy and more targeted investment. Other leaders have issued similar warnings. At least domestically, China recognises that overcapacity is a problem that needs to be addressed. The question is whether China really wants to solve it.

Meanwhile, the European Commission concluded a few days ago that electric cars are unfairly subsidised and announced tariffs of up to 38%. These are not the 100% tariffs announced by the US, but they are still high given Beijing's frantic attempts to stall the investigation for months. These include retaliatory anti-dumping investigations into cognac and pork to penalise France and Spain respectively for supporting the Commission's efforts. As usual, German carmakers lobbied China for fear of being penalised too.

Economic model

So, if China internally recognises overcapacity, why has it not yet addressed the problem? Perhaps because the Chinese economic model is based on state support for producers, foreign capital inflows through large trade surpluses and investment abroad. In other words, exported goods create a trade surplus for China, which then invests that money abroad. While this may cause problems in the short term, this model allows China to destroy competition, dominate markets, and buy political influence. Latin America and the rest of the developing world may suffer the most, as a US consultancy recently concluded, "Developing economies are likely to run larger trade deficits with China as they become more dependent on Chinese goods."

Indeed, China's state-created surplus export capacity is rather reminiscent of British colonial policy, which took raw materials from the natives and flooded their markets with cheap goods, while constantly investing the economic surplus abroad to dominate more and more markets. If Beijing had wanted to, it could have solved the overcapacity problem. Under Xi Jinping, its control over the economy is solid. But it seems clear that the Communist Party believes the benefits of this situation outweigh the problems. Xi does not care about the economy, politics and global struggle are much more important to him, as communist theory dictates.