China could soon be battling trade wars on two fronts, with Europe pushing ahead with big tariffs on Chinese electric cars and a deepening contest looming with the US.
The double crunch could still be avoided but conditions were only to get tougher for Beijing, according to analysts.
The European Union’s tariff increases on Chinese-made electric vehicles took effect on Wednesday after months of negotiations with China fell through.
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A top rate of 35.3 per cent will apply to EVs from Chinese-state owned SAIC Motor and its subsidiaries, on top of a baseline 10 per cent duty that applies to all EV imports, which by some estimates account for about 2 per cent of total trade value between China and the EU.
China responded to the decision by filing a complaint with the World Trade Organization, saying it would take “all necessary measures to resolutely safeguard the legitimate rights and interests of Chinese companies”.
In Beijing on Tuesday, Finnish President Alexander Stubb said he was concerned that there would be a cycle of escalating tariffs.
“We need to avoid that. We need to have a level playing field,” Stubb said.
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Zhou Xiaoming, former deputy representative of China’s Permanent Mission to the UN Office in Geneva, said the EU anti-subsidy inquiry that led to the tariffs set a bad precedent that could be expanded to other goods and copied by other countries.
Zhou said China saw the tariff issue as a matter of principle and would not accept the duties, but there was potential for both sides to negotiate a minimum price for Chinese EV imports into the EU to get around the tariffs.
Negotiations are expected to continue, with China’s Ministry of Commerce saying on Wednesday that it was conducting a “new phase of consultations” to reach an “acceptable” solution with the EU.
“Price undertaking involves the issue of interests and is negotiable,” Zhou said, adding that in his view, China and the EU had yet to enter a trade war.
China also faces the possibility of further pressure from the United States.
Washington has in place a range of tariffs on Chinese goods – including EVs, solar cells and semiconductors – aimed at protecting American jobs from a feared flood of cheap Chinese imports.
Former US president Donald Trump, who imposed duties on around US$300 billion worth of mainland imports when he was in office, has threatened to implement a 10 per cent blanket tax on all foreign goods, and tariffs of up to 60 per cent on Chinese goods.
Wang Xiaosong, a professor at the school of economics at Renmin University in Beijing, said geopolitical factors meant that growth in Chinese exports to developed countries was already slower than that to developing countries.
And while the EU and the US might not apply joint pressure on China, each were likely to have their own containment strategy towards Beijing, Wang said.
“The external environment [for China’s foreign trade] is already less than ideal but it is likely to deteriorate further in the future. This trend can be said to be irreversible,” he added.
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Yu Jie, senior research fellow on China at Chatham House, said China’s trade frictions with the US and the EU could prove “quite challenging” for Beijing both in economic and foreign affairs terms.
In response to trade wars on multiple fronts, China might dial down its Wolf Warrior diplomacy and resume dialogue with “politically difficult” but economically significant players. Beijing might also adopt punitive measures targeting European and American agriculture sectors, she said.
Scott Kennedy, senior adviser at the Centre for Strategic and International Studies, said China “brought this trade war [with the EU] on itself by funnelling billions of dollars” in industrial policy spending into the EV sector and other industries.
According to Kennedy, the most effective response that China could make to other countries’ countermeasures would be to reform its economy in a pro-market direction.
This would include curtailing its industrial policy spending and creating a level playing field within China for both domestic and foreign firms, he said.
Beijing should also provide a more effective reassurance that Chinese companies do not exist to serve China’s national security aims, Kennedy added.
Jack Zhang, assistant professor of political science at the University of Kansas, called the fresh EU tariffs a diplomatic setback for Beijing but he suggested that it would not escalate into a trade war unless China retaliated disproportionately.
China could respond with regulatory barriers to harass European firms in China but doing so could hurt its corporate allies and give ammunition to the EU to push for further economic decoupling.
China could also respond with tit-for-tat tariffs but, Zhang said, its options were limited and such a response could inflict collateral damage on price-sensitive Chinese consumers.
China would be at a “structural disadvantage” if it engaged in a trade war with the EU because it exported much more to Europe – including hi-tech goods – than it imported from the bloc.
Zhang said the bigger challenge for Beijing was the ongoing trade war with the US, especially if Trump was re-elected and followed through on his campaign promise of 60 per cent tariffs on Chinese exports to the US.
The strategically prudent thing for China to do is to avoid getting into multiple trade wars
Jack Zhang, assistant professor of political science
That, he said, would be “much more disruptive” than the EU tariffs on electric cars, adding that China was similarly limited in its options to retaliate given its export reliance on the US.
“It is imperative for China to avoid a multi-front trade war and this is why we have seen efforts to end trade conflicts with Australia [over wine] and seek new markets for its exports like Russia and India,” he said.
“The strategically prudent thing for China to do is to avoid getting into multiple trade wars, even if that means restraint in the short-run.”
Renmin University’s Wang suggested that regardless of who won, the next US administration would likely adopt very tough trade policies towards China and prolong the trade war.
But China did not need to be too pessimistic as Chinese exports to both the US and EU grew in the first three quarters of the year, indicating that those partners still depended heavily on China for many products.
“The US wants to restructure the industry chain and supply chain through friendshoring and nearshoring but this is unfeasible in the short term,” he said.
He also said China should invest more in research and development to produce more original leading-edge technologies, which would help to counter the US stranglehold.
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Zhou suggested that trade was no longer the ballast of US-China relations but had instead become a source of problems, leading to political and diplomatic issues.
He said the idea that fostering economic ties would ensure good relations between two countries was now outdated, as political considerations of national security had become more dominant in both the US and EU, with both willing to incur economic costs in defence of their national security interests.
Zhou suggested that China should nevertheless try to hold on to its existing markets in developed economies like the EU, US and Japan, where its exports carried higher added-value.
“China’s development still relies on opening,” he said.
“In the long run, we still need to open up new markets, including speeding up free-trade zone negotiations with some important regions, such as the Gulf Cooperation Council and Latin America.”
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