A NEW FRONT IN THE U.S.-CHINA TRADE WAR / GEOPOLITICAL FUTURES

A New Front in the US-China Trade War

Washington’s expansion of tariffs will hurt Beijing in the long run, if not the short term.

By: Victoria Herczegh

In mid-May, U.S. President Joe Biden unveiled a proposal for new tariffs on a variety of Chinese imports. 

This year, the U.S. will raise tariffs on Chinese electric vehicles to 102.5 percent from 27.5 percent, double the rate on solar cell imports to 50 percent, and more than triple the rate on lithium-ion EV batteries to 25 percent. 

Tariffs on certain steel and aluminum products will rise to 25 percent, while next year computer chip tariffs will double to 50 percent. 

The proposal expands tariffs Donald Trump put in place during presidency, and comes amid concerns about manufacturing overcapacity in China brought on by extensive subsidies and alleged forced technology transfers meant to make its products cheaper. 

(China has long denied such accusations.)

Beijing claims that it has its ways to come out of the situation unscathed. 

But the reality is somewhat different. 

Though most of the relevant industries are unlikely to be immediately affected by the new tariffs, the long-term consequences will certainly cause unwanted trouble, which China has little space to counter given its current economic problems. 

And because some alternative trading partners have similar concerns as the U.S., it will be all the more difficult for them to trust Beijing and its trade policies.

It appears as though Chinese officials expected the U.S. to impose these restrictions. 

Speaking at a forum involving China’s biggest investors the day before the announcement, Vice Premier Han Zheng spoke in detail about the need to find new partners for different areas of development. 

Yet even without the expectation of new tariffs, China has been in dire need of investment: According to recent data released by the Commerce Ministry, foreign direct investment stood at 301 billion yuan ($41.6 billion) in the first quarter of this year, down 26 percent from a year earlier and 56 percent lower than in the previous quarter. 

This follows China's worst year of FDI investments in the past three decades – just $30 billion in 2023. 

All this despite Beijing’s efforts to improve market conditions and create favorable circumstances for investment. Amid FDI outflow and weak domestic demand, trade with the U.S. has played a significant role in keeping China’s economy afloat. 

The total value of U.S. trade in goods with China in 2023 came to about $575 billion, with exports from China accounting for about $427 billion. 

The new tariffs are meant to change that.

 

It’s no surprise that of all the new U.S. tariffs, the one governing EVs – an important up-and-coming industry in China – was increased the most dramatically. 

Washington doesn’t have to be concerned about an immediate impact on U.S. customers or the car market since very few Chinese EVs are being sold in the U.S. 

Polestar, one of China’s leading EV manufacturers, sold just 2,200 vehicles in the U.S. in the first quarter of the year. 

For the same reason, China doesn’t have to worry so much about this new tariff.

Exports to the EU are a different matter. From 2020 to 2023, the total value of EU imports of Chinese EVs increased to $11.5 billion from $1.6 billion, accounting for 37 percent of all EV imports in the bloc. 

Even so, the European market may not be as open and inviting as China hoped it would be.

According to recent reports, imported Chinese cars, many of them EVs, are piling up at European ports due to insufficient demand. 

This is caused by various factors, including a lack of brand image compared to more established Western counterparts, rapid outdatedness due to new models being introduced every few months, and general buyer wariness of China’s economic troubles and questionable trade practices.

And it’s not just European customers who are suspicious. 

Earlier in May, EU foreign policy chief Josep Borrell openly expressed his concerns about Chinese car production and specifically noted the threat posed by overcapacity. 

Meanwhile, the European Commission is close to finishing an anti-subsidy investigation into Chinese EV imports meant to determine whether there is an illegal subsidization element and how seriously European EV makers are being hurt by China’s activities. 

The European Commission already has evidence of subsidies existing in the sector and is likely to join the U.S. in imposing tariffs on Chinese EVs, albeit at a lower rate. 

(It’s difficult to synchronize tariffs, which would need to be planned carefully to mitigate the risk of dismantling global supply chains and harming countries and companies that rely on the Chinese market.)

Still, some of China’s advantages in the new-energy sector should not be ignored. 

In the case of graphite – one of the products affected by tariffs – China is the largest producer in the world and processes about 90 percent of the world’s supply. 

The U.S. produces just 1 percent. So when actually imposing the tariff, the U.S. will have to consider ways of sourcing non-Chinese natural graphite – which will cost more and has the potential to financially harm U.S. automakers. 

As for solar panels, more than 80 percent of their manufacturing now takes place in China, and the cost of making a panel in China is 60 percent cheaper than in the U.S. American manufacturers have called for tariffs for some time, but their needs go against the interests of some renewable energy developers that rely on China-linked companies for critical components. 

This has created a significant divide in the country, highlighting the difficulty in deciding how best to protect the U.S economy.

Importantly, the short-term damage the tariffs will inflict on the Chinese economy is minimal. 

In the case of EVs and other green technologies, Latin America is still open to Chinese investment, the bulk of which goes to Brazil, Argentina and Mexico. 

As for the solar industry, the U.S. tariff may seem insignificant for China, since exports of solar cells to the U.S. accounted for less than 0.1 percent of China’s total exports last year. 

Shipments of completed solar panels to the U.S. reached $13.15 million in 2023, just 0.03 percent of China’s solar panel exports. 

(Most Chinese solar cell exports go to Europe and Latin America.) 

But even minimal short-term damage is cause for concern. 

With a rapid FDI outflow and weak domestic demand, Beijing needs to maintain access to its large export markets, and it cannot afford to lose the trade value it has with the U.S. and Europe at the same time.

Unfortunately for China, it doesn’t have many options to fight back. 

Raising tariffs on imports of U.S. high-tech goods, for example, could jeopardize its much-needed tech development. 

Increasing already high subsidies would just make other countries lose their trust in China, potentially encouraging them to implement similar protections as the U.S. and EU. 

The reality is there is a certain amount of risk for both sides. 

Washington may want to consider when and how to implement the tariffs so that global supply chains remain intact and U.S. entities or allies don’t get hurt financially in the process. 

Negotiations will be crucial for both sides. 

China will need to avoid the long-term consequences of the coming restrictions, and the U.S. will need to avoid alienating China so much that it incites hostility and brews trouble in one of the nearby conflict-prone areas.