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“Trade freely with China and time is on our side. That was the confident view of George W. Bush, the former US president, in the run-up to China’s accession to the World Trade Organization in 2001. A generation later, many , in the West, came to the conclusion that it was time, in fact, to side with China.
Bush was making a political judgment. He believed that a China deeply integrated into the global economy would become more open and democratic. But under Xi Jinping, China has become more closed and authoritarian. He is also more openly hostile to the United States. At the same time, China’s rapid economic growth has financed a massive military buildup.
Some US policymakers now view the decision to admit China to the WTO as a mistake. They believe that the huge boost this gave to Chinese exports also contributed significantly to the deindustrialization of America. Rising inequality in the United States then helped fuel the rise of Donald Trump.
This raises a delicate question. What if globalization, far from promoting democracy in China, undermined democracy in the United States? It would be an amusing historical irony if we didn’t live with the consequences.
Fears about the health of American democracy underpin the Biden White House’s embrace of industrial policy. Biden retained Trump’s tariffs on China and added lavish subsidies intended to reindustrialize America and give the United States a head start in the technologies of the future. The White House views these policies as crucial to stabilizing American society and its democratic system.
Many in Europe have been dismayed by the American turn toward protectionism and industrial policy. But last week’s announcement of an EU investigation into subsidies to China’s electric car industry suggests Europe is heading down a similar path. U.S. tariffs on Chinese cars stand at 27.5 percent, compared to the current European tariff of 10 percent. But if the EU determines that China is unfairly subsidizing its auto exports, that amount could rise sharply.
China’s response to EU investigations has been to accuse Europe of “outright protectionism.” But some influential Americans were more sympathetic. Jennifer Harris, who helped design US industrial policy in the Biden White House, tweeted: “Welcome Europe. I’m glad you’re here now.
If Europe does indeed follow the American example in becoming more protectionist, it will do so for similar reasons: fear that Chinese competition will undermine Europe’s industrial base and, with it, social and political stability.
The automotive industry is the most important manufacturing sector in Europe, particularly in Germany, the heart of the EU economy. It is also one of the rare areas where Europe has truly world-leading companies. Three of the world’s four largest carmakers by revenue – Volkswagen, Stellantis and the Mercedes-Benz Group – are based in the EU.
But Europe’s advantage in the global auto industry is rapidly eroding. This year, China is expected to become the world’s largest car exporter. The Chinese are particularly strong in electric vehicles, the cars of the future. That advantage will be hard to shake as China dominates battery production and the supply of rare earth minerals critical to electric vehicles.
The traditional free market response is that Europeans should be grateful if China provides cheap, reliable electric vehicles to European consumers. The fact that these cars will be fundamental to Europe’s green transition provides additional incentive to welcome Chinese electric vehicles. But the social and political reality is more complicated. The automotive sector provides more than 6 percent of jobs in the EU, according to the European Commission. It is often a well-paid job that occupies an important place in the image of countries like Germany. Seeing these jobs migrate to China would be politically and socially explosive.
Support for the far-right Alternative for Germany party is already rising in Germany, with many polls placing it as the second most popular party. Imagine what would happen if the domestic auto industry began to collapse as Chinese BYDs replaced German BMWs on the highways.
However, while protectionism seems like an obvious and tempting solution for the EU, the reality is much more complicated. Europe still needs Chinese inputs – in the form of batteries and minerals – to manufacture electric vehicles for sale on the domestic market. China is also the world’s largest automobile market and the largest export market for Mercedes and VW. The latter makes at least half of its profits there. If Europe imposes high tariffs on Chinese electric vehicles, Beijing will almost certainly retaliate. On the other hand, European companies are already losing market share in China and this decline looks set to accelerate.
These complexities could mean that Europe will not ultimately follow the American path and will have to quietly back down from its protectionist threats. On the other hand, political and social pressure to save the European auto industry will only grow. The rise of populist and nationalist parties across Europe will intensify this pressure.
It’s possible that the EU will end up proposing some sort of complicated compromise, such as “voluntary” restrictions on the export of Chinese electric vehicles. But whatever the final outcome, it is clear that industrial policy and protectionism are respectable again – on both sides of the Atlantic.
