The real reasons for the west’s protectionism

GIDEON RACHMAN

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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 joining the World Trade Organization in 2001. A generation later, many in the west have come to the conclusion that time was, in fact, on China’s side.

Bush was making a political judgment. He believed that a China that integrated deeply with the global economy would become more open and more democratic. But under Xi Jinping China has become more closed and authoritarian. It is also more overtly hostile to the US. Meanwhile, China’s rapid economic growth has funded a massive military build-up. 

Some US policymakers now look back to 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 deindustrialisation of America. Rising inequality in the US then helped to fuel the rise of Donald Trump. 

That raises an awkward question. What if globalisation, far from promoting democracy in China, undermined democracy in the US? It would be an amusing historical irony — if we were not living with the consequences. 

Fears about the health of US democracy underpin the embrace of industrial policy by the Biden White House. Biden has retained the tariffs on China imposed by Trump and added lavish subsidies designed to reindustrialise America and give the US the lead in the technologies of the future. The White House sees these policies as crucial to the stabilisation of American society and its democratic system. 

Many in Europe were dismayed by America’s turn towards protectionism and industrial policy. But last week’s announcement of an EU investigation into subsidies for China’s electric car industry suggests that Europe is starting down a similar path. The US tariff on Chinese cars is 27.5 per cent, compared with a current EU tariff of 10 per cent. But if the EU determines that China is unfairly subsidising its car exports, that could rise sharply. 

China’s response to the EU investigations was to accuse Europe of “naked protectionism”. But some influential Americans were more sympathetic. Jennifer Harris, who helped to design US industrial policy in the Biden White House, tweeted: “Welcome Europe. Glad you’re here now.”

If Europe does indeed follow America in becoming more protectionist, it will do so for similar reasons — a fear that Chinese competition is undermining Europe’s industrial base and with it social and political stability. 

The motor industry is the most important manufacturing sector in Europe, particularly in Germany, the core of the EU economy. It is also one of the few areas where Europe has real world-leading companies. Three of the four largest car companies in the world by revenue — Volkswagen, Stellantis and the Mercedes-Benz group — are based in the EU. 

But Europe’s edge in the global motor industry is fast eroding. This year China is set to become the world’s largest exporter of cars. The Chinese are particularly strong in electric vehicles, the cars of the future. This advantage will be hard to shake because China dominates the production of batteries and supply of rare earth minerals crucial to EVs. 

The traditional free market response is to say that Europeans should be grateful if China provides cheap, reliable EVs to European consumers. The fact that these cars will be fundamental to Europe’s green transition provides an added incentive to welcome Chinese EVs. But the social and political reality is more complicated. The automotive sector provides more than 6 per cent of jobs in the EU, according to the European Commission. This is often well-paid work that looms large in the self-image of countries such as Germany. Seeing those jobs migrate to China would be politically and socially explosive. 

Support for the far-right Alternative for Germany is already surging in Germany, with many polls showing it as the second most popular party. Just imagine how it would be doing if the domestic car industry began to crumble as Chinese BYDs replaced German BMWs on the autobahns. 

However, while protectionism sounds like an obvious and tempting solution for the EU, reality is much more complicated. Europe still needs Chinese inputs — in the form of batteries and minerals — to manufacture EVs for domestic sale. China is also the world’s largest vehicle market and the biggest export market for Mercedes and VW. The latter makes at least half its profits there. If Europe slaps high tariffs on Chinese EVs, Beijing would almost certainly retaliate. On the other hand, EU companies are already losing market share in China and this decline seems set to accelerate. 

These complexities could mean that Europe will not ultimately follow the American route and will have to quietly back down from its protectionist threats. On the other hand, the political and social pressure to save the European car industry is only likely to grow. The rise of populist and nationalist parties across Europe will intensify that pressure. 

It is possible that the EU may end up pushing some sort of messy compromise such as “voluntary” export restraints on Chinese EVs. But whatever the eventual outcome, it is clear that industrial policy and protectionism are once again respectable — on both sides of the Atlantic.