Barriers to Chinese exports go against free-trade principles

Christopher Tang says slamming China for using its manufacturing advantages is hypocritical

Who is in the right? US Treasury Secretary Janet Yellen on her visit to China expressed concerns about the surge in Chinese export products, including electric vehicles (EVs) and solar panels. China dismissed these concerns, viewing them as a pretext for the US to implement its protectionist policies.

As a member of the World Trade Organization (WTO), China is entitled to use its capabilities to increase its exports, provided it adheres to established rules.

China became a member of the WTO in 2001, a move strongly supported by the Clinton administration. This support was predicated on mutual benefits: the United States could access a vast market while China could accelerate economic growth.

In the early 2000s, the US underwent what is often referred to as the “China shock”. This was characterised by a surge in imports of inexpensive goods manufactured in China.

While this helped maintain low inflation rates in the US, it came at the expense of domestic manufacturing jobs.

Economic growth in China has elevated hundreds of millions of people from extreme poverty. Concurrently, a growing middle class in China developed a fondness for American products, contributing to US economic growth.

With growing economic interdependence, the US trade deficit with China ballooned from under US$100 billion in 2001 to over US$400 billion in 2018. This trade gap led former president Donald Trump to launch a trade war against China, imposing hefty tariffs on goods imported from the country.

In an effort to garner voter support, particularly ahead of the presidential elections, both Trump and President Joe Biden have strived to protect US jobs in sectors vulnerable to Chinese competition.

In January, reports emerged that Biden was contemplating higher tariffs on EVs and critical minerals imported from China. The following month, Trump said he would escalate tariffs on Chinese goods, possibly to more than 60 per cent, if elected.

But the strategy of using import tariffs to safeguard domestic jobs is both expensive and unsustainable. From 2018-23, US manufacturing jobs saw a modest increase of 3.4 per cent. “Made in America” created jobs but each one arguably cost the taxpayer hundreds of thousands of dollars.

Regrettably, these tariffs have proved to be a financial burden for American businesses and consumers. Specifically, they have increased production costs, as more than half of US imports are raw materials or intermediate goods used in production.

With Trump-Biden tariffs still in effect, China’s post-pandemic economic recovery has been slower than anticipated. Faced with declining consumer confidence and rising debt, Beijing has limited options for gross domestic product growth. Apart from issuing US$139 billion of ultra-long special government bonds, the other option to stimulate growth is by increasing its exports.

China’s manufacturing purchasing managers’ index (PMI) has mostly hovered below 50 since January 2023. (A reading above 50 indicates an expansion in production activity, while a reading below that signifies a contraction.) Given China’s conditions, this suggests excessive production capacity. Even with the manufacturing contraction, with consumer spending remaining sluggish, factories are producing more cars, machinery and electronics than the domestic economy can consume.

Supported by state-directed loans, Chinese firms are flooding foreign markets with goods they cannot sell domestically. In January, China lowered its export prices by more than 8 per cent and boosted exports by more than 15 per cent year on year. The influx of inexpensive Chinese electric vehicles and solar panels could, however, harm developed economies. To safeguard jobs and the economy, the US and European Union are looking at tariffs to restrict the import of Chinese EVs and solar panels.

Meanwhile, economies such as Brazil, India, Mexico and Indonesia fear the influx of cheap Chinese imports of commodities such as steel and chemicals could jeopardise their industries. To protect these sectors, countries are also looking at import tariffs on various Chinese commodities.

But criticising China for capitalising on its manufacturing advantages to produce competitively priced exports goes against the principles of free trade.

From China’s perspective, concerns about its competitive exports are an attempt to distort fair competition. China has established efficient supply chains and long earned the moniker “the factory of the world”. In EVs for instance, Chinese market leaders like BYD have developed a vertically integrated system that encompasses the design and production of EV batteries, chips and entire vehicles.

Due to its lower labour costs, economies of scale, an efficient production system and government subsidies, China has developed the capability to produce high-quality products at a low cost. Consequently, Beijing views the complaints about the so-called China Shock 2.0 as hypocritical.

In response to the concerns raised by the US, China lodged a complaint with the WTO last month. This was to challenge US rules in the Inflation Reduction Act, which stipulate that EVs must use parts from specific regions to qualify for subsidies, thereby excluding products from China and other countries. China argued that these rules were discriminatory and unjust.

Trade barriers are a form of protectionism that can lead to economic stagnation. A more constructive approach would be for the US and China to foster a more open and collaborative relationship, to promote fair and efficient trade.

Supported by statedirected loans, Chinese firms are flooding foreign markets with goods they cannot sell domestically