Can China’s export machine run without the West?

Employees check rain boots for export at a factory in Lianyungang, China, as Beijing revs up its export engine to drive growth. (AFP)
Employees check rain boots for export at a factory in Lianyungang, China, as Beijing revs up its export engine to drive growth. (AFP)

Summary

Beijing looks to developing markets after facing new tariffs in the U.S. and Europe.

China’s exports are still going strong. That has created tension with the West and led to a new wave of tariffs on its eclectic vehicles. But it is also reshaping global trade.

The question for Beijing is whether a pivot to the developing world will be enough to keep its export machine humming.

China’s latest trade data released last week said a lot. Exports in May increased 7.6% from a year earlier in dollar terms, while imports rose 1.8%. The implosion of China’s housing market has dragged down domestic demand, so Beijing has revved up its export engine to drive growth.

That has, however, caused much unease in Western capitals. The Biden administration has announced new tariffs of 100% on Chinese electric vehicles and a 25% tariff on Chinese EV batteries and parts, which will come into effect in the coming months.

On Wednesday, the European Commission unveiled new duties on Chinese EVs ranging from 17.4% to 38.1% following an antisubsidy investigation. In a statement, it said that it found unfair subsidies throughout the entire Chinese EV value chain and that “the influx of subsidized Chinese imports at artificially low prices therefore presents a threat of clearly foreseeable and imminent injury to EU industry."

Some of the recent strong growth could be due to manufacturers trying to front-run potential trade restrictions. China’s exports to the U.S., for example, rose 3.6% on-year in May, contrary to the trend of the past couple of years. But overall, China has been selling less to the West and more to Southeast Asia and Latin America. 

Exports to Southeast Asia in the first five months of this year rose 12% from the same period two years earlier. Over the same time, China exported 17% less to the U.S. In 2023 alone, China’s exports to the U.S. dropped 14%.

This could partly be because Chinese companies are rerouting their trades through countries like Vietnam or Mexico, though those countries have also been building up lower-end manufacturing while China moved up the value chain.

China is also finding new markets. Exports to Russia have surged 70% over the past two years as Western sanctions cut the country off from much of its trade with others. China has been shipping lots of gas-powered cars to Russia, an area where China now has excess capacity given the rapid transition into EVs in its domestic market.

But more important, China is selling different types of products than before. New segments including EVs, batteries, solar panels and mature chips accounted for 8.5% of China’s total exports last year, compared with 4.5% five years earlier, according to Morgan Stanley.

These exports have been met with a backlash in Europe and the U.S. since they are also trying to build up technologies necessary for the green transition and the rise of artificial intelligence. Chinese goods with affordable prices might, however, be welcomed in many lower-income countries. 

Brazil’s sales of EVs and hybrids nearly doubled in 2023, according to dealer association Fenabrave. China’s BYD accounted for more than half of the sales in pure EVs while Chinese automakers were also among the top sellers of hybrids.

Southeast Asia is now a bigger destination for China’s exports than the U.S. or the European Union. Southeast Asia and Latin America together have made up nearly a quarter of China’s exports so far this year, still smaller than the combined 29% share of the U.S. and the EU, but altogether a sizable market with good growth potential.

Still, while many of the developing countries are more friendly toward China generally, they aren’t immune to domestic political pressures and might still set up barriers to Chinese imports.

Many Latin American countries have raised tariffs on steel to protect domestic industries. Brazil has recently reimposed tariffs on EVs to encourage domestic production, starting at 18% and rising to 35% in 2026. In a move that could ameliorate some tensions, Chinese companies have been setting up local manufacturing that could create jobs. BYD, for example, is building an EV factory in Brazil.

China’s export pivot toward developing countries has worked out so far. But in an increasingly protectionist world that playbook will also face limits.

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