Any hope that China and the European Union (EU) might amicably resolve their widening trade imbalance is rapidly fading. A policy document published last week shows Beijing leaving little scope for compromise, giving Brussels few options but protectionist measures.
Beijing’s defiance is wrongheaded. Instead of picking a fight with a major trade partner, China should work with the bloc to preserve market access—especially when it is struggling to boost consumer spending and reduce reliance on exports, which has given it a ‘dual-speed’ economy. Unlike the US, which launched a trade war last year without anticipating Beijing’s potent rare-earths retaliation, the EU has long been preparing for a potential conflict.
Long-simmering tensions have come to a head. Europe’s trade deficit with China, now exceeding $1 billion a day, is a source of alarm. More troubling is the risk of losing 500 manufacturing jobs daily because of Chinese competition that threatens to hollow out the bloc’s industrial base.
The Chinese commerce ministry refused to acknowledge any of that in the position paper it released amid US probes of its manufacturing sector and Brussels’ October deadline to address trade gaps. Instead, in a strong defence of its industrial policy, Beijing dismissed concerns that the production capacity of Chinese producers far exceeds domestic demand, which leads them to seek growth through export markets.
This argument is inconsistent with its record. Overcapacity causes what China calls ‘involution,’ a broad concept that refers to intense competition marked by price wars—which Beijing has spent the past two years trying to curb. The results have been mixed. One unintended consequence has been to push companies further into new markets overseas.
While Chinese exporters have struck success in many countries, that has not consistently translated into healthy corporate earnings. The Chinese automotive industry’s total profits dropped nearly 20% in the first half of the year even as overseas sales hit a record high, suggesting foreign demand is not a cure-all.
Beijing should be more honest about the problems it has exported. Instead, the paper was an attempt to create a rival narrative that portrays China as a defender of free and fair trade. It framed surging exports as an opportunity for the world. Of course, consumers benefit in the short-run because it gives them access to cheaper products. But countries with established industries, or ambitions to develop their own, will see them as a threat to jobs and development.
The commentary also ignored the fact that China’s household consumption is very low relative to its economy’s size. Personal spending increased dramatically in the decade before the pandemic, creating a healthy give-and-take with trade partners eager to access the economy even as exports expanded. But growth has fallen after the collapse of the property sector and youth unemployment has risen.
EU policymakers have been identifying areas in which China still relies on the bloc, hoping to pinpoint sources of leverage. They are also considering a broader set of defensive measures: restricting Chinese companies’ access to public procurement, requiring their investment in the electric-vehicle supply chain to include technology transfers and pushing European firms to reduce their dependence on China-based suppliers.
Investigations of alleged Chinese subsidies and dumping in specific product categories are gaining momentum. Europe is weighing whether to extend that approach through broader ‘safeguard’ mechanisms that would comply with World Trade Organization rules.
Instead of publishing papers that are sure to raise hackles at a critical time in negotiations, Beijing should consider a goodwill gesture. From 2021, it began to phase out tax rebates of up to 13% that had supported exporters since the 1980s.
Tax concessions are being dropped for industries suffering overcapacity, price competition and trade friction. Batteries will lose refunds entirely by 2027, following earlier tax shifts for steel, aluminium, copper and solar products.
China could also scale back rebates for clean-energy cars, a major bone of contention with the EU. Such a move would not eliminate China’s industrial surplus or satisfy everyone. But it would show that Beijing is starting to recognize the damage it has been causing. It could also give Brussels a reason to delay wider restrictions.
China has more to lose from a relationship breakdown than its rhetoric suggests. The EU remains its largest and wealthiest customer for high-tech goods, now that the US has erected import barriers. Beijing can make modest concessions now or keep insisting there is no problem until Europe closes the door. ©Bloomberg
The author is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region.