The West should not spark off a trade war with China over EVs

Compared to the naked protectionism being promoted by the US, Scholz could offer a more fruitful approach.
Compared to the naked protectionism being promoted by the US, Scholz could offer a more fruitful approach.

Summary

  • Its carmakers would not be served well by protectionist measures. As the US ups the ante, German Chancellor Olaf Scholz should try to de-escalate trade tensions.

A nasty thing about waging war is that your enemies have a habit of fighting back. That’s a lesson German Chancellor Olaf Scholz would do well to keep in mind as he engages China amid a brewing trade fight over clean-tech. Recently, US Treasury Secretary Janet Yellen warned that “artificially cheap" Chinese-made electric vehicles (EVs), lithium-ion batteries and solar panels were causing “negative spillovers" in the US and around the world. Far from calling a ceasefire in President Donald Trump’s trade wars, the Biden administration appears now to be re-arming in an attempt to neutralize the issue ahead of elections in November.

That puts Germany in an uncomfortable spot. Russia’s invasion of Ukraine forced Berlin to rethink its post-war commitment to pacifism. US-China trade tensions are forcing a reckoning with its multilateral approach. The EU last year announced a probe of subsidies for Chinese EVs and has since added solar and wind probes. Berlin’s stance may decide whether this simmering fight intensifies or dissipates.

Cars are a contention. Automobiles are Germany’s biggest export, and one where the EU still has a slight surplus with China. Volkswagen, BMW and Mercedes-Benz sell about a third of their cars in China, and the trade relationship is crucial—the Asian country is a lucrative end-market for high-end European-made autos, and a low-cost supplier of batteries and vehicles. If Brussels raises tariffs on Chinese imports, the blowback could be devastating.

European carmakers are already facing a tough market in China, thanks both to weak local household spending and a competitive threat from cheaper locally-made EVs. Retaliatory tariffs and hostile consumer sentiment could deal a knockout blow. Hyundai, which trailed only VW in 2014 as China’s top-selling car brand, has declined since a 2015 falling-out between Beijing and Seoul over South Korea’s deployment of an anti-missile system, and barely scraped the top 20 last year.

European firms, politicians and lobby groups have so far taken a dramatically different tone in relation to China than their more hawkish US counterparts. “Free trade needs to be our North Star, our guiding principle," Oliver Zipse, BMW’s chairman, said last month. The European auto industry “is not massively damaged by the import of Chinese automobiles, nor is it in the interest of the EU to further impose customs on these products," he added.

Tariffs on Chinese EVs should be reduced, not increased, his Mercedes-Benz counterpart Ola Källenius told the Financial Times last month. Imports need “to be met with better product, better technology, more agility," he was quoted as saying. “That is the market economy. Let competition play out."

It’s not just German companies taking this stance. Stellantis, owner of the Fiat, Maserati, Citroen and Peugeot brands as well as Chrysler and Jeep, is attempting to leapfrog its slow start in EVs through a €1.5 billion tie-up with China’s Zhejiang Leapmotor Technology. VW is investing €2.5 billion under a joint-venture plant with Xpeng, the Chinese EV-maker in which it bought a 5% stake last year. Even Renault, which barely has a presence in China any more, is teaming up with Zhejiang Geely Holding Group on an engines venture.

President Xi Jinping, for his part, needs to extend an olive branch. If China wants to disprove the febrile US talk about Beijing hollowing out the world’s industrial sector, it has the perfect opportunity to show how the trading relationship can be mutually beneficial.

To date, much of China’s investment into Europe’s automotive and EV battery sector has been focused on Hungary. Under Prime Minister Viktor Orbán, that’s probably the last location you’d choose if you wanted to convince Brussels that your industrial policy wasn’t a Trojan horse for authoritarianism.

Chery Automobile and SAIC Motor Corp, which are reported to be scouting out European assembly plants, would do well to pick locations in the heart of the continent’s liberal democracies—and politicians in those countries should do all they can to attract them. China can also pour oil on troubled waters by accommodating Europe’s desire to own a larger slice of its battery-materials supply chain.

Compared to the naked protectionism being promoted by the US, Scholz could offer a more fruitful approach. Capitalists shouldn’t retreat into their shells at the first sign of competition. Instead, they should treat every danger as an opportunity to up their game. It’s ironic that the US, which pretty much invented the spirit of ebullient boosterism, is now the nation retreating from it most rapidly. Europe in general, and Germany in particular, could show the West a better path. ©bloomberg

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS