Why the EU cannot follow US' protectionism: FT
5 Min Read
Gideon Rachman analyzes how China's incorporation into the World Trade Center has led to the US and Europe using a protectionist approach, and how although it is tempting for the EU, it still needs Chinese batteries and minerals to produce domestic EVs.
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US President Joe Biden meets with European Commission President Ursula von der Leyen in the Oval Office on March 10, 2023. (AP)
According to Gideon Rachman of the Financial Times, When China joined the World Trade Organization, American officials believed time would make China warm up to the US and become more like it, whereas in reality the opposite has occured. In addition, China's economic growth has led to its increased military strength.
This has led many US leaders to regret China's admission to the WTO, feeling it has contributed greatly to America's deindustrialization, which in turn led to the rise of Donald Trump due to inequality in the US.
Rachman questions whether, instead of "boosting democracy in China," globalization had the opposite effect on the US?
Read more: Trump says Biden is perceived as 'incompetent' by China
Biden has kept Trump's tariffs on China and added hefty subsidies aimed at reindustrializing America and giving the US a lead in future technology. These measures, according to the White House, are critical to the stability of American society and its democratic system.
In addition, the US Senate voted overwhelmingly in July to prohibit China, Russia, DPRK, and Iran from acquiring US agricultural land and agricultural businesses. The measure was added as an amendment to a military spending bill, which is expected to pass the Senate and then undergo reconciliation with a House version.
The Senate's current action comes as the US increases protectionist measures as opposed to liberal markets that Washington claims to uphold.
While many Europeans were shocked by America's embrace of protectionism and industrial policy, recent news of an EU probe into subsidies for China's electric vehicle sector shows that Europe may be following suit.
Europe engaging in 'Naked protectionism'
The US duty on Chinese automobiles is 27.5%, compared to the existing EU tariff of 10%. However, if the EU concludes that China is subsidizing its auto exports, that figure might skyrocket.
China has accused Europe of "naked protectionism." Rachman argues that If it follows America's lead, it would be worried about Chinese competition undermining its industrial foundation as well as social and political stability.
The auto industry is Europe's most crucial sector, particularly in Germany. The EU is home to three of the world's four largest automotive firms by revenue: Volkswagen, Stellantis, and the Mercedes-Benz group.
This lead is rapidly fading as Beijing is scheduled to become the world's largest auto exporter this year. With a strong suit in electric vehicles, widely seen as the vehicles for the future, this advantage will be hard to beat as China dominates battery production and rare earth materials required by EVs.
According to the European Commission, the auto industry employs more than 6% of the EU workforce. Seen as a well-paid job that polishes the image of nations like Germany, it would be a major political and social blow to move those jobs to China.
Rachman cautions that although protectionism may seem tempting for the EU, it still needs Chinese batteries and minerals to produce domestic EVs.
EU could become dependent on China
A document prepared for EU leaders on Monday warns that, unless strong measures are taken, the European Union could become as reliant on China for lithium-ion batteries and fuel cells by 2030, as it was on Russia for energy before the NATO-orchestrated war in Ukraine. This document, obtained by Reuters, will be the focal point of discussions on Europe's economic security during an upcoming EU leaders' meeting in Granada, Spain, on October 5.
The document underscores that without robust measures, Europe's energy landscape could exhibit a form of dependency on China by 2030, similar in nature and severity to its previous dependence on Russia before the war in Ukraine.
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.
Rachman concludes that due to these issues, Europe may not eventually follow the American path, and may have to discreetly back down from its protectionist threats. On the other hand, the political and societal pressure to rescue Europe's auto sector is only going to increase. The growth of populist and nationalist parties throughout Europe will exacerbate this strain, as seen in the growing popularity of the German AfD party.
The EU may impose a rough compromise, like "voluntary" export restrictions on Chinese EVs. But, regardless of the outcome, industrial policy and protectionism remain admired both in the US and in Europe.
