TIOL - COB( WEB) - 924
JUNE 13, 2024

By Shailendra Kumar, Founder Editor

COMPARATIVE cost advantage is the prime mover of goods between the Global North and the Global South. But it is certainly not the ONLY driver on both sides of the aisle! A host of factors which determines its latitude are the geopolitical camaraderie between the exporting and importing countries; domestic industrial and green-transition policies; local unemployment rates and the stage of local technological advancements! If exports of any goods and chattels perniciously affects any one of these key determinants in an importing country, tariff and non-tariff bumps come thick with a potpourri of fury and crock-of-bile tears! This is a new normal for the global trade, post-pandemic! What may make it a tinder-dry issue is the miasma of overdose of state subsidies doled out to the manufacture of particular goods in the exporting country. Yup, the pot on the fire is the Chinese export of under-priced electric vehicles (EVs). Its market share in Europe has leapfrogged from 0.4% in 2019 to 8% in 2023 and is projected to be about 24% by this year-end! Its overall car exports, including combustion engine, now accounts for 4% of the EU market and is projected to be 7% by 2028!

Taking a policy leaf from the US which has recently imposed 100% tariff over and above the Trumpian tariff of 27.5% on EVs, the Brussels leadership yesterday imposed the keenly-expected anti-subsidy tariff of 38% on cheap Chinese EVs, hurting the European car-makers. Though China may allege that the Western countries are treating it like Aunt Sally or may even demonstrate a strongman antics but there are nuff tactile pieces of truth in the charges levelled by the West. The EU had initiated anti-subsidy probe in the month of October last year, against the three rambunctious exporters of China - BYD (Build Your Dream), state-run SAIC Motor Corp and Geely. They were directed to furnish legions of data along with a subsidy questionnaire. What transpired afterwards is the stale and bland script - all Chinese companies facing anti-dumping duty investigations implement the same 'manuscript' without exception! The idea is to put sand in trade machine! Their highly-paid law firms first seek more time to furnish the datasets and the CEOs of the companies simply snuggle down in the arms of Morpheus. Since it is not a case like a deer caught in headlight, they were sure-footed about the final consequences - imposition of punitive tariff! The interim period since the initiation of probe, is putatively utilised to gin up larger volumes of exports! And this is what happened if one goes by the latest projection of Chinese market share and also the agony of the European Commission - the tetchy trio did not furnish beyond sketchy information on subsidies, operations and supply chains.

Against the lack of inputs, the Commission has no choice but to resort to what is known as the concept of 'facts available'. This practically means that it has carte blanche to slap higher duties on imported goods. And the Commission did the same by imposing provisional tariff of 38% and it would be over and above the import duty of 10%. Going by the past trend of such punitive tariffs in case of other products when the exporters sheepishly cooperated and the Commission levied the maximum rate of 26%, it appears that in the case of the three truculent EV exporters, the provisional duty was always expected to be more than 30%. Market analysts observe that every additional levy of 10% erodes USD one billion of revenue based on 2023 trade data. For EU, taking such a harsh measure is existential compulsion of sort. After all, automotive sector accounts for 7% of all EU jobs - 3.4 million people are engaged in this sector. For EU, vehicle manufacturing is a strategic industry with 164 assembly and production plants. 'Made in Europe' vehicles contribute 102 billion euro trade surplus and chips in 375 billion euro in taxes to exchequers. It is EU's numero uno investor in R&D, accounting for 31% of total spending. Europe also leads the world in patents for self-driving vehicles.

However, reprisal is an integral part of China's trade policy and Beijing would certainly hit back. It has already launched anti-dumping investigation against European brandy. Mr Xi Jinping also whispered his displeasure on his recent visit to Paris. But, undeterred by Beijing's predictable response, EU seems to be going ahead with its probe against new energy products like wind turbine and solar panel modules besides medical devices. Though the EU is firm in its response which may further get grimmer if one analyses the latest elections results for the European Parliament where the far-right has made hefty gains and may peddle more influence on its tariff policy. But, interestingly, Beijing also has a few tricks up its sleeves. First, it may try to woo EU by lowering its own import tariff on European auto exports from 15% to 10%. Secondly, many of its auto manufacturers have been scouting for locations and humungous investments in the resource-starved Eastern European economies like Hungary and Poland and also Western economies like Italy and Spain. Half a dozen Chinese investors like SAIC, Geely, BYD, Chery Automobile, Great Wall Motor, Leapmotor and battery manufacturer like CATL have been chit-chatting to set up factories. The lure of eye-popping investments, Beijing thinks, may coax some of the EU countries to oppose continuation of the provisional tariff and a bail-out may be earned in six months time! In fact, China's carrot may work for some years as a good chunk of European companies continue to eye the large Chinese market for their various products. German car-manufacturers which have set up JVs in China, may favour dilution of tariffs to earn larger footprints in China. But, in the long-run, such a policy may end up being akin to putting lipstick on the pig!

Plodding away from EU, the backlash against cheaper exports of EVs is likely to come from other parts of the world too. Canada from the Western bloc is another country which is going to follow suit. Many economies from the Global South - albeit a few do not have their own EV industries, are bracing up to wall off cheap products from China. After the slump of its real estate sector, China has aggressively been dumping steel and aluminum products in global markets. China's iron and steel exports peaked to a record 13 million tons in April. With no sign of bounce-back from its housing sector, China is expected to produce a billion tonnes of steel this year and the same is going to be dumped in the global markets. India and South Korea have resorted to unprecedented number of anti-dumping probes against Chinese goods. India rather holds a record of initiating 336 anti-dumping investigations against China in the past three decades. Many Latin American economies have also spiked their tariffs to protect their local industries. Vietnam has been griping and chivvying against cheaper imports from China. Saudi Arabia and Thailand are also gearing up to up-tick their levies against cheap exports from China. Though Turkey and Brazil have raised tariffs on Chinese EVs but they are also wooing Chinese manufacturers to set up factories. I would not be surprised if Beijing devises a Marshall-Plan-like scheme to loan money lugged with advanced technologies for developing nations!

Presently, it may look like only its high-tech industries are caught in the Western crosshairs but given the accelerated slowdown in China's domestic demand a la on-going price war among low-cost retailers, pressure is mounting on sectors other than the new energy products to push exports at cheaper prices. Such a trend can be deciphered from the exports data for the last two years. Though the volumes of exports has grown by more than 10% in 2023 but the total value of Chinese exports is down by close to 8% as compared to 2022. What is also emblematic of overdose of state subsidies to the EV market is the latest pricing of its new EV model called 'Seagull'. It has been priced at USD 10,000. Even if the US or EU or any other country imposes 100% tariff, it is going to be priced between USD 22000 to USD 25000 - still hugely cheaper than other EVs in the mass segment. It is true that the Chinese EV manufacturers have achieved unparalleled innovations and upgraded the technology which may well serve the green concerns of the world but no country can afford to simply watch an important segment of one's economy being trampled by cheap imports. Automobile sector in most rich as well as emerging economies accounts for 7% to 10% of GDP and employs people in millions. It also represents the technological prowess of a country. All these factors tend to make it a sector of strategic nature which involves sensitive policy-making at the top-level. In view of the fast changing geo-economic and geopolitical order, China can, at best, look for shrinking space for its cheaper goods in the global markets. Its policy of 'overcapacity' is going to boomerang in many ways! The only future China is destined to suffer, is the growing tentacles of economic isolationism even if it may have many geopolitical backers in the Global South! Time for Beijing to turn into nervous Nelly as good-time rock 'n' roll is over for its galloping economy! Time for tech mud-bath lies ahead! Zig zags of trade history do not favour China! For Beijing, it is 'whither goest thou' moment? Carpe diem!