Opinion | As world erects barriers against Chinese exports, what about free trade? - South China Morning Post

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In the early 2000s, the US underwent what is often referred to as the “China shock”. This was characterised by a surge in imports of inexpensive goods manufactured in China. While this helped maintain low inflation rates in the US, it came at the expense of domestic manufacturing jobs.

Economic growth in China has elevated hundreds of millions of people from extreme poverty. Concurrently, a growing middle class in China developed a fondness for American products, from McDonald’s burgers to General Motors vehicles, contributing to US economic growth.

With growing economic interdependence, the US trade deficit with China ballooned from under US$100 billion in 2001 to over US$400 billion in 2018. This escalating trade gap led former president Donald Trump to launch a trade war against China, imposing hefty tariffs on goods imported from China. The intention was to pressure China into reforming its trade practices and to safeguard American jobs.

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In an effort to garner voter support, particularly ahead of the presidential elections, both Trump and President Joe Biden have strived to protect American jobs in manufacturing and other sectors vulnerable to Chinese competition.

In January, reports emerged that Biden was contemplating higher tariffs on EVs and critical minerals imported from China. The following month, Trump said he would escalate tariffs on Chinese goods, possibly to more than 60 per cent, if elected.

But the strategy of using import tariffs to safeguard domestic jobs is both expensive and unsustainable. From 2018-2023, US manufacturing employment saw a modest increase of 3.4 per cent. “Made in America” created jobs but each one arguably cost the taxpayer hundreds of thousands of dollars.

Regrettably, these tariffs have proved to be a financial burden for American businesses and consumers. Specifically, they have increased production costs, as more than half of American imports are raw materials or intermediate goods used in production. Over 200 US companies, ranging from Boeing to Caterpillar, reportedly suffered hits to their bottom line.

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With the Trump-Biden tariffs still in effect, China’s economic recovery post-pandemic has been slower than anticipated. Faced with declining consumer confidence and rising debt, China has limited options for gross domestic product growth. Apart from issuing US$139 billion of ultra-long special government bonds, the other option for China to stimulate growth is by increasing its exports.

China’s manufacturing purchasing managers’ index (PMI) has mostly hovered below 50 since January 2023. (A reading above 50 indicates an expansion in production activity, while a reading below that signifies a contraction.) Given China’s conditions, this suggests excessive production capacity. Even with the manufacturing contraction, with consumer spending in China remaining sluggish, Chinese factories are producing more cars, machinery and consumer electronics than the domestic economy can consume.

Supported by inexpensive, state-directed loans, Chinese companies are flooding foreign markets with products they cannot sell domestically. In January, China lowered its export prices by more than 8 per cent and increased its exports by more than 15 per cent year on year.

The influx of inexpensive Chinese electric vehicles and solar panels could, however, harm developed economies. To safeguard domestic jobs and the economy, both the US and European Union are looking at tariffs to restrict the import of Chinese EVs and solar panels.

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Simultaneously, developing economies such as Brazil, India, Mexico and Indonesia are apprehensive that the influx of cheap Chinese imports of commodities such as steel and chemicals could jeopardise their domestic industries. To protect these sectors, countries are also looking at import tariffs on various Chinese commodities.

But criticising China for capitalising on its manufacturing advantages to produce competitively priced exports goes against the principles of free trade.

From China’s perspective, these concerns about its competitive exports are an attempt to distort fair competition. China has established efficient supply chains and long earned the moniker “the factory of the world”. In EVs for instance, Chinese market leaders like BYD have, through decades of research and development, developed a vertically integrated system that encompasses the design and production of EV batteries, chips and entire vehicles.

The real reason for US, EU gripes about Chinese overcapacity

Due to its lower labour costs, economies of scale, an efficient production system and government subsidies, China has developed the capability to produce high-quality products at a low cost. Consequently, China views the complaints about the so-called China Shock 2.0 as hypocritical.

In response to the concerns raised by the US, China lodged a complaint with the WTO last month. This was to challenge US rules in the Inflation Reduction Act, which stipulate that EVs must use parts from specific regions to qualify for subsidies, thereby excluding products from China and other countries. China argued that these rules were discriminatory and unjust.

Trade barriers are a form of protectionism that can lead to economic stagnation. A more constructive approach would be for the US and China to foster a more open and collaborative relationship, to promote fair and efficient trade.

Christopher Tang is a distinguished professor at the UCLA Anderson School of Management

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Opinion | As world erects barriers against Chinese exports, what about free trade? - South China Morning Post
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