EU China Roiling Relations

How did Western automakers fall so far behind? China’s competitive advantages start with its economic strategy to dominate the global EV market, which can be traced back more than a decade.

11 mins read
People visit the booth of Chinese carmaker Xpeng during the 2023 International Motor Show in Munich, Germany, Sept. 5, 2023. (Xinhua/Ren Pengfei)

Mary Gallagher, a regular contributor to World Political Review, has written the following article depicting how Chinese electric vehicle manufacturing is posing a hindrance to the development of EU-China relations. She writes about the first in-person summit in Beijing since 2019. The European Union and China concluded their first in-person summit since 2019 this week, with European Commission President Ursula von der Leyen and European Council President Charles Michel traveling to Beijing to meet with Chinese President Xi Jinping and Premier Li Qiang.

Two issues were prominently displayed: EU-China trade imbalances and China’s continued support for Russia despite its invasion of Ukraine. While the latter has fundamentally shifted Europe’s view of China, it was the economic issues that dominated the discussions at the summit. The EU complained vociferously about the yawning gap in trade flows, with von der Leyen calling the EU’s $400 billion trade deficit with China “unsustainable.” Von der Leyen had already announced an anti-subsidy investigation into Chinese electric vehicle (EV) batteries in October. But the question of Chinese subsidies is only the tip of the iceberg when it comes to the two sides’ conflicting ideologies and competition over the green energy revolution in the automotive industry. Unsurprisingly, little progress was made at the summit, for the simple reason that the two sides’ positions are ultimately irreconcilable.

China’s superior position in the EV industry poses immense challenges to the EU, not just with regard to the competitive disadvantages of European legacy automakers, though those are severe. Limiting imports of Chinese EVs and EV batteries in order to expand EV manufacturing in the EU would undermine the credibility of the EU’s commitment to its green energy goals, as well as its ability to maintain a principled economic openness as protectionism and industrial policy become the norm everywhere else. As with the reshoring goals of the U.S., expanding European EV production will also fuel increased trade union activism in new EV and battery plants, which will drive up wages and, in turn, the costs of EVs to consumers. As a result, the EV challenge from China is not just a question of economics or technology. It is a confrontation between the social and political institutions on which China’s economic successes are built and the EU’s core liberal tenets and values. Unfortunately, in the green transition to EV technology, Western governments and corporations are woefully late to the game, limiting the EU’s options for confronting China’s competitive advantage. If it enacts tariffs on Chinese EV imports into the EU due to unfair subsidies, the EU would be adopting protectionist measures that it has so far resisted, in stark contrast to former U.S. President Donald Trump and President Joe Biden. This also risks delaying the EU’s own goals to phase out internal combustion engine vehicles by 2035 in exchange for supply chain resiliency.

Meanwhile, the EU’s ability to attract EV investment and manufacturing back to the EU will be hampered by stricter environmental regulations and strong trade unions that are already striking against Tesla in Scandinavia. As with the successful United Auto Workers strike this fall targeting EV manufacturing plants in the United States, Western trade unions have targeted these new industrial sectors for unionization in order to regain their former power and influence. Yet investors and manufacturers will compare labor unrest in Western centers of EV manufacturing against a labor regime in China that is dominated by pliant unions and Communist Party suppression of worker activism.

CHINESE SUCCESS IN ADOPTING COMPETITIVE ADVANTAGE IN LABOR-INTENSIVE AND LOW-END MANUFACTURING ECONOMIC MODEL

How did Western automakers fall so far behind? China’s competitive advantages start with its economic strategy to dominate the global EV market, which can be traced back more than a decade. In 2009, China began to rethink a development model too dependent on labor-intensive, low-end export manufacturing and a domestic automotive industry that was completely dominated by foreign joint ventures with Western and Japanese firms, including Volkswagen, Toyota, and GM.

To quote automotive industry expert Mike Dunne, China’s strategy in EVs is the same as its successful strategy in solar panels: “Build up massive capacity. Achieve scale. Reduce costs. And then export like a bat out of hell all over the world.” Chinese companies now produce two-thirds of all EV batteries, and China has cornered the market in mining and processing key mineral components. This is in part due to China’s decentralized political economy, which has allowed for extreme competition within the domestic EV industry, with local governments and banks eager to provide cheap money and land to prop up local EV employers.

Overcapacity has already been achieved in the production of traditional internal combustion engines vehicles, with the sector now producing at least 15 million more cars per year than China alone can consume. As a result, Chinese car exports are booming to Russia, Southeast Asia, Australia, and Latin America. But overcapacity is now spreading to the EV market as well, with domestic EV champions like BYD rapidly building export capacity.

RAPID EXPANSION OF THE CHINESE AUTOMOTIVE INDUSTRY DUE TO XI JINPING’S GLOBAL DEVELOPMENT INITIATIVE

The rapid expansion of the Chinese automotive industry has been accelerated by the decision to shift government investment from the property sector to the manufacturing sector. This accords with Xi’s desire to prop up the “real economy” over the financial sector and to fund production by firms rather than consumption by households. But this decision requires that the resulting overcapacity be exported overseas. For Europe, a large increase in cheap EVs manufactured in China, even those built by European firms like VW and BMW, risks a political backlash. It also risks the future of Europe’s legacy firms, which are far behind China’s domestic homegrown successes in EVs and losing market share in China fast.

So as impressive as China’s economic and technological success in the EV space is, it’s bad news for Europe’s legacy automotive firms and the governments that seek to champion them. Worse still for Europe and the West, China has other successes that it can tout beyond its ability to lead the global transition to EVs, both to other countries and to big business. Xi’s Global Development Initiative, which he announced in 2021, is a vision for development that prioritizes “new opportunities” for developing countries to leverage the digital economy and the green energy transition. Both are bright spots of Chinese success and innovation, from TikTok in the digital space to CATL, the world’s largest EV battery maker, in the auto industry.

CHINESE CURRENT DOMINANCE IN THE GLOBAL SOUTH

China’s current dominance lends credibility to Xi’s overseas sales pitch that China can lead the way for other countries in the Global South to “leapfrog” stages of economic development in the same way China has. Finally, China’s political system all but guarantees quiescent labor and docile trade unions that are nothing more than appendages to the Communist Party. The transition from internal combustion engine vehicles to EVs will remake the industry, with employment implications for autoworkers everywhere, which is why the UAW focused on battery plants in its fall strike in the United States. Tesla faces growing union membership in its Gigafactory outside Berlin, and the Tesla supply chain is up against strong union action in Sweden and now Denmark. As the likelihood of EU tariffs on Chinese EV imports grows, the EU is set to look more like the U.S., with protectionist industrial policy to encourage local production and an emboldened labor movement eager to capitalize on the energy transition. This might be good for Europe, but it will be bad for EU-China relations.

WORLD ECONOMIC FORUM ON THE RISE OF CHINA

The World Economic Forum, in a brief history on the rise of China, reported that China’s meteoric rise over the past half-century is one of the most striking examples of the impact of opening an economy up to global markets. Over that period, the country has undergone a shift from a largely agrarian society to an industrial powerhouse. In the process, China has seen sharp increases in productivity and wages that have allowed it to become the world’s second-largest economy. While the pace of growth over recent decades has been remarkable, it is also important to look at what the future might hold now that a large part of the gains from urbanization have been exhausted. A new paper published attempts to do just that, looking back over China’s growth story between 1953-2012 and using the data to model plausible scenarios for the country up to 2050. The first two decades following the founding of the People’s Republic of China in 1949 were marked by periods of substantial growth in per capita GDP, followed by sharp reversals. The authors suggest this represented the success of the First Five-Year Plan, during which “6000 Soviet advisers helped establish and operate the 156 large-scale capital-intensive Soviet-assisted projects,” significantly increasing the pace and quality (productivity) of industrialization in the country. However, it was followed by the Great Leap Forward (1958-1962), which undid many of the gains by worsening incentives through banning material incentives and restricting markets. These reforms were then unwound between 1962 and 1966, leading to another period of productivity and per capita GDP growth, before the events of the Cultural Revolution set the economy back once again.

According to the authors, the Third Plenary Session of the 11th Central Committee of the Communist Party in December 1978 was the defining moment in shifting the country from its unsteady early economic trajectory onto a more sustainable path. It laid the groundwork for future growth by introducing reforms that allowed farmers to sell their produce in local markets and began the shift from collective farming to the household responsibility system. A year later, the Law on Chinese Foreign Equity Joint Ventures was introduced, allowing foreign capital to enter China, helping to boost regional economies. Although it took until the mid-1980s for the government to gradually ease pricing restrictions and allow companies to retain profits and set up their own wage structures, this helped to boost GDP from an annual average of 6% between 1953-1978 to 9.4% between 1978-2012. It also increased the pace of urbanization as workers were drawn from the countryside into higher-paying jobs in cities. This process of market liberalization led to the establishment of China as a major global exporter. It eventually allowed for the reopening of the Shanghai stock exchange in December 1990 for the first time in over 40 years and, ultimately, to China’s accession to the World Trade Organization. These reforms had a significant impact both on per capita GDP and the pace of the falling share of the labor force working in the agricultural sector. The good news for the global economy is that the authors of the paper claim that the Chinese economy can continue to see relatively robust levels of growth, albeit significantly lower than we have seen over recent decades.

While the average growth rate of real GDP between 1978-2012 has been an impressive 9.4%, that figure could decline to between 7-8% between 2012-2024 in the authors’ base case. This is significantly higher than most commentators believe is likely given clear signs of a slowing economy in China’s recent economic data. Of course, such long-range projections should be treated with a great deal of caution, but the trajectory is already clear – growth is slowing. This is to be expected for an economy of China’s size, as compounding makes it harder and harder to deliver the same rate of growth from a higher level of GDP. Moreover, the factors that have driven the country’s expansion over recent decades will also have to shift in their relative importance. For example, the numbers of people making the shift from agricultural jobs into higher value-add city jobs are likely to decrease, and the process of urbanization will therefore not be able to add as much to output per worker as it has done in the recent past. Also, the catch-up process that has delivered significant productivity growth in the country is also likely to slow as Chinese industry gets closer to the technological sophistication of its Western counterparts. The initial gains of adding hundreds of millions of workers to the global labor supply are also quickly fading. Instead of allowing low-cost exports to drive growth, China will increasingly have to rely on expanding its own domestic demand to meet the government’s ambitious growth targets. Achieving this, however, will require further reforms to release Chinese consumers’ spending power and build the foundations of a more balanced economy.

SHOULD THE RISE OF CHINA BE OF CONCERN TO THE WORLD?

I had written elsewhere about Robert McNamara’s apprehension, namely how the world had come close to annihilation. Robert McNamara, in 2003, former Defense Secretary, recalls how close the world had come to annihilation. Then US Secretary of Defense, McNamara appeared in a documentary program called The Fog of War. Here he reflects on the decisions and outcomes of the Cuban missile crisis: “Under a cloak of deceit, the Soviet Union introduced nuclear missiles into Cuba, targeting 90 million Americans.

The CIA said the warheads had not been delivered yet. He said to President Kennedy the US needed to do two things. First, the US needed to develop a specific strike plan. The second thing the US would have to do is to consider the consequences. Kennedy was trying to keep the USA out of war. McNamara was trying to help him keep us out of war. And General Curtis LeMay was saying, ‘Let’s go in, let’s totally destroy Cuba.’ On that critical day, the US had two Khrushchev messages. One basically said, ‘If you’ll guarantee you won’t invade Cuba, we’ll take the missiles out.’ Then before we could respond, we had a second message that had been dictated by a bunch of hardliners. And it said, in effect, ‘If you attack, we’re prepared to confront you with masses of military power.’

At the elbow of President Kennedy was Tommy Thompson, former US ambassador to Moscow. Tommy Thompson said, ‘Mr. President, I urge you to respond to the soft message’… In the first message, Khrushchev said this: ‘We and you ought not to pull on the ends of a rope which you have tied the knots of war. Because the more the two of us pull, the tighter the knot will be tied. And then it will be necessary to cut that knot, and what that would mean is not for me to explain to you. If people do not display wisdom, they will clash like blind moles and then mutual annihilation will commence.’ McNamara said, and this is very important: in the end, we lucked out. It was luck that prevented nuclear war.

We came that close to nuclear war at the end. Rational individuals: Kennedy was rational; Khrushchev was rational; Castro was rational. Rational individuals came that close to the total destruction of their societies. And that danger exists today. The major lesson of the Cuban missile crisis is this: the indefinite combination of human fallibility and nuclear weapons will destroy nations. And he said, ‘Gentlemen, we won. I don’t want you ever to say it, but you know we won, I know we won.’ It’s almost impossible for the US people today to put themselves back into that period. In my seven years as Secretary, we came within a hair’s breadth of war with the Soviet Union on three different occasions. Twenty-four hours a day, 365 days a year for seven years as Secretary of Defense, I lived the Cold War.”

CONCLUSION

The world today, enmeshed as it is, cannot ignore the rise of China as an aspirant for a place at the table that has set the rules governing the world for almost fifty years, led by the US. However, with the emergence of multipolarity, the only superpower has to take the help of the European Union and also Scandinavian countries, which would welcome other European countries into the fold of NATO despite NATO’s rule of coming to the rescue of a partner in distress. In this milieu, forgotten are the days of boar hunting by the then Finnish President and the General Secretary of the Soviet Communist Party.

China wants to be the superpower in Asia, which the US is not yet willing to concede. Present-day Americans are not familiar with the Vietnam War and the body bags brought home. Nor are they familiar with Ho Chi Minh and his legacy of defeating the US and its fleeing from the battlefield, as they did in Afghanistan. The aspirations of the Third World Countries, some holding nuclear weapons, cannot be wished away. Adventurists, if any, have to take into account the cost of their adventures, which would mean total annihilation. The world yet has to bite its nails that mad adventurists like the North Korean ruler do not force Japan and South Korea into the nuclear race despite the presence of US troops in their countries.

Kazi Anwarul Masud

Kazi Anwarul Masud is a retired Bangladeshi diplomat. During his tenure, he worked in several countries as the ambassador of Bangladesh including Thailand, Vietnam, South Korea and Germany

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