China is under the microscope as global trade tensions escalate
Trade has become a heated subject since President Trump’s inauguration in January 2025. Not only has Trump put up punitive tariffs, but the necessity for some sort of protection from unfair competition is gaining ground in many other places. The calls for the EU to increase tariffs on China are maybe less visceral than in the US, but the root cause is largely the same: protect the domestic industrial base and to hold off unfair Chinese competition. The Ukraine War has only increased the demand to protect Europe’s manufacturing base, which will be vital for the promised increases in defence spending.
Over the years the Chinese government has been very good at nurturing its domestic manufacturing base with low-cost loans, cheap land and labour, and other subsidies. We, in the West, traditionally associate Chinese manufactures with low-cost, low-tech goods, but Chinese manufacturers are moving to the top of the value chain as they become increasingly sophisticated.
This trend has been exacerbated since the bursting of the Chinese property bubble in 2021, which reduced domestic demand; Chinese firms had to export or die. In the last 20 years, Chinese manufacturers have come to dominate not just lower end manufactures like textiles, but also higher end manufactures like electronics. In 2003, China had only three export corridors valued greater than $20bn in electronics – as of 2023, three were greater than $100bn, with more than 10 of $20bn or greater.
China’s trade surplus with the rest of the world reached a massive $1trn last year, or about 10% of GDP. For reference, the biggest trade surplus the US ever enjoyed was in 1917, before it entered the Great War, when it reached 5% of GDP.
China trades far and wide and the US is not the only country that is losing out, although it is by far the largest, most systematically important, and loudest country. The tariffs being announced in the US are causing Chinese exports to be diverted from the US market into other markets. India, the EU, Australia, Argentina, Mexico, Indonesia and the UK have all announced anti-dumping or anti subsidy investigations into China in 2023 and 2024, and more are sure to follow.
Germany is particularly challenged at the moment. For about the last 20 years China was their biggest or second biggest export market for their car producers. This, however, is changing rapidly, and has contributed strongly to Germany’s industrial production flat-lining for the last five years. In the last six years China has gone from a net importer of cars to a large net exporter of cars, as can be seen from the following chart. China exported some five million cars in 2023, with this expected to rise rapidly.
Source: Tordoir and Setser, January 2025, Centre for European Reform
China’s car industry may just be the “tip of the spear” too. It is leading in many low-carbon technologies, has developed its own narrow-body jet, challenging the Airbus / Boeing duopoly, and is increasingly moving into semi-conductors, fine chemicals and related industries. All these are areas where the US or Europe thought they had a lead.
EU Commission president Ursula von der Leyen and former competition commissioner Margrethe Vestager have both expressed concerns about Chinese trade policies, and the Centre for European Reform has called on the EU to counter unfair Chinese trade policies to protect five-and-a-half million European jobs, or about 20% of GDP, in manufacturing.
As with many things that President Trump suggests there is a nugget of truth at the centre. However, his approach seems to be more motivated by personal enmity rather than a focus on the tedious details of trade policy. There is a need to protect a domestic manufacturing base to generate jobs, create wealth, and for existential strategic reasons in a more uncertain world.
At the present time though world trade in goods continues to grow, but at a slow pace. If tariffs are to be enacted they should be thoughtful and targeted at unfair competition and consistent with WTO rules. At the present time, the outcome of the tit for tat tariff war is unclear – this has been reflected in the recent sell-off in the S&P 500. As the West wakes up to the threat of Chinese competition, are tariffs likely to become more of a feature? Over in the US Trump has found himself at the forefront of this change of attitude, though possibly for the wrong reasons. Will Trump set aside his personal enmities to avoid punishing the US consumer with higher prices induced by tariffs? There is a balance to be struck here, but it remains to be seen whether Trump will be able to achieve it.
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