US tariffs against China create challenges for Germany.

Germany faces challenges due to US anti-China tariffs.

The United States aims to protect its domestic market from inexpensive Chinese goods by imposing higher tariffs. This move by the US government is causing unease in Brussels, as Europe is still figuring out its stance regarding imports from China and potentially facing negative repercussions.

The trade dispute between the US and China continues to intensify, potentially impacting European industries. On Tuesday, President Joe Biden announced the imposition of new tariffs on Chinese imports valued at an estimated $18 billion. These tariffs will be placed on various goods, including semiconductors, batteries, solar cells, and strategically important minerals. Additionally, tariffs on port cranes and certain medical products will be imposed. The US authorities have previously announced increased tariffs on steel, aluminum, and electric cars.

This is the first time the US government has significantly stepped up the trade restrictions under Biden's predecessor, Donald Trump. The populist position towards Beijing is popular in the US. Along with the announcement of higher tariffs, the US government plans to revealed new investments in infrastructure and future technologies.

The new trade rules regarding China will be implemented gradually from 2024 to 2026. The highest increase will be seen in the tariffs on electric cars - these will increase fourfold this year to 102.5 percent. Other tariffs will double to 50 percent, such as those for chips or solar cells. Some tariffs will be introduced for the first time, such as those on certain ores. Tariffs on lithium-ion batteries and battery components will triple to 25 percent.

"China is simply too big to play by its own rules," the business information service Bloomberg quoted Biden's economic advisor Lael Brainard as saying. "China is following its script for strengthening its domestic economy at the expense of others by continuing to invest, even with overcapacity, and flooding global markets with exports that are much cheaper due to unfair economic practices."

China Turning to the EU

As the US tightens its grip on its market, there are growing concerns in Europe about the potential backlash effects. Bernd Lange (SPD), Chairman of the Trade Committee in the European Parliament, described the new 100 percent US tariff on Chinese electric cars as "purely protectionist." The higher trade barriers could put additional pressure on European companies, as Chinese exporters are expected to shift their focus to the EU market. The German Engineering Federation (VDMA) also fears this effect.

While relatively few Chinese electric cars are sold in the US and therefore do not need to be redirected, Chinese competitor products are already present in nearly all German industrial sectors and are being offered at prices significantly below market value. In April, a study by credit insurer Allianz Trade reported that Germany is particularly vulnerable to threats from Chinese competitors. The industry is losing ground to China in more and more key sectors where it once had a dominant position. Chinese exporters of machinery, chemicals, and electrical equipment are increasingly successful on the global market compared to their German counterparts.

"Chinese companies are also gaining ground in Europe, the traditional 'home turf' of German companies," explained Jasmin Gröschl, European Economist at Allianz Trade. "Within the European Union, ten out of eleven German manufacturing industries have experienced a decline in their export market share over the past ten years."

Xi Focuses on 'Made in China'

During his recent visit to Europe, Chinese President Xi Jinping dismissed concerns about a China shock. He brushed aside worries about an export offensive and attributed Chinese achievements to the superior competitiveness of domestic companies. China doesn't have problems with overcapacity, Xi contended in Paris. Since 2015, Xi has been pursuing a "Made in China" strategy, aimed at making the country a global leader in several key technologies, including the chip and electric car industries. These industries are heavily subsidized.

A study by IfW Kiel reveals that over 99% of listed companies in China will receive direct state subsidies in 2022. These subsidies are being used to bring several technologies to market readiness. In addition to subsidies, Chinese companies benefit from preferential access to critical raw materials, a mandatory technology transfer partly enforced by foreign investors, and preferential treatment in public procurement procedures. These factors have enabled Chinese companies to rapidly expand in many green technologies. They are dominating their domestic market and are increasingly penetrating EU markets.

Along with being the world leader in photovoltaic systems and battery cells, China is also aiming for a leading position in electric vehicles and wind turbines, according to the IfW. With declining domestic demand, Chinese companies are now pushing into the global market, where they often offer their products at very low prices. According to Bloomberg data, Chinese battery manufacturers are expected to have three-times-over production capacities that can meet global demand by 2025. Exports of Chinese electric cars are growing rapidly, including to Europe. Reports suggest that the shipping fleets for manufacturers like BYD, Chery, and Saic are set to double their number of e-car transporters.

In April, the EU Commission reported that Beijing is actively working to create export capacity surplus in order to make better use of domestic production. The battery industry is comparable to that of electric vehicles.

Negotiating with Beijing

A group of Kiel-based economists suggest the European Union engage in discussions with China during its ongoing anti-subsidy investigation into imported electric vehicles. The goal should be to eliminate subsidies that negatively impact the EU. The current economic situation in China, their strong position in green technology fields, and their tension with the US provides a reasonable opportunity for successful negotiations.

The EU Commission can challenge unfair practices in international trade through anti-dumping or anti-subsidy duties. They've already started investigations into potential illegal subsidies involved in Chinese e-cars. The EU was one of the first to target Chinese electric vehicles, with a deadline approaching at the end of July. If manufacturers are proven to have received subsidies that skew competition, they could face punitive tariffs. Additionally, the Commission must consider the harm that has been or would be caused to the local economy.

Mid-April saw EU Competition Commissioner Margrethe Vestager announce an investigation into Chinese wind turbine manufacturers. This involved planned wind farms in Spain, Greece, France, Romania, and Bulgaria.

EU trade expert Lange outlines various unfair practices such as state-owned companies, subsidies, dumping (artificially low prices), and state-controlled supply chains for raw materials and refineries. He states, "A considerable part of the EU's anti-dumping and anti-subsidy measures is aimed at China." As a result, the EU is not inactive.

From Reactive to Proactive Measures

The European Commission is making a "systematic and strategic realignment" towards fair global trade – moving from reactive to proactive measures. They're now taking action without specific complaints if there are clear indications of unfair competition. The law against coercive trade policy, as well as the regulation on foreign subsidies and fairness in public procurement by foreign companies, were introduced for these purposes.

Beginning in February, the Commission launched an investigation into a procurement procedure in Bulgaria involving the Chinese CRRC Quingdao Sifang Locomotive company. In April, they launched investigations into two Chinese companies involved in the tender for a large solar park in Romania. They also began an investigation into China's discrimination against EU manufacturers in their procurement market in the medical products sector.

However, opinions vary among EU member states regarding punitive measures against Chinese distortions of competition. During his April visit to China, German Chancellor Olaf Scholz advocated for open car markets, fair competitive conditions, but he has previously shown some skepticism or outright rejection. During his visit to Sweden, Scholz pointed out that half of the electric cars imported from China come from Western brands that manufacture locally and then ship the vehicles to Europe. These include the electric Mini and iX3 from BMW and the Tesla Model3. Scholz also highlighted that many European manufacturers are successfully selling their vehicles in China. German Transport Minister Volker Wissing also opposes punitive tariffs against Chinese vehicles.

On Tuesday, during a visit to Sweden, Scholz noted that half of the electric cars from China currently come from Western brands that produce domestically and import vehicles into Europe. These brands include the electric Mini and iX3 from BMW and the Tesla Model3. Scholz also emphasized that many European manufacturers are successful in the Chinese market. German Transport Minister Volker Wissing is also against tariffs on Chinese electric vehicles.

BMW CEO Oliver Zipse warned against potential retaliation from China that hasn't been considered. For instance, the Chinese government could ensure essential raw materials for electric cars become scarce. It's also worth considering that the European market hasn't been saturated with cheap Chinese vehicles.