Why the West rejects a new wave of cheap Chinese goods

Summary

The United States has imposed a 100% tariff on Chinese electric vehicles, sparking concerns of a second trade war. This move follows China's economic slowdown and its strategy to boost manufacturing through subsidies, leading to a flood of cheap exports. The West, viewing China as a geopolitical rival, fears dependency on these exports for national security reasons. Despite no desire for a full-blown trade war, escalating tensions and China's commitment to its old growth model may push the world towards economic conflict.

Takeaways

• 🚗 The United States has imposed a 100% tariff on Chinese electric vehicles, sparking fears of a new trade war.
• 📜 This follows the 2020 Trump-China trade deal that ended two years of escalating tariffs and restrictions.
• 🇪🇺 The EU is considering its own tariffs against China due to China's subsidies to strategic sectors.
• 🌏 Nations like Brazil and Thailand have also announced new tariffs on Chinese goods.
• 📉 China's economic slowdown has led it to subsidize its industries heavily, especially in manufacturing.
• 🔄 China's strategy of subsidizing exports has resulted in a flood of cheap Chinese goods globally.
• 🛡️ Western countries are imposing tariffs to protect local jobs, profits, and national security.
• 🏭 China's heavy subsidies and manufacturing focus are seen as threats to both developing and developed countries.
• 🧩 China's economic model relies on manufacturing and exports, which is problematic due to its massive production capacity.
• ⚠️ A second trade war seems likely unless China changes its growth strategy.

Q & A

What was the recent action taken by the United States regarding Chinese electric vehicles?

The United States imposed a 100% tariff on Chinese electric vehicles, which has raised concerns about the potential for a new trade war.

What was the outcome of the 2020 Trump China trade deal?

The 2020 Trump China trade deal ended a two-year period of escalating tariffs and restrictions between the two countries.

Why is the EU considering its own tariffs against China?

The EU is considering its own tariffs to compensate for China's significant subsidies to strategic sectors such as batteries, renewables, and electric vehicles.

How did China's growth model contribute to its rise as a manufacturing superpower?

China's growth model involved transitioning from an agricultural to a manufacturing-based economy with substantial government support, high tariffs, and restrictions to protect domestic industries while gaining access to Western markets.

What was the impact of China's manufacturing growth on the American industrial heartland?

The growth of China's manufacturing sector led to job losses among blue-collar workers in the American industrial heartland, known as the Rust Belt.

What was the primary goal of the first US-China trade war initiated by Trump?

The primary goal was to address the US trade deficit with China and counter what was perceived as China's unfair trade policies, such as higher tariffs and restrictions on US products.

How did China respond to the tariffs imposed by the US during the first trade war?

China responded by raising tariffs even higher on US products each time the US increased them, leading to a cycle of escalating tariffs that lasted for about two years.

What is China's Made in China 2025 program, and how does it relate to the current trade tensions?

The Made in China 2025 program is an initiative aimed at reducing China's dependence on foreign imports by heavily subsidizing strategic sectors like cars and energy, which has contributed to the current trade tensions by flooding the market with subsidized goods.

Why might the West be concerned about depending on Chinese goods for energy production?

The West is concerned about national security risks, including the potential for China to use its influence over critical energy production components, such as batteries or solar panels, to exert pressure in geopolitical conflicts.

What are the three main reasons countries are imposing tariffs to stop the influx of cheap, subsidized Chinese goods?

The three main reasons are to protect local jobs and profits, especially in industries like the car industry; to prevent developing nations from being blocked in their economic development via the export-led growth model; and concerns over national security, especially regarding the dependence on a potentially hostile country for critical goods.

What does the script suggest as the most likely outcome if China does not change its current economic strategy?

The script suggests that if China does not shift to a more sustainable growth model, it is likely that a second trade war will occur due to the world's inability to absorb excess Chinese production and concerns over national security.

Outlines

00:00

🚨 US Imposes 100% Tariff on Chinese Electric Vehicles: Prelude to a New Trade War?

The US has unexpectedly imposed a 100% tariff on Chinese electric vehicles, sparking concerns of a new trade war. This move comes after the 2020 Trump-China trade deal, which had temporarily resolved a two-year period of escalating tariffs and restrictions. The EU is also contemplating similar tariffs against China, potentially leading to a broader conflict. Despite EU leaders' intentions to avoid a trade war, the EU is expected to introduce tariffs to counter China's substantial subsidies in strategic sectors such as batteries and renewable energy. Additionally, nations like Brazil and Thailand, which are part of China's economic initiatives, have followed the US's lead in imposing new tariffs on Chinese goods. The video explores whether this is a political strategy to appear tough on China or a genuine attempt to address economic imbalances. It also delves into the historical context behind this situation, including China's rise as a manufacturing superpower, the first US-China trade war, and China's recent economic challenges and responses through industry subsidies.

05:01

🛑 China's Economic Shifts and the Escalation of Trade Tensions

This paragraph examines the progression of the US-China trade conflict, starting with Trump's initiation of the first trade war by imposing tariffs on a wide range of products. It discusses the retaliatory measures taken by China and the eventual trade deal that did little to reduce the tariffs. The summary also touches on the effectiveness of the trade war, suggesting that it may have slowed US exports to China but led to China decoupling more from the West. The paragraph further explores China's economic slowdown, the bursting of its property bubble, and its response through increased subsidies in strategic sectors, particularly electric vehicles. The narrative suggests that China's push for manufacturing and exports is leading to an overflow of cheap goods in the global market, which is causing concern among both developing and Western nations for different reasons.

10:04

🌐 Global Concerns Over Subsidized Chinese Goods: Trade War Implications

The paragraph delves into the global response to China's subsidized goods, questioning why the world is not embracing cheaper electric vehicles and energy products that could alleviate the cost of living crisis. It outlines three main reasons for countries imposing tariffs: protecting local jobs and profits, particularly in the automotive industry; concerns over developing nations' ability to develop their own manufacturing sectors due to subsidized Chinese competition; and national security issues, with Western countries fearing dependence on a potential geopolitical rival. The paragraph suggests that while China's subsidies could benefit the global energy transition, the strategic implications of relying on Chinese products are seen as too risky, especially in light of recent geopolitical tensions.

15:07

📉 China's Growth Strategy and the Prospects of a Second Trade War

The final paragraph synthesizes the information presented, addressing the likelihood of a second trade war. It suggests that China's commitment to a manufacturing and export-based growth model, coupled with the world's inability to absorb the excess production, is leading to a situation where trade tensions are likely to escalate. The West's aversion to depending on a potentially hostile country for critical goods is highlighted, along with the concerns of emerging markets about being flooded with cheap Chinese goods that could hinder their own industrial development. The paragraph concludes by predicting that unless China adopts a more sustainable growth strategy, a second trade war seems inevitable, with China already announcing retaliatory measures against Western chemical exports and potential increases in tariffs on Western cars.

Keywords

💡Tariff

A tariff is a tax imposed on imported goods, which is used to protect domestic industries by making foreign products more expensive. In the video, tariffs are a central theme, as the U.S. imposes a 100% tariff on Chinese electric vehicles, which could potentially ignite a trade war. The script discusses the history of tariffs between the U.S. and China, and how they have escalated during the first trade war under the Trump administration.

💡Trade War

A trade war refers to a situation where countries engage in a cycle of imposing tariffs on each other's goods, which can lead to negative economic consequences for all parties involved. The video script suggests the possibility of a new trade war, following the U.S.'s imposition of tariffs on Chinese electric vehicles and the EU's consideration of similar measures. The term is used to describe the escalating tensions and potential economic fallout.

💡Subsidies

Subsidies are financial incentives provided by governments to support specific industries or sectors, often to help them grow or remain competitive. The script mentions China's subsidies to strategic sectors like batteries, renewables, and electric vehicles, which have contributed to the country's dominance in these areas and are a point of contention in the trade dispute.

💡EU's von der Leyen

Ursula von der Leyen is the President of the European Commission and a key figure in shaping EU policies. In the script, her stance on the trade situation with China is referenced, indicating that while the EU does not intend to start a second trade war, it is considering new tariffs in response to China's subsidies.

💡BRICs

BRICs is an acronym for Brazil, Russia, India, China, and South Africa, which are emerging economies that are seen as significant players on the global stage. The script mentions Brazil, a BRICS member, as one of the nations that has followed the U.S.'s lead in imposing tariffs on Chinese goods, indicating a broader trend of countries responding to China's economic policies.

💡Belt and Road Initiative

The Belt and Road Initiative (BRI) is a global development strategy adopted by the Chinese government involving infrastructure development and investments in nearly 70 countries and international organizations. The script refers to Thailand, a participant in the BRI, also imposing tariffs on Chinese goods, which shows the complexity of international trade relations influenced by China's economic strategies.

💡Manufacturing Superpower

A manufacturing superpower is a country that dominates the global manufacturing industry, often due to its scale, efficiency, and technological advancements. The script discusses China's rise as a manufacturing superpower, which involved government support and protectionist measures that allowed it to develop its industries while maintaining access to Western markets.

💡Economic Slowdown

An economic slowdown refers to a period of reduced economic growth, often characterized by lower consumer demand, reduced industrial production, and high unemployment. The script describes China's recent economic challenges, including the bursting of the property bubble and the impact of COVID-19 lockdowns, which have led to increased government subsidies in an attempt to stimulate growth.

💡National Security

National security encompasses the measures taken by a country to protect its citizens, economy, and political system from threats, including military, economic, and cyber threats. The script suggests that national security concerns, such as the risk of dependence on potentially hostile countries for critical goods and technologies, are driving the West's response to China's trade practices.

💡Deindustrialization

Deindustrialization is the process where a country's manufacturing sector declines in importance, often leading to job losses and economic restructuring. The script implies that Western countries are concerned about deindustrialization as a result of cheap, subsidized Chinese goods flooding the market, which could undermine their own manufacturing capabilities.

Highlights

The US imposed a 100% tariff on Chinese electric vehicles, potentially sparking a new trade war.

The move follows the 2020 Trump China trade deal and escalating tariffs over two years.

The EU is considering tariffs against China, likely to compensate for China's subsidies in strategic sectors.

China has vowed to retaliate, and nations like Brazil and Thailand have followed the US in imposing tariffs.

The possibility of a second trade war is not the intention of Western leaders but remains a concern.

China's economic crisis and its response through increased industry subsidies are key to the situation.

China's growth model, transitioning from agriculture to manufacturing, is similar to Japan and South Korea's.

China's development was facilitated by high tariffs and restrictions while gaining access to Western markets.

The losers of China's rise were primarily American blue-collar workers in the Rust Belt.

The first US-China trade war began with Trump's election, marked by increased tariffs on both sides.

Trump's trade war did not decouple the US from China as intended but pushed China towards Asian nations.

China's economic slowdown and the Evergrande crisis highlighted the need for a new growth model.

China's response to its economic issues was to increase subsidies to strategic sectors, not switching to services.

The flood of cheap Chinese exports is seen as a threat by developing and Western nations for different reasons.

Countries imposing tariffs aim to protect local jobs and profits, especially in the car industry.

National security concerns are driving the West's fear of dependence on potentially hostile Chinese goods.

The West's experience with Russia has heightened concerns about reliance on foreign, potentially adversarial countries.

China's commitment to a manufacturing and export-based growth model may lead to a second trade war.

China's retaliation to new US tariffs with its own on Western chemical exports and cars signals escalating tensions.

The creator's move to Nebula for ad-free, creator-supported news updates on global affairs.

Transcripts

In a shocking move, the United States has just slapped a 100% tariff on Chinese

electric vehicles, igniting fears of a new and potentially devastating trade war.

This follows the 2020 Trump China trade deal that ended a two year

period of escalating tariffs and restrictions.

But now, with the EU considering its own tariffs against China

and China vowing to retaliate, the question arises has

the West just started a second trade war?

While leaders like the EU’s von der Leyen have made it clear

that a second trade war is not the intention?

She also indicated that the EU will likely follow the US soon and introduce

new tariffs to compensate for China's gigantic subsidies to strategic sectors

like batteries, renewables and electric vehicles.

Even more worryingly for China and nations that should on paper

be friendly towards it, like Brazil, which is part of the BRICs, and Thailand,

which is part of China's Belt and Road Initiative, have already followed

the US and announced new tariffs on Chinese goods.

But if China wants to essentially subsidize

the energy transition in the rest of the world, why is that such a bad thing?

Could it be that all of this is just political maneuvering to appear

tough on China, while in reality nobody wants to repeat Trump's trade war?

To answer these questions, I've dived into the latest research

by economists and journalists and uncovered

that it is not really Western and Chinese rivalry that will determine

whether or not this will escalate into a trade war.

What really matters is how China will choose to solve its economic crisis

at home.

But to explain why, we first need to quickly a recap of how we got here.

Essentially, I think there are three pieces

of historical context that we need to understand.

If we want to find out whether or not we are on the brink of a second trade war.

The first is China's so-called unfair rise as a manufacturing superpower.

The second is the first US-China trade war

that lasted from 2018 to 2020.

And the third is China's recent economic slowdown

and how it responded by increasingly subsidizing its industries.

Okay, first, let's talk about China's unfair rise

to become the manufacturing superpower that it is today.

As I discussed in my longer video

about why China's growth miracle is no longer working.

China essentially followed the same growth model that nations like Japan

and South Korea did before it, which is that it first transformed

from an agricultural economy to a manufacturing based economy,

which allowed it to level up its technology.

However, crucially, this transition was not just about opening up to the world,

as China allowed its industries to develop with a lot of government support.

Well, it had high tariffs and other restrictions in place

to protect them from foreign competition.

At the same time, the country got relatively good access to Western markets,

which for a large part allowed it to get rich.

This is something that Western powers agreed to at the time, not just for China,

but for a developing nation in general, because the consensus was that free

trade was good, but that in order to develop, poor nations

should be allowed to have some trade barriers in place against competition

from industrialized nations so that their industries could develop.

In fact, Western economists in the 1990s were so enamored with the benefits

of this arrangement in which the Chinese got rich, while Western consumers

got cheap products and Western industry bosses as well, that they tended

to forget that while on average, everyone benefits from free trade.

There are still some groups that lose out a lot.

In the case of China's development, the losers were mostly blue

collar workers in the American industrial heartland

that subsequently came to be known as the Rust Belt.

Indeed, as this graph by IMD Professor Richard Baldwin shows, manufacturing

jobs in the USA nosedived, while at the same time they grew a lot in China.

This brings us to the second part of how we got here.

The backlash and the first US-China trade war.

In response to these job losses, many of these blue collar workers

propelled Donald Trump to win the Republican primary and later

the general election on an anti-free trade message, especially against China.

Stating rather subtly that we can't continue

to allow China to our country because that's what they are doing.

Where he was referring to their unfair trade policies like higher tariffs

and other restrictions on US products that were still in place,

even though China was now much richer than it used to be.

Trump believed that this was causing the US to have a giant trade

deficit with China, and that it was largely responsible

for the industrialization in the United States.

So when he got elected, Trump started the first US-China trade war by raising

tariffs across the board on products ranging from steel to solar panels.

Indeed, as you can see here in this graph from the Peterson Institute,

tariffs from China on US products were initially quite a bit higher.

And then as Trump started increasing them, China responded

each time by raising them even higher.

Continuing for roughly two years until they signed a trade deal to ease

some measures, but mostly just led tariffs

as they were being as they were.

Also note that here both countries left their tariffs

against other countries roughly the same throughout this period.

But did the Trump trade war work?

Well, we while we cannot know for sure, US exports to China

certainly seem to have slowed down compared to their previous trajectory.

However, in spite of what Mr.

Trump wanted, it actually seems like China decoupled more from the West

than the other way around.

For example, as you can see here in this graph, in 2002,

China still relied over 50% on exports to the US, Japan, the EU.

But now that percentage has dropped to around 35%

and has even been overtaken by exports to friendlier Asian nations

that are part of China's Belt and Road Initiative.

Of course, this makes more sense if you take into account that China aimed

to become less dependent on the West already before Trump was elected.

They just did it

in a more subtle way than Trump did, because rather than relying on tariffs,

China decided to reduce its dependance on foreign imports by heavily

subsidizing its own strategic sectors like cars and energy.

When it introduced its Made in China 2025 program in 2015.

Indeed, as this chart shows, the Chinese government spent billions on

its emerging electric vehicle market from 2009

to 2017, 2018, 2019, 2020,

and then significantly more in 2021 as its economy started to slow down.

It did this through direct subsidies and more subtle sales

tax exemptions, R&D expenditures, and government procurements.

However, as you can see here, subsidies to Chinese electric vehicles

got a big bump in 2021.

Which brings us to the final part of how we got to the second trade war.

And that is China's economic slowdown.

You see, in 2021, the financial collapse of China's Evergrande Property

Group made clear that China's property bubble had finally burst

a property bubble that had helped China to continue to grow rapidly

after the country got too big to rely on exports to the West alone.

Along with the drag of Covid lockdowns, it was the bursting of this property

bubble that made China's leaders realize they needed a different growth model.

However, in spite

of most Western and Chinese economists recommending that China should switch

to promote their service sector and local consumption, China's

leadership had different ideas and reverted back to its old model

of pushing manufacturing by increasing subsidies massively.

What's more, as you can see in this graph, the Chinese started ordering

its state run banks to start lending more and more to its factories,

despite local Chinese demand for their goods going down.

This is, I think, the most crucial recent development.

If you really want to understand why we might be on the brink of a second

trade war.

As I discussed in my video about China slowdown,

economies tend to grow by focusing first on agriculture,

then on manufacturing, and then on services.

The reason why countries need to make that final switch to services is because

this is where, in a modern economy, almost all of the jobs will be.

If you do not make that switch, you will end up with high unemployment.

And perhaps even more importantly, your population will not earn enough

to buy all of the manufactured goods that your increasingly efficient

factories are producing.

So what to do then, with all of these manufactured goods

that your own population cannot afford?

Well, you can export them, of course. Sure.

This model worked very well for China in the past.

However, this old strategy cannot work right now

because China's industries are just so incredibly massive

now that just a slight increase

in production that cannot be absorbed by the Chinese consumers themselves

will result in a massive flood of cheap exports to the rest of the world.

And indeed, this is exactly what we are seeing today.

Chinese youth unemployment is very high.

Chinese local demand has stagnated, and yet the state is now

heavily encouraging more industrial production.

The inevitable consequence is that cheap Chinese

exports are now flooding the world.

But hold on a minute.

Why is that a bad thing?

If the Chinese government wants to subsidize electric vehicles,

batteries and solar panels, it would effectively mean

that the Chinese taxpayer subsidizes these goods for us.

For the rest of the world.

But if you think about it, if China wants to subsidize

our energy transition, wouldn't that be great?

Wouldn't cheaper electric vehicles and energy products help solve

the cost of living crisis that much of the world is still going through?

Yes it would.

So then why does the world

reject more subsidized Chinese goods?

Essentially, I've identified three main reasons why countries

are imposing tariffs to stop the influx of cheap, subsidized Chinese goods.

The first argument is that increased tariffs are needed to protect local jobs

and profits, especially in the car industry, for example.

Some have made the case that Joe Biden has just introduced these new tariffs

to win favor with potential working class voters in Midwestern states

like Michigan and Ohio, where a lot of cars are made.

Similarly, many have argued that European car giants like French

Italian company Stellantis, Germany's Volkswagen and France's Renault aren't

now in mortal danger due to China's dominance in the electric vehicle sector.

China is a threat to local profits and jobs could also explain why a host of

developing nations, ranging from Asian countries

like Thailand to China's BRICs partner Brazil, have already announced

new tariffs against China.

You see, given that China is rich by exporting to the rich world, countries

like Brazil, Bangladesh, Vietnam and India are now looking to do the same.

However, for that to work, they need the Chinese consumer

to be able to afford their manufactured goods.

And they do not need subsidized Chinese manufacturing, which will prevent

them from leveling up their economies by moving into manufacturing.

However, I do not think that this is

now the main reason that Western countries are worried.

Indeed, contrary to what you might have expected, Europe's car bosses

have lobbied against the tariffs because they fear a Chinese retaliation.

What's more, the American car industry has faced stiff competition

many times first from Europe, then from Japan and then from Korea,

and it never before felt the need to introduce 100% tariffs.

So could it be that, just as with the first trade

war, Western countries are worried about their trade deficit with China?

After all,

if you run a trade deficit for too long, this could cause a currency crisis.

Well, no.

I don't think that this is what the West is really afraid about today.

Given that the US China trade deficit is at its lowest in years,

and on the European side, while the EU's trade deficit with China

has certainly grown, it's

currently is running a trade surplus with the rest of the world.

So its trade deficit should not really be a big concern.

Instead, I think the third argument,

national security, is now the real reason

why the West is afraid of cheap Chinese goods.

After all, both Europe and the United States now consider China

a systemic rival

that has made it clear that it wants to displace the American order

and now quietly supports a major war on the border of Europe.

A rival that could turn into a true enemy if it ever decides

to invade Taiwan, which the US is likely to protect.

Now, as we've seen in Ukraine, if that happens,

the West would be completely screwed if it completely depended on Chinese goods

for its energy production, such as a battery or solar panels.

What's more, after several

hacking incidents and reports of China installing backdoors into various

of its export products like Huawei phones, the West likely

doesn't want to become completely dependent on Chinese electric vehicles,

which are basically giant smartphones on wheels that could be operated remotely.

I mean, just imagine that in case of a war over Taiwan, China

suddenly shuts down 50% of cars driving around in the west.

Finally, given that civilian factories like those for cars and electronics

have historically often been transformed into military factories, in case of a war,

it would be a Chinese dream if it could get the West

to de industrialize as much as possible.

As you can imagine, these are all national security scenarios

that Western officials simply cannot risk.

So to sum up, China's policies of trying to return to a manufacturing led

economy has led to a flood of exports to the rest of the world.

However, rather

than welcoming this with open arms, the world feels threatened by it.

Developing nations feel threatened by this because it blocks their development

via the export led growth model that China itself successfully used.

And on the other hand, advanced Western nations feel threatened by it

because they now view China as a geopolitical rival.

And they've seen with Russia that it is very unwise to depend

too much on a potentially hostile country.

So now that we know how we got here and why the world

feels so threatened by subsidized Chinese exports,

I think we can now answer the main question of this video.

Is this the start of a second trade war?

Well, sadly, despite the fact that neither Chinese American nor EU officials

want a full blown trade war, I still think it is likely that

this will escalate further simply because China's leaders now seem committed

to returning to its old growth model of manufacturing and export based growth.

However, because China is now so big, the world cannot absorb all of this

excess Chinese production.

The West does not want to depend on a potentially hostile country

for crucial goods after its experience with Russia.

This means that as its markets close,

more and more Chinese manufactured goods will flood emerging markets.

But while China had hoped BRICs and Belt and Road Initiative countries

can take the place of the West and become the prime customer

for Chinese industries, these countries are very unlikely to allow this

because it robs them of a chance to get rich through manufacturing themselves.

So unless the Chinese see the light and switch their growth strategy

to a more sustainable model, I fear that it is likely

that a second trade war is essentially what we are facing.

Indeed, a first development

has already been that China announced shortly after the new US tariffs

that it would retaliate against Western Chemical exports,

and it would likely raise its own tariffs on Western cars to 25%.

But how will the West respond to that?

Well, I'll do my best to keep you up to date about almost all of the latest news.

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