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How China plans to save its economy by flooding the West with cheap cars

How China plans to save its economy by flooding the West with cheap cars

 


China plans to flood the West with its cheap imports of electric vehicles and solar panels

China plans to flood the West with its cheap imports of electric vehicles and solar panels

The port of Vlissingen, in the southwest of the Netherlands, has been at the heart of global trade for centuries. Around 17,000 cargo ships dock each year in its deep waters, between the North Sea and the Scheldt, loaded with everything from vital products such as paper, wood and steel; coal, liquefied gases, fertilizers and other key raw materials; as well as fruits and vegetables which will quickly find their place on supermarket shelves.

On Wednesday, the port received one of its largest batches to date: 5,000 electric cars coming directly from a factory in Shenzhen, China, destined for forecourts across Europe and Great Britain .

Manufactured by China's largest automaker BYD, this cargo has the potential to turn growing international tensions into an all-out and explosive trade war between Beijing and the West.

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One in three electric cars sold in Britain last year, or 32.7%, were made in China – STR/AFP

Electric cars, along with lithium batteries and solar panels, are what President Xi Jinping has proclaimed to be pillars of the economy: sectors that the Chinese government has chosen to be the engines of a massive boom manufacturing exports. Commerce Minister Wang Wentao described them as China's three new industries.

The country's leaders desperately want compensate for a real estate crisis triggered by the spectacular collapse of debt-ridden developer Evergrande, which crushed consumer confidence. China's securities watchdog's attempts to prop up the nation's $8.6 trillion (6.8 trillion) stock market by banning institutional investors from selling shares at the opening and closing of markets , show how concerned officials are about consumer confidence.

Since China reopened after the pandemic, industrial production has been quite strong, but it has not kept up with domestic demand, says Duncan Wrigley of Pantheon Macroeconomys.

Households are reluctant to spend so much because they are worried about the future. People fear that if they lose their job now, they won't be able to find a replacement. This contributes to continued weakness in the real estate sector.

Xi hopes a state-backed manufacturing drive led by advanced goods and materials will fuel a new era of growth. But the prospect of China trying to save its economy by flood the West with cheap cars Policymakers in Europe and America are on red alert.

The fear in Brussels and Washington is that with domestic demand falling, China is seeking to alleviate overcapacity by selling its products abroad at lower prices than at home in international markets and by trashing the Western industry. With authorities already threatening serious recriminations and Beijing warning of counter-retaliations, trade tensions are once again dangerously high.

As BYD's Explorer No. 1 ship crossed the Channel after a five-week journey to the Zeeland archipelago where Vlissingen juts out, the Renault boss joined the ranks with a call for Britain and Europe to work together to resist what the industry fears will be an attack from very cheap Chinese electric vehicles.

With the internal combustion engine, our leadership was undisputed. For a century, we have benefited from our expertise in this technology, which constituted a barrier to entry for newcomers. Today, Europeans find themselves in a position of relative fragility, said Luca de Meo, general manager of the French automaker.

De Meo and his counterparts are right to be concerned. By the second half of last year, the Chinese had captured around 10% of the European electric vehicle market, according to Schmidt Automotive Research.

An invasion of Chinese cars promises to be great for Western consumers but terrible for European car manufacturers. A typical Tesla can cost $40,000, while BYD models only cost $8,000. Chinese automakers are offering generous discounts of up to 12,000 to boost their sales on the mainland, Schmidts researchers have found.

Even Elon Musk, the industry pioneer and someone who once scoffed at the suggestion that BYD could one day compete with Tesla, is afraid. Without trade barriers, Chinese players would virtually demolish most other automakers in the world, Musk said soon after. BYD toppled Tesla as top seller of electric models in mainland China at the end of 2023.

A report from Bloombergs New Energy Finance predicts that annual sales of electric vehicles will reach 56 million worldwide by 2040, or 58% of all cars sold worldwide. It also estimates that China's share of the electric car market will reach 40% by the end of this decade, a forecast supported by the International Energy Agency.

Experts liken this to how the country came to dominate the solar industry. China has huge advantages: thanks to its already enormous size, manufacturing costs are much lower and it has all the supply chains. Over the past three to five years, the cost of producing electric vehicle batteries has fallen so much that they no longer need as much government support, Wrigley says.

It's hard to ignore echoes of past Chinese booms that have raised concerns about widespread dumping of heavy industrial goods such as chemicals, steel and textiles.

Today, Chinese industrial policy does not simply create much more competitive industrial players. Overcapacity in protected industries is flooding global markets and can weaken our industrial base, European Commission President Ursula Von der Leyen warned at a conference in Berlin in November.

Brussels is particularly concerned about excess capacity being exported, especially if it is driven by direct and indirect subsidies, she said. This situation will worsen as China's economy slows and domestic demand fails to recover, she added.

There is no doubt that Chinese automakers have been the beneficiaries of some extraordinarily generous subsidies.

Subsidies and tax breaks have created chronic overcapacity and fierce price competition, as well as ruthlessly efficient companies, said Yanmei Xie of Gavekal Research. Last year, policymakers unveiled new support measures.

Ahead of his re-election, von der Leyen has promised recriminations to protect Europe's industrial backbone. Car manufacturing is particularly sensitive because European leaders see it as both the past and future foundation of the bloc's industrial success, Xie said.

Chinese electric cars already face 25% tariffs in the United States. With protectionism high there, trade with Europe is more important than ever for China. However, the EU has launched a anti-subsidy investigation into China's electric car industry.

Officials estimate that subsidies have already allowed Chinese imports to reduce European prices for electric vehicles by a fifth. Tariffs of 10 to 15% were threatened. Additional investigations could take place on wind turbines, steel and medical devices, Xie believes.

The fate of the European solar industry could set a precedent. The continent's solar panel makers have appealed to Brussels for help after being crushed by cheaper imports and oversupply from China, but German Economy Minister Robert Habeck warned that restrictions trade could bankrupt European companies that assemble and install solar panels using imported parts.

Miguel Stilwell d'Andrade, head of Portuguese utility EDP, pointed out that the price of solar panels in the United States is more than double that in Europe due to tariffs on Chinese imports.

EU Financial Services Commissioner Mairead McGuinness fears the transition to green energy could be undone.

Western automakers fear retaliation the most. Many have significant operations in China, and most rely on Chinese coins, in particular batteries, for their electric models: by slowing Chinese expansion, they could sell more cars, but they would need more Chinese materials to manufacture them.

Tu Le, founder of Sino Auto Insights, accuses the industry of hypocrisy. Look how much these foreign automakers have profited from the Chinese market over the past 40 years. Volkswagen, Toyota and General Motors would not be what they are without it. So it's a bit of a stretch to think that they don't want to compete with China, or that they only want to compete with China on their terms and in their domestic markets.

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