The real reasons for the west’s protectionism

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“With free trade with China, time is on our side.” This was the confident view of former US President George W Bush on the eve of China’s 2001 accession to the World Trade Organization. A generation later, many Westerners concluded that, in fact, time had passed. Here in China.

Bush is making a political judgment. He believes that a China deeply integrated with the global economy will become more open and democratic. But under Xi Jinping, China has become more closed and authoritarian. Its hostility to the United States has also become more pronounced. At the same time, China’s rapid economic growth has provided funds for large-scale military construction.

Some U.S. policymakers now believe the decision to admit China to the WTO was a mistake.They believe that huge Promote This has also made a great contribution to China’s exports. deindustrialization America’s. The rise of Donald Trump has been further fueled by rising inequality in the United States.

This raises an awkward question. What if globalization, instead of promoting democracy in China, actually undermines democracy in the United States? It would be an interesting irony of history if we didn’t face the consequences.

Concerns about the health of American democracy underpin the Biden White House’s embrace of industrial policy. Biden has kept in place the tariffs Trump imposed on China and added massive subsidies aimed at reindustrializing the United States and giving the country a lead in future technologies. The White House considers these policies critical to the stability of American society and its democratic system.

Many Europeans are frustrated by America’s shift toward protectionism and industrial policy. But last week’s announcement of an EU investigation into subsidies for China’s electric vehicle industry suggests Europe is heading down a similar path.U.S. imposes 27.5% tariff on Chinese cars Comparison of The current EU tariff is 10%. But that number could rise significantly if the EU decides China unfairly subsidizes its car exports.

China responded to the EU investigation by accusing Europe of “naked protectionism”. But some influential Americans are more sympathetic. Jennifer Harris helped design U.S. industrial policy in the Biden White House, Tweet: “Welcome Europe. Glad you are here now.”

If Europe does follow the U.S. in becoming more protectionist, it will similar reasons — Worried that Chinese competition is destroying Europe’s industrial base and social and political stability.

The automobile industry is the most important manufacturing industry in Europe, especially in Germany, the economic core of the EU. It is also one of the few regions in Europe with truly world-leading companies.three out of four largest car company Volkswagen, Stellantis and Mercedes-Benz Group are among the world’s largest companies by revenue and are headquartered in the EU.

But Europe’s dominance in the global auto industry is quickly emerging erosion. This year China will become the world’s largest automobile exporter. The Chinese are particularly strong in electric vehicles (the cars of the future). That advantage is difficult to shake because China dominates the production of batteries and the supply of rare earth minerals crucial to electric vehicles.

The traditional free-market reaction is that Europeans should be grateful if China provides European consumers with cheap, reliable electric cars. The fact that these cars will form the basis of Europe’s green transition provides additional impetus to welcome Chinese electric vehicles. But the social and political reality is more complex. The automotive industry provides more than 6% of employment opportunities in the EU, according to submitted to the European Commission. These are often high-paying jobs that play an important role in the self-image of countries such as Germany. Seeing these jobs migrate to China would have explosive consequences politically and socially.

Support for Germany’s far-right Alternative for Germany party has surging In Germany, many opinion polls show the party to be the second most popular party. Just imagine what would happen if China’s BYD cars replaced German BMWs on the highways and the domestic auto industry began to collapse.

However, while protectionism sounds like an obvious and tempting solution for the EU, the reality is much more complex. Europe still needs Chinese input (in the form of batteries and minerals) to build electric cars for domestic sale. China is also the world’s largest automobile market and the largest export market for Mercedes-Benz and Volkswagen. At least half of the latter’s profits are made there. If Europe imposes steep tariffs on Chinese electric vehicles, Beijing will almost certainly retaliate. On the other hand, EU companies have already lost market share in China, and this decline appears to be accelerating.

These complexities may mean that Europe ultimately does not go the U.S. route and has to quietly abandon its protectionist threats. On the other hand, political and social pressure to save the European auto industry is only growing. The rise of populist and nationalist parties across Europe will exacerbate this pressure.

The EU may end up pushing for some kind of messy compromise, such as “voluntary” export restrictions on Chinese electric cars. But whatever the final outcome, it is clear that industrial policy and protectionism are once again respected on both sides of the Atlantic.

gideon.rachman@ft.com