Andy Xie

The View | Western protectionism will fail – China’s success isn’t down to subsidies

Complaints of Chinese overcapacity and dumping may be useful in justifying US, EU subsidies and trade barriers but China’s success is really due to its innovation and scale

The strategy will only lead these high-cost Western economies to pay the price with slower growth and higher indebtedness down the road

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Electric cars are lined up for export at Taicang Port in Suzhou, in China’s eastern Jiangsu province, on April 16. The West did not complain about China’s overcapacity in the past because it was good for them. It’s a different picture now. Photo: AFP

Andy Xie

Published: 3:30pm, 24 Apr 2024

The global economy is moving further towards a world of two prices as the West prop up their green technological industries with subsidies and protectionist tariffs against the cheaper products made by the Global South.

The protectionism of the United States and the European Union is likely to spread to other emerging industries, such as small modular nuclear reactors, and even to high-value sectors like aviation or shipbuilding.

But this strategy will only lead these high-cost Western economies to pay the price with slower growth and higher indebtedness down the road. Meanwhile, the Global South, with its lower costs, will enjoy faster growth and healthier finances.

US Treasury Secretary Janet Yellen has just been to China to complain about its overcapacity, subsidies and dumping in the global market. Plainly, this attack is aimed at justifying America’s use of subsidies and tariffs as well as non-tariff barriers to protect its nascent green tech industry.

Under the Inflation Reduction Act, for instance, US makers of batteries for electric vehicle (EVs) can claim a tax credit of US$45 per kWh. In China, EV battery prices are already expected to fall through US$45 per kWh this year, thanks to intense competition. But the issue of dependence on China’s supply chain has become politically toxic in the US, so American subsidies will continue.

Some have been surprised that the US is not focusing on its exchange rate to boost its competitiveness, as it has done before. In 1971, it ditched the gold standard and devalued the dollar by about one third, as the Japanese yen and Deutschmark strengthened. After the 1985 Plaza accord to depreciate the dollar, the US currency weakened by half against these currencies.