Europe’s political and business leaderships appear to have concluded that China’s economic dominance represents an existential threat – not from intrinsic competitiveness but from subsidies, technology theft, state-owned enterprises and a pervasive industrial policy.
Cecilia Malmstrom, former European Commission member and a member of the European Parliament, wrote this week about “an ever more aggressive China”, which “seems to be entering a new phase of industrial policy with an increase of targeted subsidies, dumping and overproduction as strategies to increase exports”.
She called for Europe to develop “a coherent updated strategy” to deal with the threat. It is perhaps no coincidence that EU trade commissioner Maros Sefcovic met his Chinese counterpart Li Chenggang on the margins of an Organisation for Economic Cooperation and Development ministerial meeting in Paris on June 4. In addition, China’s Commerce Minister Wang Wentao will hold talks in Brussels at the end of this month as part of a “trade and investment consultation mechanism”.
From here in Asia, European companies have much to fear from competitive Chinese enterprises, whether public or private. However, to blame the threat on subsidies and export-focused overproduction is as mistaken as it is inevitable. The alternative is to look inward at Europe’s own competitive shortcomings.
European enterprises crying foul against Chinese competitors is no surprise: what self-respecting chief executive is ever going to confess that a sharply declining market share is down to their own failings? Blame will always be placed on those “cheating foreign enterprises” which work hand-in-glove with their governments to tilt the playing field.
That is why so many executives rarely call for “free trade” but instead talk of the need for “fair trade”. It is easier to blame subsidies, dumping or overproduction than to focus on their own weaknesses, and on the fundamental foundations of China’s economic competitiveness.
It is true that China has unabashedly developed industrial policies and uses subsidies, preferential tax rates and generous financing to aid development of strategic sectors. But what about Europe’s huge farm subsidies? What about the US local content rules that have protected the American car industry for decades? What about the openly developed industry policies that supported growth in Japan, South Korea, Singapore and Hong Kong in the wake of World War II?
From this vantage point, China’s sins are twofold. First, it developed and sustained a carefully targeted suite of industry policies tailored to an economic system that interconnects policymakers with enterprises, both government-owned and private.
Second, it has an economy large and cohesive enough to experiment, make mistakes and recover. It has also helped that China has focused on infrastructure and research and development in sophisticated sectors, ensuring fierce domestic competition while keeping companies exposed to the discipline of export competition. In short, China’s difference is not that it has industrial policies, but that they have been smart, flexible and sustained.
A recent Rhodium study of China’s industry policies noted how hard it is to pin down the support mechanisms Beijing provides. This is not just because they are numerous or opaquely delivered but because “they are systemic, pervasive and cannot easily be identified as benefiting certain sectors or companies in particular”.
China’s industrial policies are not about picking winners but about pursuing competitiveness across the economy. As Yuen Yuen Ang of Johns Hopkins University recognised, it is about “directed improvisation” – broad policy guidance from the top and creative flexibility below for companies and local governments to compete fiercely, both domestically and in international markets.
The so-called subsidies that upset the West are in reality no more than integral elements of domestic fiscal management. The extensive Rhodium audit of China’s subsidies discovered that the largest form of subsidy was in land prices, cheap bank loans or discounted energy prices. But are such costs not commonly determined at the discretion of most governments, and no more a trade weapon than a government’s right to set its own corporate tax rates or capital gains taxes?
It is the same with Western claims of China’s overproduction. How can Europeans complain when Germany exported 76 per cent of the 4.15 million cars it produced last year? China produced more than 34.5 million cars last year, but it only exported around 7 million, a 21 per cent rise from the previous year.
For a manufacturer in Europe, this provides cold comfort. The competitive threat is acute, even if China’s motives are not as aggressive as some might believe. The imperative in Europe to “de-risk” remains strong, and not only when it comes to China.
If China’s motives are not aggressive, then the European search for a solution must be different. Security concerns become less important, and the imperative to lift competitiveness becomes more so.
In this context, recommendations in the recently released Industrial Accelerator Act make sense: demand that Chinese companies produce in Europe, transfer technology, train and employ local staff, and commit to joint ventures with no more than a 49 per cent share.
Reintegrating a country as huge as China into the global economy was never going to be easy. Its success is a mixed blessing for many and its huge trade surpluses are unsustainable. The “China shock” is real and has to be addressed. This month’s high-level EU-China discussions are critically important.