US tariffs on Chinese electric vehicles (EVs) have generated a debate over rising protectionism. Just a decade ago countries were pushing for open trade, no barriers, and no investment barriers. The understanding was that the external sector is what will help the economy grow – now it’s a question mark.
In the global turn toward protectionism, President Joe Biden announced steep new tariffs on a range of Chinese imports, including a 100% duty on Chinese EVs, “Folks, look: I’m determined that the future of electric vehicles will be made in America, by union workers, period.”
Also read: Under Biden, the Fundamentals of Sino-US Relations Will Remain the Same
Europe is considering a similar move. In a speech made at Princeton, New Jersey on April 9, EU competition chief Margrethe Vestager said that the “playbook for how China came to dominate the solar panel industry,” had resulted in European companies making less than 3% of the solar panels installed in the region. She said, “We can’t afford to see what happened on solar panels happening again on electric vehicles, wind, or essential chips.”
The understanding is that China’s massive export of cheap EVs and solar panels, fuelled by state-supported production capacity that far exceeds domestic demand, is threatening competitors all over the world. When the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question.
Following suit Brazil, Chile, Mexico and Latin American countries have imposed prohibitive tariffs on steel products from China over the past few weeks, and chances are Colombia may follow.
Nearly a decade ago, China started dumping cheap steel onto global markets. In 2018, the Trump administration applied Section 301 of the US Trade Act of 1974 which covers unfair trade practices, to impose tariffs on hundreds of billions of dollars worth of Chinese imports, escalating the US-China trade war.
Throughout her five-day visit to Guangzhou and Beijing in April, US treasury secretary Janet Yellen hammered a stern message to China’s leaders that their overinvestment in factory capacity for clean energy goods is unacceptable. Putting off the decision to scrap any Trump-era tariffs on China imports, this past week Joe Biden’s administration decided to deal with Chinese overcapacity by codifying and escalating tariffs on an additional $18 billion of imports, including electric vehicles, solar panels, semiconductors and medical product to protect US producers and workers in the strategic sectors.
So while ‘protectionism’ is not the term that the US has used to describe what’s happening, that’s where the global economy has arrived.
Rise of economic nationalism
For the first two decades of the 21st century, trade was seen as the key to better standards of living. But as formidable global problems, pandemic threats, climate change, conflict, rising poverty and inequality cause seismic shifts in the geopolitics of the world, hyperglobalisation and neoliberal economics seem to be crumbling. The result is an overzealous trade industrial policy and technology nationalism marked by growth in big governments around the world, and trade restrictions are seen as the key to protecting living standards in many countries.
From a position where economics was the driving force of political decision-making, politics is now determining economics. This new configuration is drastically different from the liberalisation dogma.
The failure to achieve inclusive globalisation is now giving birth to economic nationalism around the world. And tariffs are not even the most protectionist of instruments, there are now export bans, import bans, technology bans, investment bans, and sanctions – all a guise for aggressive economic nationalism.
A lot of the rising tension is really over technologies that are intelligent, green, ubiquitous and redefining economic structures and international relations. For advanced economies that want to maintain their position in the value chain or for developing countries that aspire to climb up the value chain, mastering these new emerging strategic technologies now appears to be critical. Increasingly these technologies are dual-use. This complicates trade where economic drivers and technological diffusion are sometimes inextricably linked with security concerns.
For all these reasons we’re seeing a return of the state and targeted government intervention to actively steer production towards certain sectors or even create national champions.
This is true for the US’s CHIPS Act, Inflation Reduction Act, Europe’s Net Zero Industry Act, and of course China with its mega innovation projects. Promoted under the mantle of “self-reliance” and “Make in India,” Prime Minister Narendra Modi’s tenure has been characterised by a ramping up of trade protectionism.
India is not part of the global value chains in any significant way. At a recent CII event NITI Aayog CEO BVR Subrahmanyam, said, “To get into global value chains means a fundamental change in a lot of things. It means low tariffs, low procedures and no protectionism,…I think we should go for very low tariffs when you should sign many more free trade agreements and try not to protect anybody or any sector so that we can actually be on par with the rest of the world.”
In September 2023, World Trade Organisation (WTO) chief Ngozi Okonjo-Iweala lashed out at Western nations, saying they were moving towards a power-based global economic system by adopting protectionist measures. In its “Global Trade Outlook and Statistics, 2024”, the WTO has reiterated that rising protectionism is a risk that could undermine the recovery of trade in 2024-25.
The solution to achieving economic growth, social progress and environmental sustainability lies in working through the institutions that reinforce a multilateral order. Albeit the institutions become flexible and advocate just solutions.
Vaishali Basu Sharma is a strategic and economic affairs analyst.
