Ichiro Suzuki
The European Union is raising is tariffs on Chinese-made battery electric vehicles (BEVs) up to 38%, in response to ‘unfair’ subsidies Chinese car makers are receiving from the government, and a threat they pose to the electronic car industry in Europe. These tariffs will come on top of 10% duties imposed on imports of BEVs. Despite its religious zeal for reducing emissions, the EU is slapping low cost Chinese EVs that would certainly accelerate diffusion of EVs. Jobs take precedence over emission reduction, this action suggests. It’s a sign of the times for the EU to be resorting to tariffs.
Donald Trump gave a new lease on life to tariffs during his presidency, breaking a decades-long trend of reducing them. As soon as he entered the White House, he pulled the U.S. out of the Trans-Pacific Partnership (TPP) that was negotiated tirelessly under the Obama administration. TPP still went ahead without the U.S., hoping that the U.S. would return to it after the Trump presidency was over.
President Joe Biden, however, is holding onto much of the Trump tariffs. Today Democratic presidential candidate Kamala Harris shows little sympathy for free trade. Instead, she talks about her tariffs as opposed to Trump’s tariffs. Republican candidates have traditionally embraced free trade whereas Democrats often leaned toward restricting trade even if Bill Clinton brought NAFTA into being. When Republican President or candidate talks against free trade and leans toward protectionism, Democrats have to respond to it.
There is no vote for globalization while protectionism/ tariffs is good politics. It appeals to local communities where jobs are threatened by foreign competitors. Of course, such actions raises costs of goods and higher costs are eventually paid by consumers. Such costs, however, are spread thinly among a vast number of people across the country as opposed to job losses whose pains are felt acutely and personally in small communities. Decades of globalization lowered consumer prices materially, but such benefits were not appreciated as much as they should have been because benefits were spread so thinly.
While Donald Trump turned the system of free trade upside down, this was in a sense a rational response to China’s relentless mercantilism. The World Trade Organization embraced China’s entry at the beginning of the 21st century, hoping that China would ‘grow up’ as the country moved up the ladder of development. To be more specific, China was expected to turn democratic and shift its growth engine to domestic demand from exports. As it turned out, however, China remains autocratic, not surprisingly. Worse, the country’s growth model has little changed with its focus on exports at the sacrifice of the household sector. Excess capacity in a variety of industries allows China to produce goods at very low cost while producers are mot generating profits. President Xi Jinping has no interest in capacity reduction at the expense of factory jobs. While jobs are saved, zombie factories and companies exert downward pressure on prices that spreads throughout the economy. This is what Japan had suffered in the 1990s, and something that China definitely wanted to avoid through extensive studies on the Japan disease.
There is a distinct difference, however, between China today and Japan back then. Japan didn’t export deflation because its currency went through a period of relentless appreciation at a time when its economy was crumbling. The yen’s meteoric rise didn’t make Japanese exports too inexpensive to the rest of the world. This was in the 1990s. Then there was the latter half of the 1980s, when the 1985 Plaza Accord set a stage for the yen’s super normal rise against the dollar amid heightened trade frictions between the two countries. The yen doubled its value against the greenback by the end of 1987 in mere 27 months since the G-7 finance ministers agreed on reversing the direction of the overvalued dollar.
In 1985 Japan was forced to revalue its currency. Then the yen’s rise got its own life and kept rising through the middle of the 1990s and stayed expensive until relatively recently. Were it not for the sharp rise of the currency, Japan might have ended up with having tariffs being imposed on its exports to the U.S. In sharp contrast, the Chinese renminbi had stopped rising ten years ago. The Chinese authorities stopped letting its currency rise in the early years of the 2010s, after ‘mere’ 50% gain in eight years as opposed to the yen that tripled its value between 1985 and 1995. After all, the RMB is not a free float currency even if its belongs in a basket of the IMF’s special drawing rights (SDR) and China is promoting the RMB in global trade. Downward pressure on the RMB has been strong recently because massive amount of capital is trying to get out of China, foreign capital or that of wealthy Chinese.
The RMB in a relatively narrow trading range in recent years has made Chinese export goods competitive again, at least from this perspective while labor costs are going up. Rising labor costs can be offset by downward pressure on prices caused by excess capacity in high fixed-cost industries. While this combination is decisively negative for profit margins, this still makes Chinese goods competitive in export markets. ‘Made in China 2025’ slogan is said to be roughly on target, bringing upgrades on quality of goods though what’s expected for the second largest economy is domestic demand-driven growth. China is yet to find how to do it without inflating real estate prices. Structural reform is a truly tough act. In the late 20th century, Japan was punished for its export surge and inadequate domestic demand by the yen’s sharp rise. Japan also responded to the U.S. anger with voluntary caps on car export volumes. And Japan was and still is a U.S. ally. In the absence of free float currency and voluntary caps, the U.S. is hitting adversarial China with tariffs instead for its mercantilism.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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