China’s next shock is coming – and Britain and Europe are sitting ducks

chinese EV exports
The full brunt of China's massive export capacity is yet to be felt in Western economies - STR/AFP via Getty Images

The EU will be forced to follow Joe Biden’s tariffs against China whether it likes it or not, otherwise Europe will alone face the concentrated trade shock from Xi Jinping’s predatory mercantilism.

It will become the primary dumping ground for China’s exorbitant overproduction of industrial goods, with a flood cars, batteries, and cleantech components together posing an existential threat to the European social market model.

Britain, too, will have to follow suit or become the market of last resort for over-indebted Chinese companies desperately seeking a foreign outlet for excess goods that they cannot sell into their own depressed economy, a fate that would annihilate the UK’s manufacturing base within a decade. We are beyond the point of theoretical discussions about the merits of free trade.

An open world economy cannot coexist under normal trade patterns with a deformed Chinese economy that accounts for 13pc of global consumption but produces 31pc of global manufactured goods. This imbalance is not the result of natural trade flows. Nor is it simply “a reflection of the vitality and creativity of China’s economy” as the People’s Daily told us last week.

It is the mechanical consequence of a hyper-investment strategy directed by the Communist Party. China’s trade surplus has ballooned to 5pc of GDP. Capital Economics estimates that it is twice as large a share of world output as it was before the Lehman crisis in 2008, when it was already causing trouble.

This excess capacity can be absorbed only by hollowing out the industrial cores of America, India, and Europe. The first two are defending themselves. India has just imposed a de facto ban on the use of Chinese-made solar panels in projects that receive public subsidies. Europe is the last big sitting duck.

The original “China Shock” hit the developed world in the 1990s and the early 2000s after China opened the door to offshore plants by Western multinationals. American and European companies could tap China’s vast reserve army of labour and play off Chinese wages against wages at home via “labour arbitrage”. The profit share of GDP in the US rose to extremes not seen since 1929. It was an era of collusion between Western capital and Chinese Communism. It was also an abject failure in the political management of globalisation.

China’s export tsunami was tolerated by Western governments but we now know the damage it did to the cohesion of the western democracies. The China Shock, published by the US National Bureau of Economic Research in 2016, concluded that the overall effect cost 2.4 million American jobs directly, lowered real wages, and devastated local communities in rust-bowl regions. The survivors were Donald Trump’s “deplorables”, to use the ill-judged term of Hillary Clinton.

Most economists assumed that this shock was a one-off episode: the world would rebalance as China progressed from export-led growth to a consumption economy in time-honoured fashion. It has not happened.

Professor Michael Pettis of Beijing University says investment has spiked back up to 42-44pc of GDP, far surpassing any level ever seen in any major country since the industrial revolution. Other Asian tigers peaked in the low-30s before dropping back as they became richer.

Xi Jinping has reverted to the worst pathologies of the old model, partly as a quick-fix to counter the property crash and secular debt-deflation, and partly because the Communist Party needs its instruments of political control.

What makes it intolerable this time is Xi’s bare-knuckled push for cleantech hegemony and his open attempt to overthrow the universalist liberal order – a broader grouping than the West since it includes Japan, Korea, and Taiwan.

Washington is not going to tolerate this second and even larger China Shock. “They’re driving manufacturing companies out of business in Europe. We won’t let that happen here in America,” said Joe Biden.

“We’re not going to let China flood our market. The future of EVs will be made in America by union workers. Period,” he said.

The tariffs announced last week are breathtaking: 100pc on EVs; 50pc on solar panels, semiconductors, and syringes; 25pc on steel, aluminium, lithium batteries, magnets, and so forth. There is much election theatre in this blitz, but it is not protectionist as such.

Adam Smith recognised the limits of free trade. He supported the Navigation Acts in order to sustain a dual purpose shipping fleet, deeming “absolute prohibitions” to be necessary when national security was at stake. Clearly you cannot conduct trade on normal terms with a hostile power infused with Leninist zero sum ideology and in league with Putin.

The Biden tariffs cover 4pc of America’s total imports from China. They are nothing like Trump’s plan for tariffs on everything and against everybody. Nor are they a Smoot-Hawley free-for-all. They are surgical.

Xi says “there is no such thing as ‘China’s overcapacity problem’”. Really?

China’s output of solar cells was 310 gigawatts (GW) in 2022, 567 GW in 2023, and heading for 1,000 GW next year – five times the total installed capacity in the US to date.

Battery output capacity was 550 gigawatt hours (GWh) in 2022; 800 GWh in 2023, and will be 3,000 GWh in 2025, four times the current world market. China already has enough EV plants to meet global demand three times over. This surplus capacity has been promoted by state planners and it is coming Europe’s way.

The EV wave has barely begun. Capital Economics says three quarters of the 4.8 million cars exported by China last year – up from one million in 2021 – were petrol and diesel models. Old internal combustion engine (ICE) cars are becoming unsellable in China where the car market is shrinking and where over half of all car purchases in early April were EVs and hybrids. They are being diverted into the global market instead.

China has already wiped out the EU’s solar industry, first by copying the technology and then flooding the market. It is following the same script with wind turbines. Electrolysers are next. It will happen with EVs soon because Chinese carmakers can make a much fatter profit per car overseas.

Europe’s political economy is in no fit condition to weather this shock. Economic growth has been negligible for 15 years in the big mature economies. The post-Covid recovery is anaemic. Public debt ratios are badly stretched, and fiscal austerity is back. The political centre is crumbling almost everywhere.

Xi slapped Europe in the face earlier this month, visiting his groupies in Hungary and Serbia, with a brief stop in Paris. He needs to move with care. The further he goes in helping Putin to crush Ukraine, the harder it will be for Europe’s globalist camp to hold the line on free trade.

The Commission’s probe of Chinese EVs will conclude in early July. It does not take a crystal ball to see that a giant tariff wall is coming, and that it will spread to every area targeted in Xi’s bid for cleantech hegemony.

The Europeans may wish to carve out a third way between the US in China. Reality will not let them.