EU trade policy towards China: SPD ministries for a tougher approach

afp/dpa/rtr | The SPD-led federal ministries are urging the government to take tougher action against China. This emerges from a paper preparing the upcoming coalition committee, which was first reported by Die Zeit. “China’s economic and trade policies are based on a web of government subsidies, administratively controlled excess capacity and economic coercion,” it says. Chinese companies would therefore have competitive advantages that would not be possible using purely market-based means. Germany must counter these distortions more robustly.

The SPD ministries argue in their paper that China is systematically violating the existing rules of world trade. That is why Germany should, for example, lobby the EU for an anti-subsidy investigation against Chinese car companies that produce plug-in hybrids. It is examined whether foreign manufacturers have unlawful competitive advantages through state support. If necessary, there may then be countervailing duties. In addition, stricter measures should be taken against product piracy and greater attention should be paid to the violation of labor and environmental standards, through which China achieves low export prices.

In the coalition committee on Wednesday, the leaders of the Union and SPD want to discuss how to deal with China. Recently, in view of the growing threat from cheap imports from China, the company had already taken a somewhat more restrictive course. According to Die Zeit, the Union-led Economics Ministry and parts of the Chancellery want to use trade protection measures very cautiously.

According to economic experts from Germany and France, the flood of exports from China cannot be stopped with blanket tariffs. “Too expensive and not targeted enough,” said a statement from the Franco-German Council of Economic Experts (FGCEE) published on Monday. General “Buy European” measures should also be rejected for the same reasons. The EU already has a comprehensive range of instruments at its disposal that should be used more effectively, quickly and more coherently.

The experts are calling for a targeted EU strategy. This must ensure economic security, preserve the advantages of free trade and cleverly counter China's economic dominance. In order not to become susceptible to blackmail through economic dependencies, the economists are calling for a combination of new trade agreements, trade policy protection instruments and a diversification of supply chains in public procurement and government funding. In the long term, trade and investment relationships should be deepened with countries that can serve as alternative sources of supply for critical raw materials and goods. In the short term, a quicker and more tailored use of existing trade defense instruments is recommended.

In addition, the EU should use targeted industrial and innovation policies to promote activities in which the EU can act as an important global supplier. Public procurement should play a key role as the initial market for innovative European products.

“Blatant tariffs are a costly and poorly tailored response to Chinese economic power and concerns about Europe’s economic resilience,” said ‌Gabriel Felbermayr, member of the Economic Advisory Council. “Politicians should target products that can lead to dependence on a single trading partner and thus to strategic vulnerability.”

The background is concern about China's growing trade surplus, extensive industrial subsidies and its leading role in strategically important supply chains, such as rare earths. The aim should be to specifically close weak points that can be exploited politically - and not to restrict imports from China across the board. For each dependency, the EU should consider how best to achieve resilience: ‌through private sector expansion of domestic ‌capacities, through diversification of supply chains, or through a combination of both.

“To strengthen resilience, we not only need to reduce vulnerabilities, but also an offensive strategy,” said Felbermayr. “The EU must strengthen its own location so that companies strengthen and develop technical and industrial skills on which their trading partners depend.”

The EU's rapidly growing bilateral trade deficit with China shows the urgency of a European strategy. According to the information, it is expected to grow to around 400 billion euros this year, which corresponds to around two percent of Europe's gross domestic product. In 2019 it was still 164 billion euros.

When EU Trade Commissioner Maros Sefcovic travels to Beijing next week, he is hoping for goodwill there: The EU wants to convince China to voluntarily limit its exports to Europe. In Brussels, the EU Commission is at the same time working on alternatives to protect European industry from competition - including punitive tariffs and new options for retaliation.

The EU does not want a trade war, but concerns about the European economy have increased significantly in recent months. The EU imports significantly more goods from China than the other way around; the difference is now worth more than a billion euros per day. Chinese suppliers are cheaper, for example when it comes to steel for wind turbines and power transformers, as well as semiconductors and batteries.

Brussels accuses Beijing of deliberately fueling this imbalance with state subsidies. The EU Commission has therefore already imposed punitive tariffs on electric cars from China, tightened steel tariffs and repeatedly excluded Chinese companies from public tenders.

China rejects the allegations. The reason for the success is not unfair subsidies, but rather investments in research and mass production in Chinese industry. China is an export country like Germany, argues the Chinese Ministry of Commerce. The economist Zhu Tian also points out the weak demand in the country: Less is being bought in China, so more has to be exported.

The EU wants China to voluntarily give up part of its exports to Europe, for example hybrid cars. Negotiations on this have been going on for weeks, and the Ministry of Commerce in Beijing has publicly rejected the proposal. It violates the rules of the World Trade Organization (WTO) and the principle of fair competition.

It is therefore unclear whether Sefcovic and Chinese Trade Minister Wang Wentao will agree on specific figures in Beijing. From an EU perspective, even an agreement in “one or two areas” would be “the best possible result,” says trade expert at the Brussels think tank Bruegel, Ignacio García Bercero. This also includes European access to raw materials in China.

However, the Chinese economist Zhu expects that China is also interested in compromises “on specific issues”. The alternative could be punitive tariffs, like those that already exist on electric cars. Beijing also wants to prevent the EU from introducing “Made in Europe” quotas for public funding as planned.

In Germany, calls for tougher action have become louder. With Lars Klingbeil and Carsten Schneider (both SPD), two federal ministers have spoken out in favor of tariffs on plug-in hybrids - unlike in the debate about electric cars two years ago, when the federal government did not want to anger China and endanger German exports.

The reason for the sharper tone is the current difficulties in the German auto industry. The manufacturers' association VDA is also open to the punitive tariffs. “If unfair behavior is proven, the use of WTO-compliant trade protection instruments must be examined,” demands VDA President Hildegard Müller. The Commission only needs to check whether China is really paying unfair subsidies.

In addition to tariffs, the EU can ban Chinese companies from the European market or public tenders - but there are months-long deadlines for this. On behalf of Germany and France, the Commission is therefore looking for new ways in which it could react within a few hours or days in the event of a trade war.

Commission President Ursula von der Leyen is expected to present the first results in mid-October. Beijing has already issued a warning to Brussels, citing the trade practices of the current US government: "The EU itself has already become a victim of such instruments. Don't do to others what you don't want to do to yourself."

However, trading expert Bercero assumes that the type of instrument is irrelevant. “There is still a lack of political will to use them,” he says. Whether anything changes will be seen a week after Sefcovic's trip to the summit of European heads of state and government.