Issue Brief - Reviewing the State of Play: Tech Tensions between China and the West
An in-depth look at geopolitical and economic trends
By: Jennifer Lee
Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Following recent events, this piece takes stock of tensions between China and the West in the high and green tech spaces.
In a recent Pew Research poll, more than half of American respondents believe China has a significant negative effect on the US economy. US and allied efforts to limit Chinese access to dual-use high tech and Chinese efforts to address the impact of such export controls and sanctions on their technological advancement show no sign of abating. The Biden administration is expected to announce next week initiation of a Section 301 trade case aimed at increasing tariffs in specific strategic sectors, including EVs and lithium batteries, solar panels, and semiconductors.
Top Chinese officials have traveled to Europe on multiple occasions this spring to try to assuage similar concerns of negative impacts on the EU economy from China’s economic practices; Chinese President Xi Jinping visited France, Serbia, and Hungary this week. In April, at the same time US Treasury Secretary Yellen visited China to warn against excess exports and call for China to revise its industrial practices, Chinese Commerce Minister Wang Wentao traveled to France to discuss EU concerns of overcapacity. To combat security and economic threats arising from China’s strategic tech access and industrial policies, the US, the EU, and partners (e.g., Japan, South Korea) have implemented export controls and launched investigations – among other measures – across multiple sectors. In some cases, China has retaliated with its own restrictions.
Electric vehicles (and lithium batteries)
The EU & China
In 2023, China became the world’s largest vehicle exporter (overtaking Japan), and Chinese company BYD surpassed Tesla as the largest electric vehicle (EV) seller. With European carmakers concerned about the influx of Chinese EVs, the European Commission initiated an anti-subsidy investigation October 2023 against Chinese battery EVs, with Commission President von der Leyen criticizing Chinese EVs for prices “kept artificially low by huge state subsidies.”
China ended subsidies for private consumers purchasing EVs in 2022, but it still provides a variety of government support – both at national and local levels – to Chinese EV companies, such as exempting them from consumption taxes or offering them land at discounted prices. The EU ranked as the top destination for Chinese EV exports in 2023, and Chinese EVs accounted for 8% of the EU EV market in the first seven months of 2023, compared to under 1% in 2019. The EU currently has an import tariff of 10% applied to Chinese vehicles, much lower than the US tariff of 27.5%. Under the anti-subsidy tool’s rules, the Commission could impose provisional tariffs by July (9 months of investigating) and finalize them by November (13 months of investigating). European Commissioner for Trade Dombrovskis has indicated the EU will be ready to announce provisional steps by the summer deadline.
In apparent response to the probe, China launched an anti-dumping investigation into EU brandy in January. Almost all of China’s EU brandy imports originate from France. In his visit to France, Wang Wentao Apr. 8 insisted the move does not target a specific country. Executives from prominent Chinese EV companies including BYD, Geely, and SAIC joined Wang on the trip. In his meeting with those representatives as well as stakeholders from Chinese lithium battery leader CATL, Wang denied EU allegations of Chinese EV overcapacity. Although BYD and SAIC have high utilization rates for their EVs, utilization of lithium batteries (used in the battery EVs) is low; thus the battery producers are experiencing overcapacity that is expected to worsen further through 2025.
During Xi’s visit, Paris sought to strike a balance between protecting its auto industry and allowing Chinese investment. French Finance Minister Le Maire signed a deal with France’s auto industry leaders that increases national targets for EV sales, expands the charging station network, and ensures that government subsidies remain focused on EV models that meet the strictest environmental regulations, which would favor EU models over Chinese products. But in his remarks, Le Maire noted that the government would welcome BYD or other Chinese companies to open EV plants in France. (Macron also noted that Xi had shown an open attitude on the brandy issue and that China would not impose duties until after the EU EV investigation concluded.)
The US & China
The US already has higher tariffs on Chinese vehicle imports than the EU does, but lawmakers on both sides of the aisle have called for increased tariffs. Those levels are expected to increase further with the White House’s completion of its review of tariff levels. Washington has also begun scrutinizing China’s EV exports from a security risk aspect. In February the White House directed the Commerce Department to begin investigating potential national security threats arising from data use and other connectivity aspects of Chinese EV technology.
Washington has taken action on lithium batteries produced in China via provisions in the Inflation Reduction Act (IRA). Per updated guidelines that went into effect at the beginning of this year, purchasers of EVs are ineligible for the IRA tax credit of up to $7500 if any critical minerals or components of the batteries for the EVs were produced (extracted, processed, recycled, manufactured) or assembled by a foreign entity of concern – including China; any foreign entity identified as “engaged in unauthorized conduct that is detrimental to the national security or foreign policy” of the US; or any foreign entity that is headquartered in, incorporated in, controlled, owned, or “subject to the direction” of a foreign entity of concern, the latter three determined by if an entity of concern cumulatively holds at least 25 percent of the board seats, voting rights, or equity interest. China filed a formal complaint with the World Trade Organization (WTO) that the IRA violates WTO rules in retaliation.
Wind and solar power products
The EU & China
In addition to the anti-subsidy probe on Chinese EVs, European Commissioner for Competition Vestager announced Apr. 9 that Brussels would also launch an anti-subsidy probe into China’s wind turbines. The Commission could act by banning certain transactions or disqualifying public tender bids. Chinese turbine exports cost about 20% less than comparable EU and US products. Of note, the EU utilizes anti-subsidy tools less frequently than anti-dumping actions (21 anti-subsidy compared to 117 anti-dumping in 2022) because anti-subsidy investigations carry greater political weight; they impose penalties based on the behavior of a government rather than on the behavior of a company. China holds 60% of global wind turbine production capacity and faces a “domestic supply glut,” contributing to its drive to export wind turbines. Beijing criticized the move as “discriminatory” and against WTO rules.
The US & China
The Commerce Department ruled in 2012 that Chinese suppliers of crystalline solar photovoltaic (PV) cells – the most common cells used in solar panels – were dumping their products in the US and benefitting from subsidies. Currently these products have a tariff of 14.25%, and further levies designed to address attempts to circumvent the tariffs by finishing assembly in Southeast Asia are slated to resume June 6. A bipartisan group of senators in January renewed calls to increase tariffs for Chinese solar products. The US industry debates the merits of raising tariffs on Chinese solar inputs. While Chinese solar panels outcompete US solar panel sellers in price, some US solar companies benefit from cheap inputs coming China and worry that tariffs would endanger supply at a time where demand for solar power is growing. China is projected to maintain control over 80% of global solar manufacturing capacity through 2026.
Ahead of her April travel to China, Yellen visited US solar cell manufacturing company Suniva. In her speech, she alluded to China’s overcapacity and subsidization as driving Suniva to bankruptcy in 2017. Indeed, China produces double the number of solar panels currently demanded worldwide. Yellen credited funding from the IRA for spurring growth and promoting the investment Suniva needed to resume manufacturing this year.
Semiconductors
Beyond economic concerns, Washington has worked to limit China’s access to strategic technology citing national security. The Biden administration has pushed its allies to coordinate efforts to restrict semiconductor exports to China and adopt sweeping controls. European allies, Japan, and South Korea have widely cooperated with restrictions even as they have their own trade tensions with the US (e.g., over the IRA, steel and aluminum tariffs, etc.). Washington released new rules Apr. 4 designed to improve enforcement of existing semiconductor controls. The Biden administration is engaging government officials and ASML representatives from the Netherlands to get ASML to stop servicing machines in China even if purchased prior to when restrictions went into effect (ASML provides the extreme ultraviolet lithography equipment needed to produce advanced chips).
The US-led controls have caused Beijing discomfort. In his Apr. 2 phone call with President Biden, Chinese President Xi listed US efforts to restrict China’s tech advances just after China’s “red line” of supporting Taiwan independence, indicating the significance Xi assigns to the issue. When Dutch Prime Minister Rutte visited Beijing the week prior, Xi warned him against implementing further tech restrictions or else risk “division and confrontation.”
What to watch (and what not to expect) in the coming months
Biden’s calculus on green trade tariffs and Beijing’s response. The extent to which to the White House will raise the tariffs is still up in the air. Yellen cautioned officials in China that continued export of excess capacity products may elicit economic retaliation from the US and other partners. The recent warnings from Yellen and subsequently Blinken mean that Beijing was informed of the possibility of such measures well in advance. Beijing will likely threaten retaliation but will await the final decisions before reacting.
China’s industrial policies slow to change. Yellen’s warnings fell on largely deaf ears because China’s overcapacity goes hand-in-hand with its economic model and industrial policies. Though Li Qiang’s Government Work Report called for preventing overcapacity, the plan relies on technological advancement and “new productive forces” and is expected to progress on Beijing’s timeline, not very susceptible to foreign pressure. Still, Beijing will remain concerned about the state of investigations and tech controls and will continue to seek foreign investment for its sluggish economy.
Reactions from Berlin and Paris. Though Germany has thus far followed suit with its European colleagues in economic and technological punitive measures against China, it has sometimes been a reluctant accomplice. Germany’s Chancellor Scholz, whose popularity has sunk to the lowest level ever recorded by a German chancellor, visited China in April seeking greater access for Western (particularly German) companies to the Chinese market. During his meetings, Beijing pressed him to oppose any tariffs arising from the EU investigations and any further export controls on semiconductor technology. With German elections approaching in 2025, Scholz is under pressure to improve the economy. Estimates for Germany’s 2024 GDP growth have declined to a mere 0.1%. With German automakers more heavily invested in China, Beijing could target German cars for retaliation to EU tariffs. France, meanwhile, has encouraged the EU probe into Chinese EVs. But Paris also has a mixed record with supporting EU policy towards China, and Xi played on Macron’s concerns about market access in China in an effort to try to get him to rethink US-led Western trade restrictions.
Other election effects: the prospect of Trump protectionism and far-right gains in Europe. Leaders worldwide, including in Europe, are bracing for the potential return of Trump’s high tariffs and America-first policies should he return to the White House after the November US elections. Meanwhile, far-right party gains ahead of June’s European Parliament elections at the expense of European green parties could hamper European green agenda efforts such as increasing renewable energy deployment.
EU emphasis on competitiveness. In a reaction to not only China’s economic practices but also the US IRA, the EU is set to prioritize economic competitiveness in its 2024-2029 Strategic Agenda. The European Council in a special summit Apr. 17-18 discussed initiatives such as removing barriers for the EU single market, harmonizing corporate laws to facilitate a European capital markets union (to draw foreign investment), facilitating R&D within the bloc, and jointly addressing emerging tech challenges including AI. French Finance Minister Le Maire met with German Economy Minister Habeck and Italian Economic Development Minister Urso Apr. 8 to seek their cooperation on acting against China’s overcapacity in green tech goods. The European Council will likely approve the final Strategic Agenda at its June 27-28 meeting before Belgium hands over the rotational presidency to Hungary, which could seek to slow walk further actions against Beijing.