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Policymakers Grapple with China’s Car Exports: Balancing Competitiveness and Protection

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Policymakers Grapple with China’s Car Exports: Balancing Competitiveness and Protection

China’s Rapid Rise as a Global Car Exporter: Implications for the European Union

China is set to become the world’s largest car exporter by the end of this year, with nearly 5 million motor vehicles expected to be exported. This surprising development has caught many off guard, but it is a testament to China’s rapid expansion in the automotive industry. For decades, becoming a global car exporter with renowned brand names has been seen as a symbol of manufacturing prowess, as demonstrated by countries like Japan and South Korea.

In response to China’s growing dominance in automotive exports, European Commission President Ursula von der Leyen recently announced an anti-subsidy probe into China’s automotive industrial policies. However, this article argues that the European Union should not respond by turning inward and raising trade barriers. Instead, it should embrace competition from China and focus on fostering domestic innovation to remain relevant in the global frontier of automotive manufacturing.

China’s journey towards becoming a major car exporter can be traced back to 2009 when the Chinese government initiated efforts to develop the electric vehicle (EV) sector by introducing a range of subsidies, tax credits, and other policy incentives. These measures enabled car manufacturers and their suppliers to pursue EV design and production at relatively low costs. Numerous domestic companies, including BYD, SAIC Motor, and Geely, seized this opportunity and emerged as key players in the Chinese automotive industry. One of the critical factors behind their success was the development of the most competitive EV battery sector in the world, with China now accounting for over 75% of global EV battery production.

Interestingly, China not only supported domestic firms but also attracted foreign brands such as BMW, Volkswagen, Mercedes, and Tesla. These major foreign companies were enticed by China’s vast domestic market, as well as its lower labor costs and advanced industrial base. China’s favorable EV subsidies further motivated them to establish auto manufacturing plants within the country, serving both foreign and domestic markets. For instance, the high-profile case of Tesla building its gigafactory in Shanghai exemplifies why major foreign brands have been drawn to China.

The European Union’s initial response to China’s surge in automotive exports has been considering implementing punitive tariffs in an attempt to limit exposure to China’s competitive manufacturing. However, this protectionist approach is unlikely to benefit the European Union in the long run. Imposing tariffs would slow down investment incentives in EV design and production, hindering innovation and keeping EV prices higher. Such measures would also impede efforts to decarbonize the transport sector and combat climate change.

Rather than resorting to protectionism, European policymakers should embrace competition with China and focus on revamping their industrial policies. Reconsidering investment in the automotive sector through targeted and well-designed policies to encourage innovation is crucial. Accelerating the transition to EVs and addressing gaps in EV technologies is essential. For example, European carmakers should prioritize investing in long-distance batteries, which face underinvestment globally but align better with Western consumer preferences.

While the European Union deliberates on its approach, it should consider the potential consequences of imposing import tariffs on Chinese EVs. Diversion to other markets is inevitable, as demonstrated by the growing popularity of Chinese EVs in Australia. Rather than obstructing the influx of cheap EVs, the Australian government should embrace them and expedite the country’s transition to a net-zero carbon economy.

In conclusion, China’s remarkable rise as a global car exporter presents both challenges and opportunities for the European Union. The European automotive industry needs to adapt to this new competitive landscape by promoting domestic innovation, investing in EV technologies, and avoiding protectionist measures. By embracing competition and pursuing targeted industrial policies, Europe stands a chance to remain competitive and relevant in the rapidly evolving automotive manufacturing sector.

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