Pearls and Irritations

America insists on treating China as an economic threat, but the reality is that China’s economic advancement has benefited us all. Instead, the stagnation of wages and manufacturing job losses experienced by Trump supporters in the US largely reflects the impact of technological change.

For the best part of forty years, from the late 1970s until not long before the arrival of Donald Trump as US President, the West encouraged and welcomed the development of the Chinese economy. All that has changed, however, and the US now sees China as an economic threat rather than an opportunity.

But first, what has brought about this change in attitudes, and second, why and how far is China really an economic threat to the US and other advanced economies?

Why is China now widely perceived as an economic threat?

Certainly, the Chinese economy is now much bigger than when the West was supporting its further development. Indeed, properly valued at its purchasing power value, China is now the biggest economy in the world, and the US is second.

But that in itself does not make China an economic threat, anymore than the US was a threat when it was the biggest economy. Rather the reason why China is now seen as an economic threat, especially by many Americans, is because they believe that China’s economic growth threatens their living standards.

The core of the problem is that over the last forty years or so, the real wage of the typical white male adult worker fell in the US. The US was not alone in experiencing wage stagnation and rising inequality, but its workers suffered more than most.

Not surprisingly, no-one wants to think it is their fault when they start going backwards. Instead, they look for someone else to blame, and in the US foreign migrants and competition from China were the obvious targets. On the other hand, the incomes of the educated “elite” have not gone backwards, and the growing income gap between these educated “elites” and the white workers has underpinned the polarisation of the US electorate that has been widely remarked upon.

Trump has pitched his appeal to these disadvantaged white workers and sought their support by increasing tariffs on imports from China. In addition, Trump sought to close off American universities to Chinese students and information exchange, and restricted Chinese firms investing in the US, as well as trying to ban migrants more generally. Biden has continued Trump’s protectionist policies against China and his Inflation Reduction Act introduced significant subsidies for some US industries as well.

The justification offered for these attempts to restrict Chinese competition is that this competition is unfair. It is often alleged that China steals western technology and unfairly subsidises its new industries.

For example, recently the fear of Chinese competition was captured in an article in the latest issue of The Economist, headlined “An influx of Chinese cars is terrifying the West”. However, the reasons why China has first become the world’s biggest producer of cars, and now the biggest car exporter are worth examining in more detail.

The Chinese car threat

Although it is again not widely recognised, China has been the biggest manufacturer of cars since 2009, however it was only in 2023 that it became the world’s biggest car exporter.

China’s early significance as a leading car manufacturer reflects the fact that it has a very big domestic market. In 2022 about 22 million passenger vehicles were sold in China, compared with less than 13 million in both America and Europe.

Furthermore, as the world decarbonises the EV market will be by far the fastest growing, and as reported in The Economist, last November some 42 per cent of car sales in China were either pure battery or hybrids, compared to about 25 per cent in the EU and just 10 per cent in America. Thus, China’s share of the vehicle market is likely to continue to increase as China is way ahead in the production of electric vehicles (EVs) at a competitive price.

The other obvious reason why China’s share of the car market is growing is that its cars are relatively cheap. For example, China is reportedly selling cars in South-East Asia for less than $US10,000.

While if we compare the price of electric cars, VW’s ID3 and Tesla’s Model 3, both made in China, are about 15 per cent more expensive in Europe than the Chinese BYD Seal, a midsized saloon that is bigger and arguably better. And in China the Seal costs less than half what its costs in Europe but it is still profitable. While the cheapest EV sold in China by BYD costs around $US12,000, compared with $US39,000 for the cheapest Tesla in America.

Part of the reason for this low Chinese price is subsidies, but other countries also subsidise their car manufacture, and especially the manufacture and purchase of EVs, yet they are not matching China’s car prices.

In addition, Chinese cars are competitive for a number of other reasons including:

• Car manufacturers in China benefit from a vast local supply chain and the associated economies of scale. For example, VW is reported as cutting its manufacturing costs in China by at least 30 per cent by sourcing locally.
• Chinese cars incorporate the latest technology. Frequently Chinese car firms are associated with technology firms, including the firms that now make 70 per cent of the world’s lithium-ion batteries.
• For much the same reasons, Chinese cars have superior infotainment systems, which especially appeal to younger drivers, and the Chinese systems are 34 per cent cheaper than the older versions bought abroad, even though they have 70 per cent more computing power.
• The Chinese market is more competitive, with around 150 carmakers, including foreign brands.
• Chinese firms are less risk averse, quickly updating their technologies and introducing new models to keep the customers interested in half the six to seven years common in their foreign competitors.

In short, as The Economist put it: “Chinese EVs are so snazzy, whizzy and – most important – cheap that the constraint on their export today is the scarcity of vessels for shipping them”.

The response to the Chinese car threat

But how should other governments respond to this so-called Chinese car threat? Clearly as The Economist says: “The temptation will be for rich-world policymakers to shield their carmakers from the onslaught of state-backed competition.”

But is that really a good idea? Instead, there are a number of good reasons for welcoming Chinese cars rather than seeing them as a threat.

First, consumers obviously benefit from the competition that Chinese cars bring, and especially Chinese EVs, which offer better value for money.

Second, the availability of cheap Chinese EVs will make the transition to a low carbon world that much easier.

Third, Chinese car exports are mostly not to the US or Europe, but to Southeast Asia, the Middle East and Latin America. For example, in 2017 the value of Chinese car exports to ASEAN economies was 60 per cent of its exports to the US, but now it is 120 per cent. So the threat from Chinese car exports to the advanced economies is less than might be thought.

Fourth, the US and European car manufacturers may well be able to respond to Chinese competition and improve the value of their cars, as they did in response to the rise in Japanese and South Korean carmakers in the 1980s. Also, the new Chinese entrants are likely to move production closer to the consumers over time, Already BYD is opening a factory in Hungary, and other locations are likely.

Fifth, the existence of a car-making industry does not determine a country’s economic growth or its living standards. For example, although tariff protection for the Australian car industry ended in the early 1990s, total manufacturing production continued to increase until it peaked in 2008, and last year it was still 23.7 per cent higher than it was thirty years ago when the decision to stop protection was taken.

What has changed is manufacturing employment in Australia which has fallen by 27 per cent since 1980, but over the same period manufacturing employment in the US has fallen by slightly more (29 per cent). Thus, the real threat to manufacturing jobs was not foreign competition but rather the increase in productivity stemming from technological change.

Furthermore, total employment across all industries has never been higher in both Australia and the US. The loss of jobs in manufacturing has been more than offset by the increasing job opportunities mainly in the service industries. What matters is how governments respond to the impact of technological change on the labour market. But without that increase in manufacturing productivity and the chance to purchase cheaper goods from China and other developing countries our living standards would have stagnated.

Finally, in Australia’s case, we are likely to benefit from an increase in Chinese car market share, as we will export the iron ore that makes the steel in Chinese cars. Indeed, if we succeed in our ambition to become the most competitive source of renewable energy, in future the steel for Chinese cars might well be made in Australia, rather than just shipping the iron ore.

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