The rumbling trade war between the US, China and the EU took a new twist this week. It emerged that if China were to invade Taiwan, which manufactures the world’s top-end computer chips, Taiwan would be able, remotely, to disable the machines that made the chips, curtailing China’s ability to access and manufacture them.
Bloomberg reported that the Dutch-based ASML, the only producer of the machines that make the most advanced semiconductors, and its largest customer, Taiwan Semiconductor Manufacturing Company (TSMC), had confirmed to the Dutch government that this could be done. The Netherlands , it reported, had been carrying out simulations on what would happen were China to invade.
The significance of this is that there is a US ban on exporting the highest specification chips to China because they can be used for military purposes. ASML, which is Europe’s most valuable company, does not sell the machines that make them to China and the aim was to reassure the Biden administration that it cannot seize the technology by force.
Increasingly acrimonious
Access to advanced chip technology is just one front in what is becoming an increasingly acrimonious trade battle between the US and China, a fight into which the EU is gradually being drawn.
There are many different aspects to the conflict and the difficulty is to distinguish what is really significant and what is just sniping. But the broad facts are well known. China is the world’s largest manufacturer and the largest exporter of goods, passing the US and Germany around 2008. That growth took off after China joined the World Trade Association and was supported by successive US administrations, which considered trade as the best way of binding China into the Western economic system.
But that policy had the effect of China running huge trade surpluses with the US, and to a lesser extent Europe. The switch from full co-operation between the US and China to a much tougher approach was triggered by Donald Trump putting tariffs on Chinese imports to the US.
The impact of that is still being debated and there have been claims that it cost thousands of US jobs. But actually those initial import restrictions have been substantially tightened by the Biden administration, most recently by bringing in a 100 per cent tariff on imported Chinese cars and a 50 per cent one on solar cells.
Flash point
The car issue has become a flash point. The EU has been drawn into the conflict, partly because of political pressure from the US, but also because European car manufacturers fear that much cheaper Chinese vehicles will damage their own sales.
Janet Yellen, the US Treasury Secretary, has this week urged Europe to join with the US to stop China dumping its excess production. She told a German audience: “China’s industrial policy may seem remote as we sit here in this room, but if we do not respond strategically and in a united way, the viability of businesses in both our countries and around the world could be at risk.”
As far as EU exports are concerned, the US and UK matter more than China. China has indeed become Europe’s largest trade partner, with 16 per cent of all trade in goods. But since China sells more to Europe than it buys, it is not so important as an export market. The US takes 18 per cent of the EU’s exports; the UK is second with 13 per cent; and China only third with 10 per cent.
It is however very important to European car producers. Britons will be familiar with Chinese-made MG cars, which have become bestsellers. But the real game-changer for Europe would be if Chinese companies could import electric cars at below €20,000 (£17,000), as its largest manufacturer, BYD, plans to do next year.
Points of friction
Europe’s response is not yet clear, but according to its trade commissioner, Valdis Dombrovskis, the EU is planning some announcement of restrictions “before the summer break”.
Unsurprisingly, China has threatened to retaliate, with stories of it imposing a 25 per cent levy on EU and US cars imported into the country. That would hit Europe much harder than America, which sells very few cars there.
So it’s a tit-for-tat spat. If you bring in tariffs so will we, and let’s see who gets hurt the most. The two current areas of tension are computer chips and cars, with the US holding a much stronger hand than China on the first, and China being in a better position on the second.
But there will be many other points of friction in the months ahead, and the huge question looming over everything is whether what is currently an ill-tempered squabble will slither into a full-scale trade war.
Expect the sniping to continue
It can’t completely, for one simple reason. China dominates some areas of production so completely that the rest of the world cannot do without it, at least in the medium-term. For example, it makes 80 per cent of the world’s solar panels. At the moment there is massive oversupply of these and they are selling at rock-bottom prices, but if the world is to make the switch successfully to solar power, only China can deliver the goods.
Or take iPhones. More than 95 per cent of them are made there. While Apple is seeking to diversify production to India, that switch takes time.
Everyone knows this. So expect the sniping to continue. Expect a gradual diversification of sourcing, as companies try to make sure they are not too reliant on any one supplier, or country. But the politicians are prisoners of reality. It will be more trade friction than full-scale trade war.
Need to know
A footnote on the China/US spat. One of the less-noticed aspects of the current retreat from globalisation is that it began about 15 years ago. If you take the proportion of international trade relative to world GDP as a measure, it peaked around 2008. So it wasn’t Donald Trump’s doing after all, though he was very important in his realigning of US trade policy, which, as noted above, has stuck.
So what’s the explanation? My best shot is to say three things.
One is that we reached the practical limits of specialisation. There was no point in trying to cut prices still further by having something made on the far side of the world. Better to manufacture closer to the market, even if that cost a bit more. The second is to point out that cost of labour became quite a small element in most manufacturing processes, so the savings became progressively less significant. And third, the manufacturers of the developed world lifted their game. I would like to see more research on this, as it is so vital to our understanding of arguably the most important element of economics – how trade creates wealth – over the past couple of centuries.
But there is one other element of economic history to consider: the costs of protectionism in the inter-war period of the last century. It took until the middle 1970s before trade reached its 1913 peak. Since then we have had the greatest burst of prosperity the world has ever known, lifting billions of people out of poverty in China, India, South East Asia and Africa.
There has been an environmental cost to that growth and that is the huge challenge now facing the world. But those years after 1913 were dreadful. I hope all politicians remember that.