Against the backdrop of the wars in the Middle East and Ukraine, the world is witnessing tension between China and the West. The recent EU regulations on Chinese-made electronic vehicles epitomize the bloc’s concerns about Chinese industrial policies. However, an overview of the historical background and recent developments is necessary for a critical analysis of the potential trade war between China and the EU. This is the first of a sequence of two articles. In this article, we take a closer look at how China as a country evolved over the last four decades. We explore its current and historical relationships with its neighbors and the rest of the world.
China’s Historical Relations with Its Neighbors
Since Russia invaded Ukraine, the world has been keeping a close eye on the development in the South China Sea. China’s long-standing claim over Taiwan along with increased military exercises in the region have heightened tension, as speculation about a possible Chinese attack on Taiwan is not going away. Border clash with India in 2021 and China’s alleged involvement with the ongoing civil war in Myanmar assert that the country does not often intend to show restraints when it comes to military or diplomatic tensions with its neighbors. China has had a long history of military conflicts with its neighbors. Wars with India in 1962 and 1967 and Vietnam in 1979 (subsequent border and naval clashes till 1991), the invasion and annexation of Tibet, and border tension with the former Soviet Union serve as the illustration of the country’s desire to use military strength in achieving regional superiority and territorial expansion. Notwithstanding the brutal military crackdown in Tiananmen Square in 1989, trade and economic liberalization, initiated by Deng Xiaoping, and continued by his chosen successors Jiang Zemin and Hu Jintao made China a global economic powerhouse. This heralded the beginning of a new China, a country that would have deeper economic engagement with its neighbors and the rest of the world.
Post-1991 economic liberalization
The post-1991 economic liberalization enabled China to leapfrog economic development, propelled growth, boosted foreign investment, and created wealthy and prosperous middle and upper-class consumers that remained at the epicenter of an unrivaled industrial development. China rose from a low-income to an upper-middle-income status. China’s GDP was $18.3 trillion in 2022, 73% of the GDP of the United States. China’s per capita income is now roughly $13,000. The sheer size of the market comprising more than a billion consumers attracted multinational companies, while concurrently offering formidable market opportunities for local companies.
The reforms in the 1990s included changes to state ownership of enterprise, the legal system, fiscal policy, and the central bank, as well as the establishment of factor markets, a social safety net, and a personal income tax. It was a hybrid market system where a market-driven model was supplemented and regulated by central planning. Accordingly, the Chinese Communist Party moved China closer to a market-driven economy, governed by a strict authoritarian regime. However, freedom of speech and the celebration of liberal values that underpinned the formation of the industrialized societies in North America and Europe have not been parts of the Chinese recipe for success. Some capitalist market mechanisms have co-existed with authoritarian government regulations, making way for the country’s progression into an economic superpower by the 2010s.
China’s ‘Debt Trap Diplomacy’
By the end of the 2010s, Western governments have started to feel that China’s growing power isn’t just confined to economic progression. While the Trump Administration was wary about China’s threat to the US economy, concerns regarding Chinese political influence were raised in Europe. The concerns were not just in the Western countries. Chinese influence has direct or indirect effects in other parts of the world. China has been a major lender in Africa. Chinese loans exceeded US$170 billion to 49 African countries and regional institutions between 2000 and 2022. Institute for Security Studies (ISS) research looked into Africa’s debt dilemma to make a clearer assessment of Chinese roles in the region’s debt crisis. The study found that while China wasn’t the primary cause of the debt crisis, there were concerns about a lack of transparency, clauses impacting local industries, and the absence of collective restructuring options in Chinese loan contracts.
In the last decade, Chinese loans to developing countries created a new term ‘Debt Trap Diplomacy’. Sri Lanka, a supporter of China’s giant infrastructure Belt and Road Initiative (BRI) from as early as 2013, has often been attributed by China critics as a victim of an alleged Chinese ‘debt trap’. In the last ten years, many political and economic observers concluded that Chinese economic influence on various nations is not necessarily independent of their political and diplomatic interests.
Post-2020 Economic Downturn
The Chinese economy has tumbled since the global pandemic. China’s economic growth was powered by huge investments in the real estate sector and infrastructural development. 70 percent of assets were invested in the property sector. The property value burst in 2021 which led to China’s economic downturn. Bloomberg Economics calculates that a 5 percent fall in housing prices would equate to a loss of 19 trillion RMB ($2.7 trillion) in wealth.
The pandemic of course had a strong impact on the reduced GDP rate. The per capita GDP graph plateaued since the pandemic time. However, the total GDP growth started to dip even before the pandemic. Amidst the worsening relationship with the West, Chinese leadership started to distance themselves from market-driven policies and resorted back to much more centralized policies. Since President Obama’s ‘Pivot to Asia’ policy, successive US Governments have been vocal critics of Chinese leadership. The total bilateral trade between the US and China dropped to $15.9 billion in 2020 as a result of the rising tensions between the two countries.
Security Threat
In the last few years, the Western Governments have been persistently wary about possible Chinese spying activities. Very recently, two Parliamentary aids to British ministers have been charged with spying for China. In Germany, suspected Chinese spies linked with political parties have been arrested in April 2024. In October 2023, the British Intelligence Agency MI5 warned about large-scale Chinese espionage. Similar statements have echoed in the US. It was reported that 20,000 people in the sole UK have been covertly approached by Chinese spies. Previously, Chinese telco giant Huawei was banned in July 2020 over national security concerns. TikTok, the popular Chinese social media app, has created a significant level of controversy. The US Senate on 23rd April 2024 advanced a foreign aid package that includes a provision that could lead to a ban on TikTok in the U.S. if the popular platform’s Chinese owner doesn’t sell its stake within a year.
Chinese Electric Vehicles in Europe
Amidst the above developments, the Chinese-made electric vehicles are expected to flood European markets, thanks to the Chinese state support . The European electric vehicle market grew by 62% in the last year. Currently, the EV’s demand is propelled by high fuel prices and the spiraling cost of living crisis across Europe. Furthermore, there is growing environmental awareness and preference for sustainable products among consumers. However, high production costs and a lack of charging infrastructure impede the mass adoption of electric vehicles. The supply chain difficulties further increase the costs and make it less affordable for consumers.
Chinese vehicles have gradually gained popularity, although the number is still very low, with 350,000 Chinese sedans and SUVs sold in Europe in 2023. MG and BYD are also making inroads. Although BYD’s market share is very low at this point, it is expected that the company will grow in the coming years. BYD is about to introduce the Seal U, an SUV aimed directly to compete with the Tesla Model Y, to add to the cheaper Atto3 and bottom-of-the-range Dolphin. BYD announced last year that it would build a transplant factory in Hungary, which should be making about 200,000 vehicles a year by 2027 at the latest. BYD overtook Tesla as the biggest global maker of EVs in last year’s fourth quarter.
Chinese EVs main advantage point is their lower price point. However, they still do not match the European, Korean, and US-made EVs. In the continent’s high-speed motorways, the Chinese electric vehicles do not perform at the same level compared to their other Asian, European, or US counterparts.
Given the EU directives on EVs, Europe will soon become the battleground for electric vehicle brands. The current situation puts the EU into a difficult policy conundrum. They can choose to allow more affordable Chinese brands to accelerate the mass adoption of electric vehicles, de facto supporting Chinese exports against EU producers. Or they can impose stricter regulations to protect the fairness and competitive nature of the market.
In the next part, we will delve further into the market data and critically assess the EU’s policies on electronic vehicles and how a potential trade war with China can shape the future of electric vehicles in the continent.
The article is based on the author’s own research and analysis.
References:
Dr Bidit Dey
Director of Accreditation
& Senior Lecturer (Associate Professor) in Marketing
Sheffield University Management School
The University of Sheffield
LinkedIn: Bidit Dey | LinkedIn