On May 14th, President Biden raised tariffs on specific Chinese goods to:
25% on steel and aluminium
25% on lithium ion electric vehicle batteries
25% on PPE
25% on some critical minerals
25% on ship to shore cranes
50% on solar panels
50% on semiconductors
50% on syringes and needles
100% on electric vehicles
These are in addition to the previous Trump tariffs, and more are promised in 2025. Additionally the misnamed US$400 billion Inflation Reduction Act is explicitly protectionist in imposing local content rules for specific parts of electric vehicles (e.g. the battery) with respect to qualifying for purchase and production subsidies. There is also the protectionist US$280 billion Chips and Science Act. Recently, the US also pressured the Mexican government into not financially supporting Chinese EV and battery plants in Mexico. The rationale put behind these additional protectionist measures was put forward in a speech by National Economic Advisor Lael Brainard at the Center for American Progress. In it, Brainard makes completely unsubstantiated claims that China has intentionally created industrial over-capacity in order to globally dominate certain industries.
In the speech Brainard stated that:
The President came to office with a plan to grow the economy from the middle out and bottom up—a sharp departure from the trickle-down approach of the prior administration. On his watch, we are seeing record investment in clean energy and advanced manufacturing.
Investment must be paired with trade enforcement to make sure the comeback we are seeing in communities around the country is not undercut by a flood of unfairly underpriced exports from China. We have learned from the past. There can be no second China Shock here in America.
The above is of course the usual political BS, and bears no relation to reality. As long as US corporations are driven by an extractive and rentier mindset, any subsidies (in the form of direct subsidies or tariffs) will be used more to pad the bottom line than drive new investment. With a heavily oligopolized economy and corrupted politics, the US will also be open to the problems of South American Import Substitution Industrialization (ISI) that stemmed from a lack of internal market competition and corrupt state-business relationships.
The following paragraph about the devastating impacts of the first “China Shock” upon American workers and industrial towns overflows with mendacity as it leaves out any mention of the extractive corporate elites and private equity types that outsourced jobs and production to China and other nations, while cutting investment to help goose profits, and fund share buy backs and consultancy fees. Even driving companies into bankruptcy as the most efficient way of feeding of the corporate corpse. The Democratic and Republican parties call such people “political donors”.
We saw what happened in the wake of the first China Shock, which harmed factory towns all over our country. Twelve years ago, here at the Center for American Progress, I discussed my concerns that China’s unbalanced investment- and export-driven growth model was imposing costs on growth in America and globally. I noted that “only by moving from an economy dependent on external demand and exports to one driven by domestic consumer demand” could China achieve its long-term growth goals consistent with broader global growth.
Then there was the usual misstating of the basis of China’s advantages being managed by a highly efficient and effective Party-state not beholden to a ruling capitalist class, and instead focused on the development of China and its people. The very opposite of the neoliberalism, financialization, rentiership, and political corruption (much of it legalized by the US Supreme Court) so prevalent in the US.
The Administration is committed to responsibly managing competition with China, as demonstrated by the President’s regular discussions with President Xi, along with the recent visits by the Secretary of State and the Secretary of Treasury. We are committed to cooperating with China to meet the world’s most pressing challenges, including by supporting the deployment of clean energy technologies. Within that broader context, it is important to enforce our trade laws against China’s unfair nonmarket practices to prevent harm to American workers and businesses.
Then there is a further threat to the sovereignty of Mexico, as it has not properly displayed its subject vassal status properly with respect to industrial policy:
In negotiating USMCA, the previous administration did not adequately address the potential transshipment of Chinese exports entering the U.S. market via Mexico. Mexico is an important partner to the US in many areas. We look forward to working with Mexico to address concerns that some Chinese steel exports appear to be flowing through Mexico, and some Chinese auto companies may be considering exporting vehicles and auto parts via Mexico. The USMCA review in 2026 would be an opportunity to further discuss this potential risk.
The truth is that the US has seriously underestimated the Chinese Party-state for the past two plus decades. First of all it thought that it could limit China to the role of provider of cheap workers and markets for US goods, as its corporations moved large chunks of US manufacturing over to China. Instead, China expertly kept control of its financial sector and development model to continuously upgrade its production capabilities. While US corporations were happily throwing away industrial skills, such as tool and die making that take decades to perfect, China was building up those very skills. In the middle of the 2010s the US seemed to at last wake up to the fact that China has become the workshop of the world and had plans to further move up the value added curve; directly threatening US pre-eminence in high end technology industries and the related global supply chains.
But still the US underestimated China as it thought that it could trap China in the “middle income trap” by cutting off access to specific advanced technologies and putting tariffs on Chinese imports to the US. A major part of this was the attempt to completely destroy the leading Chinese technology firm Huawei, which was threatening the Google/Apple monopoly in mobile phone systems as well as leading with respect to 5G technology. The attack worked in the short term, but has now back-fired as Huawei and the Chinese Party-state understood that they would have to develop their own micro-processor supply chain. Thus was born the new Kirin 9010 7-nanometer processor that drives the newly-competitive Huawei phones, with Huawei now equalling Apple in China handset market share; while the company worked out how to use less advanced chips to drive its router products.
In parallel, China has greatly diversified its exports, partly driven by the movement of lower value-added activities offshore. China’s exports to developed nations including the US have stagnated for many years, while its exports to the Global South have doubled over the same period and are now twice those of exports to the developed nations. From 2022 onwards this rebalancing was given an extra boost as the Western sanctions on Russia opened many new opportunities for Chinese corporations. Much of this offshore production still uses Chinese components, but as the country of origin is not China they are not subject to the anti-China tariffs. The US is working to close such loopholes in some cases, as with solar cells, but this avenue still provides many possibilities for tariff-dodging as well as driving exports to nations other than the US. One area that has been predominantly driven by government support and domestic market dynamics is the huge increase in EV production in China, with approximately 50% of domestic new car sales now being EVs. In the past couple of years China has begun expanding its car exports into Asia, MENA, and Europe while also building car factories in such places as Thailand, Brazil, Mexico and Hungary. The Chinese EV industry has now reached such a scale that even foreign manufacturers find it preferable to build factories in China to supply other markets; the supply chain infrastructure is just so much better developed than anywhere else. Resulting in about 70% of all global EV production being in China, and the two leading EV battery manufacturers being Chinese. Even with this, a relatively small share of Chinese car production is exported, in contrast to a Germany which exports the majority of its car production. China is not even exporting EVs from China to the US in any meaningful numbers, so the 100% tariff on such imports actually removes some of the incentives for US manufacturers to move to EVs and serves to protect Tesla’s home market; the market where it makes the majority of its profits.
Fundamentally, the US is attempting to close the stable door after the Chinese dragon has escaped and is half-way to the next town. At the same time, the US has spent many decades gutting its own manufacturing capabilities, destroying its legacy of skilled workers, and replacing executives with engineering and manufacturing backgrounds with those that possess MBAs and legal and marketing qualifications. While strangling new investment, resulting in the ageing of much of what remains of US manufacturing establishments. Just look at the debacle created at Boeing, and the gutting of General Electric, by such executive teams. Another great example is a General Motors that recently announced a US$10 billion stock buyback, and a 33% boost to its dividend, while scaling back EV and self-driving investments and slashing 5,000 jobs.
With this starting point, and a government dominated by an extractive, rentier and financialized ruling capitalist elite, any thought that the US could magically rebuild its manufacturing capabilities in even a decade or two would be delusional. Michael Roberts notes here some fundamental differences between what the US is doing and how Chinese industrial policy is managed:
There are two things here. First, China’s state aid is mostly low-cost loans to industry, while in the OECD it is mainly tax concessions. That’s important because in China’s case, the state banks can direct resources and keep control of the allocation; in the case of the OECD, tax concessions simply leave the private sector to do what they want.
Second, China’s state aid aims at boosting manufacturing and export sectors, not protecting weak and ailing industries from foreign competition. In the case of the US, industrial policy measures like tariffs and the IRA are aimed at doing the opposite. A recent study by IMF economists Cherif and Hasanov found that the latter approach of ‘import substitution’ undermines growth in the long term since it creates ‘excessively coddled, inefficient industries’.
Without some government control over how the state largesse is spent, and the nature of the US capitalist ruling class, the tariffs and subsidies will more fill the pockets of owners and executives than drive a new industrial renaissance. They will also raise prices within the US and retard the US move toward a green economy. Cyrus Janssen captures the delusional nature Biden’s attempt to drive re-industrialization through tariffs and subsidies:
At the same time, China’s retributory moves have hurt US producers, and this will only get worse for the US and its vassals.
Without a complete reorientation of the capitalist ruling class toward more domestic competition and a state-managed integrated industrial policy the US will continue to be beaten by China. The response may be a deepening tariff wall that cuts the US of from leading technologies, creating a parallel of communist East Germany.
As Michael Roberts notes, countries with a higher level of technology than others can gain from an unequal exchange (UE) of value. Although the US trade deficit with China was US$279.4 billion in 2023 it still gets a net transfer of value from China. It gets good on the cheap when measured in hours of labor, but that has been diminishing over time as China climbs the technology ladder and closes the gap with the US:
However, as China’s ‘technology deficit’ with the US began to narrow in the 21st century, US UE gains began to disappear. “China has indeed succeeded in significantly reducing the importance of this unequal exchange, with its disadvantage in the transfer of wealth gradually diminishing: the proportion of this unfavorable transfer in the Chinese added value fell from -3.7 percent to -0.9 percent between 1995 and 2014. As a matter of fact, China had to trade fifty hours of Chinese labor for one hour of U.S. labor in 1995, but only seven in 2014.”
This gap has continued to shrink and Roberts and Carcedi found that “during the post Great Recession years (what I have called the decade of the Long Depression), China’s value loss on UE fell 40% as a share of China GDP." In essence, China is doing to the US what the US, Germany and France did to Britain in the late nineteenth century.
It is this fast-disappearing profit from trade with China that is the real driver of the US attack on the Chinese economy, its exports and semi-conductor industry. The US is losing its imperialist profit extraction from trade with China and increasingly being squeezed out of world markets by Chinese goods.
The decline in US hegemony in trade and production is repeating what happened to UK hegemony in the 19th century. In 1885, Friedrich Engels pointed out that when a capitalist economy is dominant worldwide, it is in favour of ‘free trade’, as Britain was from the 1840s to 1870s. But free trade breeds rivals and after the experience of the depression of the 1880s, British policy changed from ‘free trade’ to protectionist measures for its colonial empire. Engels perceptively identified that it was the depression of the 1880s that broke the British hegemony. “England’s monopoly of the world market is being increasingly shattered by the participation of France, Germany and, above all, of America in world trade, a new form of evening-out appears to come into operation.”
Instead of attempting to come to some kind of mutual accommodation with China, the delusional US ruling class
is determined to strangle the Chinese economy, not only to ‘protect’ its weakening industrial sectors, but also eventually bring about ‘regime change’ in China itself. The US reckons it still has time as China and the so-called BRICS nations are still well behind the economic and financial power of the US-led imperialist bloc.
And as Roberts notes, “the cost to the US economy and the profitability of US industry will be considerable, and even more to the real incomes of Americans. But America’s ruling elite see that cost as worthwhile if it brings China to its knees”. With those lower incomes will come the increasing authoritarianism required to keep the lid on a boiling social and economic pot. None of this will produce a good outcome for the general US population, and probably in the end not even the US capitalist ruling elite, but that US elite never seems to learn; as with the utter failure of its sanctions designed to harm the Russian economy and drive regime change. Instead Russia has prospered with 5.4% annualized GDP growth in the first quarter of 2024, and President Putin’s approval ratings have remained extremely high.
After implementing the self-harming sanctions against Russia, Europe will now come under pressure from the US to join it in its crusade to hamstring China’s technological advancement; after European chip manufacturers have already been sideswiped by the US chip technology export bans on China. This has already started, for example with a speech delivered by Janet Yellen on May 21st. As the New York Times noted:
Following her speech, Ms. Yellen told reporters that the United States and countries in Europe have different concerns when it comes to commerce with China and, as a result, they could use different tools to address them. But she added that because many of the concerns about China’s heavy subsidization of exports are broadly shared, it is “more forceful to communicate to China as a group.”
The same article also referenced a speech made by German chancellor Olaf Scholz in Stockholm the previous week:
Chancellor Olaf Scholz said in a speech in Stockholm last week, “We should not forget: European manufacturers, and also some American ones, are successful on the Chinese market and also sell a lot of vehicles that are produced in Europe to China.” He added that at least half of electric vehicles imported to Europe from China were Western brands.
With European, especially German, manufacturers suffering from the greatly increased energy prices produced by the sanctions and the destruction of Nordstream II (the culprit of which Germany seems to have no interest in finding, at least publicly), the last thing that European industry needs is more negative impacts. With a stable trade deficit between Europe and China, and large and increasing investments in China by European manufacturers, any trade measures taken against China could significantly impact an already weak European industrial sector. Especially when China has been forthright in stating its commitment to retaliate against any such measures. It has already launched an anti-dumping investigation into a widely used plastic that it imports from the US, EU, Taiwan and Japan, and has threatened to impose a 25% tariff on imported cars with large engines; directly targeting the German luxury manufacturers.
Europe will also be heavily dependent upon Chinese green technologies and imports to drive its commitments to reducing fossil fuel use and greenhouse gas emissions. A drive which will have the side benefit of greatly reducing Europe’s large oil and gas imports. So this will be a significant test of the European capitalist elite’s ability to stand up to their US master. Will they cave in and once again sacrifice Europe’s industry to prove their fealty and vassalage, or will they be able to resist the pressure from the US. The latter case, perhaps partially obfuscated through performative but not substantive actions, would show a limitation of US power in Europe. The former would confirm Europe’s status as a true vassal of the US, as European governments significantly increase defence spending (much of which acts as a subsidy program for US arms manufacturers) against a mythical threat of Russian invasion.