What's Behind the Latest US-China Trade Fight?

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What's Behind the Latest US-China Trade Fight? Blog Image

What’s in today’s article?

  • Why in News?
  • What's Behind the New Trade Fight between the US-China?
  • What are the Concerns Raised by Both the US and China?
  • What Needs to be Done to Check New US-China Trade Fight?

Why in News?

According to the Treasury Secretary Janet Yellen (during her five-day visit to China), China’s burgeoning production of electric cars and other green technologies has become a flashpoint in a new U.S.-China trade fight.

What's Behind the New Trade Fight between the US-China?

  • According to the International Energy Agency (IEA), after more than a decade of subsidising its automakers, China has built a substantial car industry that accounts for 60% of global electric vehicle (EV) sales.
  • Chinese companies are producing as many as 10 million more EVs annually than they can sell domestically, driving them to sell more cars overseas.
  • Similar dynamics exist in other industries, such as solar panels, batteries, and more traditional areas such as steel.
  • As the Chinese are building up a lot of capacity in many industries, they are going to be looking for markets outside the country, if domestic demand does not pick up.
  • For example, leading Chinese automaker BYD had recently introduced an electric SUV at the “astonishingly low” price of $14,000, posing an “existential threat” to U.S. carmakers.
  • The U.S. currently has 25% tariffs on cars from China that has largely blocked vehicles from that country, but Mexico has a free trade agreement with the US.
  • The new trade fight is quite similar to the previous one. What’s new is that the concerns around overcapacity in some cutting-edge sectors have become acute.

What are the Concerns Raised by Both the US and China?

  • According to China, the Biden administration pushed through several pieces of legislation that have provided financial support to clean energy and semiconductor producers.
  • China has even filed a complaint before the World Trade Organisation (WTO) charging that some of Biden’s subsidies for electric car purchases violate trade rules.
  • But a 2022 report found that China’s industrial subsidies in 2019 were double (in dollar terms) the size of U.S. support.
  • China subsidises the production of goods with little spur in consumption by its own citizens.
  • However, the US supported much higher consumption with several rounds of stimulus checks during the COVID-19 pandemic.

What Needs to be Done to Check New US-China Trade Fight?

  • For now, the two sides have mainly agreed to hold talks on the issue.
  • China hasn’t committed to any steps to address American concerns, arguing that its cheap solar panels and other green products are helping the world wage the costly battle against climate change.
  • But the government in Beijing has also acknowledged that manufacturing overcapacity and weak consumer spending are challenges it needs to confront to achieve sustainable growth for its own economy.
  • The rapid expansion of EV production has sparked fierce price wars that are expected to drive some makers out of business.
  • As a result, China needs greater policy coordination to support the development of new technologies without incentivizing every province to push the same industry and companies to overinvest.

Q.1. What is a trade war?

A trade war is an economic conflict often resulting from extreme protectionism in which states raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party.

Q.2. How will the US-China trade war impact their economies?

Trade wars are usually bad for the countries involved. After the U.S. and China launched tit-for-tat tariffs on imports from each other in 2018, prices rose for American consumers, jobs were lost and corporate profits fell. Economic growth in both countries slowed.