Washington’s tariff war against China is not fully WTO-compliant

Washington has launched a fresh round of tariff war against Chinese products, including electric vehicles, lithium batteries, semiconductors, steel, and several other categories. How should we interpret these tariffs' impacts? Will high tariffs get the manufacturing industry back to America?

Let’s find out more with Zheng Yun, a senior partner of Roland Berger.

Guest:
Zheng Yun
Senior Partner of Roland Berger

Transcript

Host:
Hi everyone, welcome to China Trends. Let’s stay on top of trends shaping our future.
The U.S. government has just launched a new round of tariff hikes against Chinese products, including electric vehicles (EVs), lithium batteries, semiconductors, and several other categories. So, how do we interpret the impacts of the tariff hikes?
Let's welcome our guest today, Zheng Yun, a senior partner of Roland Berger. Welcome.

Zheng:
I am very happy to have the pleasure to be here.

Host:
Welcome. My first question is: what do the Section 301 tariffs entail? What is the review process?

Zheng:
Sure.

Section 301 of the Trade Act of 1974 is a very effective tool. It also authorizes the United States Trade Representative to look into what they deem as unfair trade or unfair commerce activities by imposing unilateral tariffs or penalties towards the offending country. This is, I would say, an effective tool from the U.S. commercial protection perspective for their own domestic industries and goods.

The process itself usually starts with an initiation. They can also consider petitions from certain industries or sub-sectors. Then, they will consult pubic opinions and collect information that they deem necessary or helpful to look into the matter. Then, they propose potential actions and seek the president's approval. So, that is roughly the whole procedure.

The Section 301 review is mandated every four years. Parties have 60 days' notice to request a review, and then the whole process will be looking in a more detailed manner to see whether there is any need for adjustment.

Host:
I see. In your view, does the process align with the WTO regulation?

Zheng:
That is a very good question.

I think, for WTO, there is a standard, or, let's say, a formal dispute resolution or a procedure that sometimes does not really, I would say, gel with the unilateral way of Section 301.

So there is always a bit of the, I would say, discussion and also quite a bit of the strategic and political nuance along the way.

So I would say that, indeed, there are critics towards Section 301 that it is not fully WTO-compliant as there is quite a formal and also well-established process to really look into those dispute manners or into the commercial disputes between the different countries, etc.

Yeah, that is the status.

Host:
When we refer to tariff hikes, there is a keyword: overcapacity. How do you interpret this concept?

Zheng:
I would say that, in the past, with the fast development of Chinese industrial modernization as well as the economic development, there was a strong push from the central and local governments in China to really look into the industries that will have global competitiveness in different areas.

In the automotive industry itself, I think it is slightly different because in automotive industries we have what is called the announced capacity. In reality, there is also the capacity in place, meaning the factories are operational and ready to produce cars. Then there's the utilization rate. So, the automotive industry has quite a bit of a tuning knob when it comes to capacity.

Given the very long value chain of the automotive industry and also the strong, fierce competition between OEMs or, let's say, suppliers, it's always a top concern whether it makes economic sense for them to produce a specific component or a specific model. That's why in automotive, the announced capacity looks high, but the actual capacity also fits the current situation with quite a bit of flexibility.

Host:
So, there's a really high demand globally for Chinese EVs.

Zheng:
Yes. Even from the announced capacity perspective, one can argue that China alone wouldn't be able to consume everything. But let's talk about the automotive industry, which is now a global market. Chinese brands can enter North America and Europe, though with varying degrees of difficulty.

Indeed, all Chinese OEMs are aiming to become global brands and are looking to the global market. Therefore, the “overcapacity issue” can even become more subtle if the Chinese market is serving the global market.

Host:
It's a very interesting phenomenon.

We know the Trump administration has previously launched several tariff hikes, including a Section 301 investigation against Chinese products.
So, this time, does it mean the Biden administration's tariff hike is indicative of an intensification of the trade conflict?

Zheng:
I would say it is not a very straightforward intensification. If you look at how the Trump administration handled global trade, or the trade between China and the U.S., and if you compare that to the Biden administration, I think there are still quite some differences.
The Biden administration took a more nuanced approach. On one side, they are looking to use a multifaceted strategy. They are making more allies than that in Trump’s era which is more unilateral. That is one fine difference.

Second, I think the Biden administration focuses more on environmental and labor perspectives and even looks into the granularity of the supply chain. These are some fine differences as we compared the two administrations.

However, given that it is also the election cycle period, I would say that there is a bit of political maneuvering behind it.

Host:
Yes. The sectors that these tariff hikes targeted include strategic sections, especially EV and battery industries. You have experience in this industry and have served many clients and top enterprises in this field. Could you please tell us how their business operations are for these related Chinese enterprises in the U.S. market?

Zheng:
Sure. I think although the pure export volume from China to the U.S. is still small compared to China’s total export number last year, it is going forward.

For example, U.S. consumers are not so unfamiliar with Chinese brands. For example, Polestar, which is part of the Geely group, and quite a few General Motors cars are built in Shanghai and shipped to the U.S.

I would say that, while the volume of Chinese brands or Chinese-made automobiles in the U.S. is still quite limited, brand awareness and consumer perception of Chinese products are indeed improving significantly.

Also, many Chinese OEMs are planning to enter the U.S. as a major step in their business expansion.

There are different approaches to doing this. You can either set up a factory in the U.S. or do it in a neighboring country in South America. So that is the current situation on the OEMs side. On the battery side, China basically dominates lithium battery production, with about 75% of the global lithium batteries being produced in China. This is a very strong supply chain advantage that the Chinese automotive industry has.

Host:
According to the different market ratios in different sectors, what is the impact of the tariff hikes?

Zheng:
I think if you look at it in terms of automotive volume itself, the impact might still not be very strong. As I mentioned, the total volume is still small. There are different ways of handling that challenge. You can look into local supply, local production, or, let's say, local CKD (Completely Knock Down). There are always different approaches to address this. But indeed, it presents a more challenging situation when we talk about the timeline.

However, given the low base, the volume itself will still be, I would say, manageable.

Host:
So what kind of suggestions or measures do you think the related enterprises could employ to conquer this situation?

Zheng:
Sure. I think for Chinese companies, one strategy is to definitely look into diversifying their markets. Chinese products are now of very high quality and also very price-competitive. They could look into markets such as the Middle East, Southeast Asia, South America, and to a certain extent, parts of Europe as well. This would make them a bit more resilient if there is difficulty in penetrating a specific market.

At the same time, China has the advantage of its very large base market. With that large base market, there is also a good chance to seize a higher market share by Chinese OEMs.

Aside from the market, Chinese OEMs can also look into strategic partnerships with global OEMs, whether in technology, production, or sales. We have already seen quite a few Chinese brands actively seeking and forming these partnerships. This is also a good approach. Given the continuous sophistication of the automotive value chain, I would say that consumers are ultimately looking for good products at very competitive prices. Therefore, continuous branding and marketing initiatives should still be pursued so that consumers are fully engaged.

I think that is also an important angle to counterbalance when there is a trade dispute discussion.

Host:
These are all very helpful suggestions.

In the bigger picture, do you think this tariff hike casts doubt on the China-U.S. cooperation given the “decoupling” or “derisking” background?

Zheng:
I think you're referring to Biden's previous claim that he does not want to decouple from economic activities with China and will not sever the economic relationship entirely. However, we do see some contradictory maneuvers, especially regarding the current tax hike.

We need to understand that in the U.S.,especially in this election cycle, politicians need to compete for a higher approval rating from the electorate. For example, workers are a large group that all the candidates are trying to attract.

In the U.S., there are also some national economists who emphasize more on the "Made in U.S." concept. So, a lot of these activities, or what Biden did, have their rationale behind them, specifically when considering the election cycle.

I would say it did no good to the China-U.S. relations. But I would say the solution depends on the smart maneuvers both countries demonstrate to resolve this challenging situation.

Host:
Do you think the tariff hikes can really get the manufacturing industry back to the U.S.?

Zheng:
I think it depends on the various sub-sectors or sub-industries. End of the day, I would say, let's always consider the consumers’ perspective. Consumers want to buy good quality products with a competitive price.

And also, when we talk about certain industries, take automotive for example, it's a very long value chain and it has been and will continue to be a global industry. It is very difficult to have all the supply chain localized. If you are imposing tariffs on not only the automotive industry itself, but also on the components, then for sure competitiveness would also be reduced if you are talking about a purely local brand or a locally produced car.

Host:
I see, we've discussed a lot about the U.S. market. Now, let's turn to the EU because previously the EU launched an anti-subsidy probe into the Chinese EV market. So, do you see any differences between the U.S. and the EU regarding the additional tariffs on the Chinese EV sector?

Zheng:
Europe has been a strong economic partner with China. However, the European Union also faces a big challenge in having a unified voice and opinion, and then coming out with a coherent policy to address trade-related matters between China and Europe.
From what I'm seeing, there are supporters of higher tariffs towards Chinese automotive products, especially in countries with a very high dependency on the automotive industry, such as France and Italy. On the other side, there are also some EU countries that are opposed to that suggestion, like Germany, the Netherlands, or Sweden. These countries all already have very strong, I would say, automotive-related commercial interests with China.

So, how to solve these differing opinions and come out with a coherent policy that considers the different commercial interests of the various nations, I would say, will always be a challenge for the European Union. Therefore, I would say that the risk of the EU imposing higher tariffs will definitely be higher.

Host:
Last question, I think market players will be very interested in the possibility of the EU following the U.S. to increase additional tariffs on certain Chinese goods?

Zheng:
Yeah, I think that is also very related to what we have discussed just now. First, the risk is higher. If you compared it to five years ago, or eight years ago, that risk level now is much higher.

On the other side, I would say, it's still a big challenge to have a coherent policy towards Chinese products considering or aligning all the interests of the major European countries, or all of the European countries. Especially for some of the big players, they have very strong Chinese ties and also have huge investments in China.

So that will really make them hesitate to consider imposing higher tariffs on Chinese products.

Host:
It's more likely to be a back-and-forth process.

Zheng:
And I would say that it really depends on the smart moves that the different governments are able to push on their opponents.

Host:
Thank you for your time and thank you for watching today's China Trends. See you next time.

Zheng:
Thank you.