Businesses and individual consumers are already stockpiling and preparing for increased prices, but once these tariffs are underway, where will manufacturing go? Many Chinese businesses are turning to neighboring regions. They now stand to gain major economic advantages if President Trump’s promised tariffs are implemented.

Tariffs are Taxes

While Trump has often said that tariffs are paid by the foreign manufacturer, that is not the case. A tariff is simply a tax on goods manufactured abroad. To simplify, under Trump’s plan, a Chinese product priced at $100 would face a 60 percent tariff upon arrival at the U.S. border. This means the American company receiving the product pays $60 to the U.S. Treasury. Thus, China receives $100 for the product, the U.S. government gets $60 for the tariff, and the business pays $160 total.

Companies then have a choice—they can pay the cost of the tariff and keep prices for consumers the same, increase the price by a percentage of the tariff to make some of the money back, or increase the price enough to cover the entire cost of the tariff. More often than not, they increase the cost to cover part, if not all, of the tariff.

In addition to the unintended consequences Trump’s tariffs will have on domestic consumers, his policies may also impact the economies of countries surrounding China. As American companies weigh their options for domestic or foreign manufacturing, Vietnam, Malaysia, and Kazakhstan stand to gain significantly if further tariffs are imposed on China.

The Impact on China and Surrounding Countries

Beijing’s response to trade shocks has been bolstered in recent years by implementing proportionate tariff increases and building relationships with surrounding nations. While the Chinese government tries to mitigate any potential impacts of the tariffs, many Chinese companies seek to set up shop elsewhere. This could have the intended consequence Trump is ultimately hoping for: to weaken China’s economy. But with Chinese businesses hoping to move away, countries like Vietnam, Malaysia, and Kazakhstan have a lot to gain by welcoming them with open arms.

Vietnam seems the most likely relocation for Chinese business given their positive trade relations with the U.S. The U.S.-Vietnam commercial relationship has flourished since the normalization of ties in the mid-1990s, making the U.S. Vietnam’s largest export market and a key source of foreign investment. Economic reforms (Doi Moi, in Vietnam) and Vietnam’s integration into global markets, marked by its entry into the World Trade Organization (WTO) in 2007, have driven remarkable progress—bilateral trade has surged from $2.9 billion in 2002 to over $139 billion in 2022. Vietnam is a rising star among Asia’s economies as it benefits from shifting global supply chains. It also stands as a growing market for U.S. agricultural exports, solidifying its role in regional trade and investment opportunities. Vietnam’s manufacturing wing and Chinese businesses have a lot to gain from these transitions.

Malaysia has played both sides since Trump’s initial promises for tariffs, courting both Beijing and Washington, D.C., in an effort to get ahead of potential tariffs. Leaders made headlines cautioning Chinese businesses against using Malaysia as a way to “rebadge” their products to avoid U.S. tariffs. In the public sector, Malaysian officials have been working out a deal with Singapore to provide “a special economic zone where companies will be given financial incentives to build factories.” Malaysia stands to gain significant economic ground if Chinese companies move to its shores, but could face repercussions in their relations with the U.S.

A somewhat surprising player is gearing up to take a piece of the pie as well: Kazakhstan. While not known for manufacturing, Kazakhstan could become a transshipment hotspot, essentially acting as a middle man. At the 29th United Nations Climate Change Conference (COP29), they strengthened their economic partnerships as “Kazakhstan, Azerbaijan, and China signed an agreement on the establishment of an intermodal cargo terminal in the Port of Baku in Alat.” China has a good relationship with Kazakhstan: 80 percent of China’s exports to Europe pass through Kazakhstan first, and this year their trade levels reached new records with 28 million tons of cargo transported. Expanding their transshipment operations in the wake of new tariffs could transform Kazakh involvement in manufacturing and open up new doors for infrastructure.

The Takeaways

The imposition of U.S. tariffs on China is tricky: while President Trump claims it could challenge China’s economic position, it creates new opportunities for countries around it. It will not impact the Chinese economy the way he thinks it will. Nations like Vietnam, Malaysia, and Kazakhstan are strategically positioned to capitalize on this shifting landscape, whether by attracting manufacturing, expanding infrastructure, or serving as critical transit hubs.

These developments not only bolster regional economies but also highlight the interconnectedness of global trade. As businesses adapt to the evolving tariff environment, the economic fortunes of China’s neighboring countries could rise, reinforcing the complex interplay between policy decisions and market dynamics. In the initial days of his presidency, President Trump engaged in tariff negotiations with countries like Canada and Mexico, reshaping dynamics with the U.S.’s own neighbors. As tariffs on China develop and change, his decisions will have reverberating impacts across Asia and the world.

To read this blog as it was published on The International Affairs Review website, please click here.

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For more than two decades, China has worked to free itself from dependence on Western technology while making the West dependent on Chinese products. It protects priority industries and subsidizes them into becoming export juggernauts.

China engages in economic coercion. Its civil-military fusion strategy powers a significant buildup of its military, surveillance, and disruptive capabilities. Its aggressive territorial claims in the South and East China Seas, and its threats to Taiwan’s integrity, present real risks of military conflict. Beijing and Moscow’s declaration of a “no limits” strategic partnership, and China’s active support for Russia’s war on Ukraine, threaten US and European security, interests, and values.

Although the transatlantic partners are closer in their assessments of the China challenge today than they were four years ago, they approach Beijing from different strategic positions, with different tools, and with different senses of urgency. They have allowed their own bilateral squabbles to get in the way of robust transatlantic efforts to address Chinese aggression. These simmering problems could boil over in 2025.

This series analyzes the impact of China’s rise on transatlantic ties and presents ideas about how to forge a constructive partnership to meet the China challenge. It is based on a yearlong series of CEPA-sponsored workshops of leading European and US experts that I chaired together with Lucinda Creighton under the Chatham House Rule.

The basic question we addressed is whether Donald Trump’s new administration and Europe’s new leaders believe their own bilateral disputes are more or less important than the need to adopt joint or complementary approaches to China. Does the Trump administration believe it can and should fight predatory Chinese economic practices on its own, or forge a broad coalition of countries that could impose far greater costs on China than individual efforts? Are Europeans willing and able to bridge their own considerable differences over both China and Trump’s America to help lead such a coalition?

A joint approach to China should be guided by three Ds: deconflict, disentangle, and deny. The US and Europe should deconflict their own bilateral ties so they do not endanger transatlantic cooperation on China. They should disentangle their economies from uncomfortable dependence on China. And they should deny critical technologies, data, or goods to China that could advance Beijing’s military capabilities and revisionist goals.

To deal with China, the transatlantic partners first need to deal with each other. A transatlantic accord could include European commitments to boost defense spending to 3% or more of gross domestic product by the end of the decade; bolster support for Ukraine; diversify from Russian energy; buy more US-produced liquified natural gas and other energy exports, agricultural products, and defense equipment; and refrain from levying unilateral digital services taxes on US firms. The US, in turn, could commit to maintain an active role in NATO, ensure Ukrainian security and sovereignty, refrain from imposing preemptive tariffs, and explore effective global tax reform.

The two parties should streamline the US–European Union (EU) Trade and Technology Council, now ensnared in an unwieldy tangle of many working parties, with three strong pillars. Pillar One would focus on mitigating US-EU disputes and advancing bilateral cooperation. It could include efforts to strike a quick trade deal to avoid a transatlantic trade war, finalize the Global Arrangement on Sustainable Steel and Aluminum, conclude critical minerals agreements, reduce trade costs by expanding conformity assessments, improve transatlantic risk assessments, and ensure that new EU laws such as the Digital Markets Act do not privilege Chinese and Russian tech over US firms. NATO allies should invoke Article 2 of the North Atlantic Treaty to promote defense-related innovation, and enhance screening of foreign investment in security-related infrastructure, companies, and technologies.

Pillar Two would address the China challenge: extending sanctions on Chinese actors for supporting Russia’s war efforts; improving and expanding coordination on export controls; restricting data flows to China, Russia, and other countries of concern; sharing information on nonmarket policies affecting digital trade; and improving inbound and outbound investment screening. 

Pillar Three would include areas in which the US and the EU could address China-related issues by working with like-minded partners. These include strengthening and expanding cooperation on critical minerals, energy security and climate change; coordinating and enhancing efforts to counter Chinese theft of intellectual property; supporting the use of trusted vendors in digital technologies; reviving and expanding US-EU-Japanese talks on nonmarket economies; and promoting a “Free Road Initiative” to help allies develop more secure and resilient connectivity options.

It is an ambitious agenda. Any effort to forge joint or complementary US-European approaches to China could be a bridge too far. Yet the high stakes warrant exploring what a transatlantic deal on China might look like.

To read the commentary as it was published on the Center for European Policy Analysis (CEPA) website, click here. 

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Conservatives in the United States have been positioning tariffs as a potent tool to boost American industry. It sounds patriotic, doesn’t it? But sometimes patriotism comes with a price. Tariffs can cause a heavy burden on U.S. consumers, increasing their household spending and causing financial anxiety.

The new U.S. President Donald Trump delayed day-one tariffs but stayed true to his campaign promise, signaling tariffs on all Chinese imports. He vowed 25% duties against Canada and Mexico starting on Feb. 1.

Tariffs generally lead to higher prices, but China could absorb some of the cost – although this has historically not been the case. Some argue that past tariffs didn’t fuel overall inflation, and that’s partially true. The Consumer Price Index rose 2.4% in 2018 but slowed to 1.8% in 2019. Price increases impact certain sectors, particularly those subject to tariffs.

But don’t mistake that for Chinese exporters footing the bill. Importers took on the burden, sacrificing their profits, but Americans still paid the price. According to the National Bureau of Statistics, 95% of U.S. tariffs were reflected in the prices of imported products as soon as they entered the American border. This means American importers paid $95 for every $100 in tariffs. Even two years later, prices remained sticky.

Research by two economists, Pablo D. Fajgelbaum and Amit K. Khandelwal, highlights why this happened during earlier trade wars: Sudden tariffs left U.S. importers stuck with pre-signed contracts, unable to adjust demand or shift the cost to consumers.

Price elasticity puzzle

In a future trade war, even with a warning, tariffs on all Chinese imports could drive overall inflation, with Trump promising to target all products, not just specific sectors. This is where price elasticity comes into play. Chinese companies can push tariff costs down to U.S. buyers in industries with rigid demand, where consumers can’t easily switch or reduce purchases of essentials, as evidence from previous trade wars suggests.

Rigid consumer behavior centered around certain products – such as ship-to-shore cranes, which the U.S. imports from China and needs for its construction purposes – almost always challenges the protectionist policy outlook since consumers end up bearing the brunt of rising tariffs. With no domestic firms producing these cranes, a 25% tariff now hits ports with at least $131 million in extra costs.

Looking ahead, the key question is how much of the tariff burden China will absorb – and for how long. Beijing is playing the long game. With the Belt and Road Initiative and stronger ties to BRICS countries, China is diversifying its trade and reducing dependence on the U.S. This makes Beijing less likely to lower prices to keep its foothold in American markets.

Alternative markets dilemma

As Trump’s trade war gains momentum, U.S. businesses will scramble to find alternatives to Chinese imports. However, this quest for new suppliers is not without its challenges. If the U.S. follows through on its threats to impose tariffs on imports from the European Union, Canada or Mexico, the cost of imports from these countries could also rise. This situation is further complicated by the fact that Russia is also under sanctions, leaving businesses with fewer affordable options.

During the previous trade war, tariffs were also applied to steel and aluminum from Canada and Mexico. As a result, domestic price indexes for competing iron, steel and steel mill products rose by 10.2% to 17.7% between February and September 2018.

What happens when there’s no escape route? Consumers stock with fewer affordable options and pay more, whether the goods come from China or somewhere else.

Supply gap dilemma

When tariffs are in play, inflation can rear its head if local production can’t fill the gap left by imported goods. Boosting domestic production is not a straightforward solution. In the previous trade war, Trump attempted to lower interest rates to dissuade industry leaders from expanding their offshore investments in production facilities and attracting capital back into the country. This strategy could help boost domestic production and partially fill the supply gap, but it’s not a silver bullet.

Since real wages in the U.S. are significantly higher compared to China, American production will always be less cost-effective.

Many American companies still produce in China, drawn by both – its cheap labor and the “In China, for China” strategy, which keeps them close to the Chinese market sphere as well as neighboring nations such as Vietnam, Malaysia and India. Even after the imposition of trade tariffs, U.S. foreign direct investment in China continued to rise. It reached $107 billion in 2018, increased to $109 billion in 2019 and grew to $116 billion in 2020. Therefore, bringing capital back can be a great rhetorical phrase, but it is out of step with economic realities.

Trump’s China policy can produce a blowback effect, making Chinese citizens more pro-domestic and protectionist in their market outlook. According to data from the China Academy of Information and Communications Technology, foreign mobile phone shipments to China dropped by 47.4% in November 2024 compared to the previous year.

As a result, Chinese consumers are likely shifting toward domestically made products, forcing U.S. companies to increase investments in China to remain competitive.

The result? A supply gap at home, inflation climbing higher and consumers left with footing the bill.

Competition and price monopoly

The lack of alternatives can lead to higher prices – even for domestically produced goods, as producers face less pressure to keep prices competitive.

When Trump imposed a 20% tariff on washing machines, the effects rippled through the market in unexpected ways. As anticipated, the price of foreign-made washing machines climbed due to the new tariffs. According to the National Bureau of Statistics, the price of washers rose by nearly 12%. However, the surprise came when prices for domestically produced washing machines also started to rise. It didn’t stop there – prices for dryers also began to increase by a similar amount.

In industries where entry of new players is tough and the size of base capital is directly linked to the longevity of a business, tariffs can take the steam off the competition. Many believe monopolies are a thing of the past in the U.S., but think again. Take March, for instance, Apple faced accusations of monopolizing the market. This is important because electrical devices are a massive slice of U.S. imports from China. In 2023 alone, items like smartphones, computers, lithium-ion batteries, toys and video game consoles comprised 27% of all goods imported from China. If tariffs hike prices and competition shrinks, consumers could see costs skyrocket in this sector.

With fewer players in the game, producers can charge higher prices and basically have a price monopoly. And here’s the kicker: If the supply line can’t be quickly ramped up, prices will rise even more. Take the example of solar panel tariffs. When a $1 tariff is placed on manufacturers, the price of installed photovoltaic panels subject to the tariff increases by $1.35. So, while tariffs are projected to protect domestic industries, they may only create higher prices for the consumer in the long run.

Import dependency problem

Besides all those critical areas, there is yet another blind spot: Raw materials prices. Some industries rely heavily on imported raw materials and tariffs on these imports can increase production costs. We saw this play out in 2018 when tariffs on Chinese goods increased input costs for many American industries.

Ford and General Motors even slashed profit forecasts in 2018, blaming higher steel and aluminum prices caused by 25% tariffs. The ripple effect hit products like nails, bumpers, tractor parts, wires and cables, forcing additional tariffs on “derivative” steel and aluminum goods by 2020.

Things may get worse as China has started to retaliate. Recently, they’ve restricted exports of key minerals like germanium and gallium, which are vital for making semiconductors, solar panels, EV batteries and infrared tech. With China controlling 94% of global gallium and 83% of germanium, finding replacements is no small feat.

2025 will be a critical year for the U.S. economic outlook. It would not just determine where American citizens will have to narrow their margins but also shape an economic order where the U.S. may be sidelined by several emerging powers to continue trading with China despite the risk of sanctions looming large.

To read the op-ed as it was published on the Daily Sabah website, click here.

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Part of the problem in looking for a way forward is that it is not clear where exactly people — U.S. government officials, policy wonks, ordinary voters — want to go. Is the goal to make China more like the U.S. in terms of the role of the market in its economy and economic policymaking? Is it to “fix” the bilateral trade deficit by encouraging China to buy more from the U.S. and sell less to the U.S.? Or is it to exclude Chinese companies from U.S. markets so that American companies do not have to compete with them?

Which of these goals the U.S. ultimately adopts will determine the approach it takes regarding the rules surrounding trade with China. If the choice is to keep China out of the U.S. market, the answer is simple: Unilateral tariffs and other restrictions will do the job — at a serious cost to the economy, of course. And if the focus is on reducing the trade deficit, a greater willingness to address the macroeconomic causes of trade deficits, such as low U.S. savings rates, is needed.

But if the United States wants China to be more market-oriented, in the sense of moving towards an economy driven by the forces of supply and demand — and that’s what it should want, because this will make both China and the U.S. better off — then there needs to be a discussion of strategy. How exactly can the U.S. nudge China in that direction? As a general matter, influencing the domestic policies of other countries is a delicate operation. But the foundation has already been laid at the World Trade Organization (WTO), and progress could be achieved here if 1) this objective were made a priority of U.S. policy, and 2) policymakers thought carefully about what might be most effective.

This brief reviews the history of U.S. approaches to pressing China on trade issues, including on market-orientation, looking at the various unilateral, bilateral, and multilateral efforts that have been tried. Based on this assessment, it concludes that formal WTO complaints provide the best chance of success for pushing China in a more market-oriented direction.

Lessons From the Past

Late ’80s Through Early ’00s: The Promise of China’s WTO Accession Gets Lost in the Foreign Policy Shuffle

In the late 1980s and the 1990s, the George H.W. Bush and Bill Clinton administrations put significant effort into crafting rules that would make China more market-oriented. As part of China’s WTO accession negotiations, China agreed to a detailed set of “WTO-plus” obligations (meaning that China took on obligations that other governments did not) related to the functioning of its economy. The U.S.-China bilateral negotiations on accession, completed in 1999, were crucial to China’s broader negotiations with all of the WTO member governments, and China’s economic structure was at the core of those negotiations.

Subsequently, as part of the effort to enact domestic legislation that would grant China Permanent Normal Trade Relations (PNTR) and pave the way for its WTO membership, President Clinton laid out the case in 2000 for how China’s WTO membership, and the rules it agreed to, could facilitate its development as a market-oriented democracy that respects individual rights. This was not a promise, but rather a hope that multilateral rules were a way to achieve this goal.

Once China joined the WTO in 2001, progress on Clinton’s hopes might have begun in earnest with a push for China to comply with the broad obligations it had agreed to. But something got in the way: After the 9/11 terrorist attacks, the focus of U.S. foreign policy shifted elsewhere. Instead of pressing China on its nonmarket practices, or human rights, or democracy — as might have been expected in the summer of 2001 — the United States soon got caught up with the invasion of Iraq and the Global War on Terror. In doing so, the U.S. often needed China to go along with its plans. The practical result was that the U.S. had to cater to China’s views and positions a bit more, and scale back pressure for Chinese reforms.

To be clear, the U.S. did eventually bring WTO complaints against China, and they were reasonably successful. But on the big picture principles related to market-orientation of the Chinese economy, the U.S. often left the WTO-plus rules unenforced and did not press China as much as might have been expected, given the broad rules that had been negotiated.

Pre-Trump Alternatives to Multilateralism

WTO complaints are not the only approach that has been tried, so we have the ability to compare and contrast the different options for pushing China toward market-orientation. Various U.S. administrations have tried unilateral, bilateral, and other strategies to address the problems they saw with China trade.

The George W. Bush administration started the Strategic Economic Dialogue, involving high level U.S. and Chinese officials talking about trade issues. The Barack Obama administration continued this approach in the form of the U.S.–China Strategic and Economic Dialogue.

President Obama also led the negotiation of the Trans-Pacific Partnership (TPP), a plurilateral agreement in the Pacific region that excluded China, explaining that the TPP would allow the U.S. to “write the rules” of trade rather than allowing China to do so. Obama also took unilateral actions, imposing tariffs on China under Section 421 of the PNTR statute, a special China-specific safeguard mechanism that was authorized under China’s WTO accession agreement.

None of these approaches had much impact on China’s trade policies or general economic policies, though, and when President Donald Trump first took office he elevated concerns about U.S.–China trade to the forefront of his policy priorities.

Trump’s Approach: Tariffs, Deals, and Discussions

While prioritization is important, Trump’s focus on tariffs and the trade deficit undermined his efforts to steer China toward a market-oriented economy during his first term. In practice, his approach to issues relating to trade with China was a mix of unilateralism, bilateralism, and multilateralism. None of these strategies achieved much success.

With regard to unilateral measures, the Trump administration initiated a Section 301 investigation on specific Chinese practices related to tech transfer, intellectual property (IP) protection, and innovation, and then imposed tariffs based on its findings. Predictably, this led to tariff retaliation by China.

The Trump administration also negotiated a bilateral trade deal with China, generally referred to as the Phase One deal. This deal included managed trade policies such as promises by China to buy specific quantities of U.S. goods and services, as well as more traditional market access concessions such as liberalizing Chinese agricultural regulations. However, the deal did not have a traditional dispute settlement mechanism, and there is no public information about whether the unique approach to disputes included in the agreement has led to any significant reforms of China’s economic or trade policies.

In addition, the Trump administration initiated discussions at the WTO General Council of China’s nonmarket practices. The concerns expressed there were legitimate ones that get at the core of the problem of a state-oriented economy such as China participating in a world trading system that assumes a certain degree of market orientation. However, the Trump administration did not file WTO complaints on these matters and the discussions did not lead to any changes.

Similar issues were raised by the Trump administration in trilateral discussions with the European Union (EU) and Japan, as well as at the annual G7 meetings of world leaders to discuss and coordinate solutions to global issues. But again, there was no concrete progress on issues related to China’s market orientation.

Biden Continues Most Trump Trade Policies

During his presidential campaign, Joe Biden was critical of Trump’s China strategy. Then, early on in his administration, his U.S. Trade Representative, Katherine Tai, gave a high-profile speech laying out her views on the problems with China trade, in which she offered this assessment of the state of affairs on trade with China:

“For too long, China’s lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world. In recent years, Beijing has doubled down on its state-centered economic system. It is increasingly clear that China’s plans do not include meaningful reforms to address the concerns that have been shared by the United States and many other countries.”

It took a while for the Biden administration to put its vision for U.S.-China trade into practice, but eventually the administration offered a new variation on the critique of China’s economic policies, focusing on the idea that Chinese nonmarket policies had led to “overcapacity.”

In terms of specific trade policy changes, rather than making significant revisions to the Trump administration’s Section 301 tariffs, or taking any enforcement actions in the Phase One deal or at the WTO, the Biden administration focused on encouraging domestic investment in strategic industries through the use of subsidies and coordinating supply chains with allies. With regard to the Section 301 tariffs, towards the end of Biden’s term, his administration tweaked them, imposing new tariffs on a slightly different set of imports, including 100% tariffs on electric vehicles. To date, the imposition of these Section 301 tariffs has not led to significant changes in Chinese trade policies and practices.

Crafting a New Trade Policy Toward China

With all this experience, we should be able to learn some lessons. What has worked and what has not worked? And based on this analysis, what should the U.S. and allies such as the EU, Japan, and Australia, do going forward?

Finding the right approach to dealing with China depends on what the goals are. One view is that China was never going to change, and people holding this view seem to have given up on the China economic integration project and just want to shut China out of the U.S. market as much as possible.

Others, however, say they want to influence China in a more market-oriented direction. For example, Brian Deese, the former director of the National Economic Council in the Biden administration, recently wrote: “Responding to China’s anti-market behavior strongly enough to discourage it … is challenging but essential to the well-being of our economy and that of our peers.” If making China more market-oriented is the objective, WTO complaints are clearly the best option.

WTO complaints have had success in the past. Multiple studies evaluating the impact of those cases against China have shown a reasonable degree of compliance. Not every dispute has resulted in full compliance, of course, but that is true for complaints against the U.S. and the EU as well. When China has been the subject of a complaint, it has sometimes agreed to make changes to its policies even before a dispute settlement ruling, and has generally made at least some effort to comply in cases that result in a ruling.

However, the WTO complaints that have been brought to date have tended to focus on narrow, industry-specific issues, rather than broad systemic ones, and that has limited the scope of their impact. If the world wants China to become significantly more market-oriented, it may be time to test the broader obligations China agreed to when it joined the WTO. For example, in the Working Party report related to its WTO accession, China promised the following:

“The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement.”

This is a broad obligation that China agreed to and complying with it could have a real impact on China’s economic structure.

Some people have doubts about the effectiveness of WTO complaints and seem to believe that unilateral action would work better. It is understandable that unilateralism feels like the toughest and strongest approach. With the large U.S. economy, to which many countries want access, it is not surprising that some people think the United States can just force other countries to change by using its economic leverage. Generally speaking, however, the answer in practice has been that this approach does not achieve much, and that is particularly true with regard to larger countries such as China. As evidence of this, the Biden administration has acknowledged that the Section 301 tariffs have not led to significant changes in China’s policies and practices.

To be clear, it is important not to overstate the case here. There is no guarantee of success with WTO complaints. And in some circumstances, unilateralism might work a bit, at least in the short term. Nonetheless, based on past experience, WTO complaints provide the best overall chance of success over the long term.

One important caveat to the argument set out here is that currently the WTO’s dispute settlement mechanism is not functioning for all members, as the U.S. has blocked the appointment of WTO appeals judges on the basis of a number of concerns, including allegations of judicial activism. Ideally, the U.S. will eventually reverse course and agree to a compromise that restores full functionality. In the meantime, one of the various governments that have agreed to an alternative WTO appeal mechanism could take the lead in bringing these complaints.

Conclusions

The goal of integrating China into the club of market-oriented countries is still worth pursuing. Both China and the rest of the world would be better off if China moved in this direction. While the way things played out after China’s accession to the WTO was a missed opportunity, if we make China’s economic structure a priority now, as it was in the 1990s, we might see some progress.

The current political environment may not support this approach, as keeping China out of the U.S. market has become the primary trade objective. And the best opportunity for pushing market-orientation may have been in the years immediately following China’s WTO accession in 2001. Nonetheless, completing the unfinished business of integrating China into the world trading system would still be of value today. It looks as though U.S. trade policymakers are in the midst of trying all other options at the moment, but if and when those do not succeed, the foundation exists for a more productive approach.

In terms of the reaction from China, some of the actions and rhetoric coming out of Washington these days could be characterized as “anti-China.” But establishing and applying a set of rules about market orientation should not be seen as punitive. Rather, it simply reflects what China and other WTO Members agreed to as part of China’s WTO accession. Everyone has an interest in, and benefits from, this system of rules. If approached diplomatically, a renewed effort to push for China to be more market-oriented could actually be part of an improvement in relations between China and the West.

To read the issue brief as it was published on the Baker Institute website, click here.

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U.S. President-elect Donald Trump has threatened tariff hikes on the United States’ largest trading partners, but China seems to be in the most immediate line of fire as his inauguration approaches. Late last year, Trump announced plans to impose an additional 10 percent tariff on Chinese imports, citing Beijing’s inadequate efforts to curtail the fentanyl trade.

Trump has repeatedly argued that China has stolen U.S. jobs and industries and taken advantage of the United States, leading him to threaten increased tariffs of 60 percent or more on the campaign trail. The tariff proposals don’t stop there: There is growing interest within Congress to revoke China’s current “permanent normal trade telations” (PNTR) tariff status—a move supported by Trump’s nominee for U.S. trade representative, Jamieson Greer.

As the threats pile up, the incoming administration’s endgame is not clear. Are Trump and his allies issuing these tariff threats to lure China to the negotiating table, or are they more about further disentangling the world’s two largest economies? Scott Bessent, Trump’s nominee for treasury secretary, has espoused the former view, suggesting that tariffs can be an important bargaining chip. On the other hand, Greer has talked more about the importance of “strategic decoupling from China,” even if it causes “short-term pain.”

The U.S.-China Phase One trade agreement was concluded during Trump’s first term, in the wake of an escalating trade war. At the time, he lauded the “historic” agreement as “righting the wrongs of the past.” He was proud of securing China’s commitment to purchase at least $200 billion worth of U.S. goods and services over a two-year period. The agreement went even further, obligating China to strengthen its intellectual property regime, curtail technology transfer requirements, lift barriers to U.S. agriculture exports, and refrain from currency manipulation. China lived up to most of these commitments but fell short on its purchasing obligations.

When the Phase One agreement was signed in January 2020, the United States and China envisioned a Phase Two negotiation to focus on unresolved issues, such as subsidies, state-owned enterprises, excess capacity, and cross-border data transfers. However, these talks never got off the ground due to the need to take a breather after the high-stakes Phase One negotiation; the complexity of the next set of issues; and the outbreak of the COVID-19 pandemic, which quickly raised tensions between the two countries.

Six years later, the challenges to negotiating a new trade agreement have become more formidable. Both sides have expanded trade and technology restrictions while taking steps to reduce their mutual dependence. Beijing has doubled down on increasing the role of the state in its economy by providing massive subsidies and expanding the reach of state-owned enterprises. Moreover, China is now unloading its excess domestic production capacity on foreign markets at unprecedented levels, leading to record global surpluses.

These developments, coupled with the unfulfilled commitments of the Phase One agreement, suggest that a negotiated trade solution between the United States and China is out of reach. However, Trump sees himself as a dealmaker with the skills and temperament needed to achieve what was not previously possible. As the president-elect made clear during his first term, he is prepared to ratchet up tariff pain to unseen levels, regardless of the cost to U.S. interests.

Facing its own economic challenges, China may conclude that a deal with the United States—even with unconventional provisions—is a better outcome than jeopardizing what remains of the $600 billion trade relationship. If Trump orders his trade team to reengage in negotiations with China, what should the United States ask for this time around, in light of past experiences and growing obstacles?

A first step would be to revisit Washington’s initial demands of Beijing during the Phase One talks to consider putting some of these requests back on the table—or updating them for 2025. This could include demanding more in terms of intellectual property protection, agriculture, and technology transfer while adding new areas of focus, such as cloud computing. Lessons could be drawn from the first go-around regarding purchasing commitments: making targets more realistic, conducting more regular progress monitoring, and realigning products of interest with what the U.S. private sector is ready to sell.

A new agreement should not stop there. U.S. negotiators should try to curb China’s use of subsidies and financial assistance and address the factors leading to excess production, such as limited domestic demand. But they shouldn’t be surprised if these efforts don’t gain traction. Washington might also consider an accommodation aimed at limiting U.S. imports of unfairly traded Chinese products. Rather than imposing unilateral high tariffs, this could be accomplished by setting quantitative limits on select Chinese exports, like batteries, that are subject to strong enforcement provisions (such as an immediate snapback to high tariffs).

But a deal that only addresses trade flows between the United States and China would miss the mark, as many Chinese companies are moving operations to Southeast Asia, Mexico, and elsewhere to avoid U.S. tariffs. To be durable, an agreement with Beijing must also consider its growing investments in third-country markets, particularly in the automotive and electronics sectors. Strengthened anti-circumvention measures, stricter rules of origin, greater operations transparency, and even export bans on specific Chinese companies would concretely address U.S. concerns about these investments.

Currency matters should also be an integral part of any U.S.-China trade deal. Even with the risk of capital outflows, Beijing may be tempted to allow yuan depreciation to soften the blow to its exporters. The Phase One agreement’s currency provisions should be strengthened—in terms of both transparency and enforceability—to ensure that currency swings don’t undermine the objectives of a potential deal.

Both sides should also consider unwinding tariff increases imposed in recent years in nonstrategic sectors. This could be pursued through a step-by-step approach, starting with low-value consumer goods and possibly broadening over time to include certain low-tech manufacturing goods and machinery. Finally, any deal would need strong enforcement provisions, allowing the United States to quickly respond with punitive measures should China slow-walk or violate its obligations.

These proposals would face challenges, including getting Beijing on board—and Chinese negotiators will have their own demands, many of which would be nonstarters for the United States, such as the relaxation of technology export controls. But one area certainly worth exploring is opening the door for select Chinese investments in the United States, a move that has already sparked Trump’s interest. At a rally last March, he welcomed Chinese automotive investments that would provide benefits to U.S. workers.

U.S. trading partners would certainly protest such a deal with China, claiming that it would reroute Chinese exports to their markets, discourage Chinese foreign direct investment in their countries, and violate World Trade Organization obligations. Washington should do its best to allay these concerns, persuade partners to align with its approach, and continue developing alternative supply chains.

Greer has been clear that Washington needs to be “committed to fundamentally changing the U.S. trade relationship with China.” These recommendations aim to do just that.

There is no doubt that tariffs are coming in Trump’s second term, but the timing, magnitude, and the targeted economies remain unclear. The new administration’s endgame when it comes to tariffs against China is anyone’s guess; like other matters in Trump’s world, it may change week to week. In light of his transactionalism, a Phase Two trade negotiation—no matter how challenging—could be in the offing. It’s important that Washington gets it right this time.

The post How Trump Could Strike a Trade Deal With China appeared first on WITA.

A recent working paper published by the International Monetary Fund (IMF) found that subsidies made up 95 percent of all Chinese trade distortive policies between 2009 and 2022. For western observers and politicians who have long complained of the impact of Chinese subsidies on domestic producers, the report provides a degree of vindication. As China continues to file complaints with the WTO for other countries’ supposedly excessive tariff regimes, it raises a crucial question: what role does China’s subsidies play in global trade distortion? These frequent complaints may indicate a defensive posture in response to external pressures, but they reveal a concerning disconnect from the implications of its own subsidy program.

This ambiguity is most evident in industries China considers strategic, where 20 percent of sectors have received over 50 percent of subsidies, with key products such as batteries, solar panels, and electronic vehicles (EVs) among the most endowed. One may view this targeted approach to subsidies as geared towards a green transition, but it is equally possible that the purpose of subsidies is to outcompete and drive out foreign producers.

A case in point is the steel industry. China, the world’s largest steel producer, has been accused of flooding international markets with cheap steel, thanks to the wealth of government subsidies distorting market signals. Japan and South Korea are looking at anti-dumping actions, India has a variety of China-facing anti-dumping probes, including recently on steel, and the government in Chile has imposed temporary anti-dumping tariffs of 25-34 percent to try to keep their steel makers afloat. China’s’ subsidy wave has made it the top net exporter of steel in the world—more than double the volume of Japan, which holds the number two spot.

Steel subsidies also highlight the downstream impacts on the exports of related products. For example, the IMF report found the increasing number of steel subsidies was correlated with a 3.5 percent increase in automotive exports. This suggests the actual impact of Chinese subsidies on trade is broader than it initially seems with the focus on subsidising strategic industries. One report in 2021 examining basic metals sector, for instance, found that an increase in one standard deviation of Chinese subsidy interventions reduced exports in the other major economies by a very significant 0.17 percent. Upstream industries can also pass on the effect of the subsidies in the form of cheaper input costs, leading to oversupply in other industries. This effect is also present but less effective going from downstream industries to upstream.

China’s approach to subsidies, as the above indicates, raises many questions. But perhaps no more important than understanding what such distortion means for the long-term viability of domestic industries that do not benefit from similar support. The challenge, emphatically, has been downward pressure on the private sector, and non-strategic innovation. Meanwhile, household consumption has long been a weak point despite China’s rapid economic growth, and has been a key contributor to ongoing subsidies. With a mandated five percent GDP to be achieved, the government feels it is only via the outsized role of its manufacturing sector that China can maintain its artificial growth rates.

In response to claims by US and EU officials that Chinese subsidies have caused excess supply and increased export quantities, the IMF report finds there is on average “weak” evidence of this effect. That is not to say the oversupply argument has no backing. Particularly in the communications, plastic, metal products, and other industries, increased export supply was attributed to these subsidies.

In the case of automobiles and EVs, Beijing’s subsidies lowered both export prices and export quantities, likely due to retaliatory tariffs. The picture is therefore muddied by an uneven spread of subsidies and a scattered retaliatory response from trade partners—enacting protectionist policy in certain sectors but appearing to allow subsidised trade deficits in others.

The spillover effects of Chinese subsidies have disrupted global trade flows and other countries have reacted by enacting retaliatory measures and trade barriers. The consequences of these disruptions ultimately lead to less cooperation, domestication of industries for more resilience, and more scepticism towards trading partners. Chinese subsidies that contribute to the overall growth of Chinese firms can end up causing a subsidy race between major economic powers, leading to stifled innovation and harming global competition in the long term. China would claim that these retaliatory measures are coming from the West; mainly the US and the EU, with aims to hinder China’s growth by implementing unfair trade barriers. But the evidence suggests the complaints are much more global.

An example is Türkiye. On 8 October, China filed a WTO complaint after Türkiye slapped additional tariffs targeting Chinese EVs and commercial vehicles. This came on the back of a 40 percent tariff on all vehicles imported from China in July of this year. Türkiye’s biggest exports are machinery and transport equipment, out of which road vehicles cover 15 percent of total exports. Going as far back as 2021, a communiqué by Türkiye’s MoC discussed the possibility of decreased profitability of car engines due to Chinese imports and dumping practices.

As nations seek to counterbalance China’s extensive subsidy programs, they risk engaging in a cycle of competitive state support that could distort global trade even further. This scenario, rather than levelling the playing field, may exacerbate the inequalities that already exist, leading to an even more fragmented global economy. This is already being seen in national plans to reshore strategic industries such as semiconductors as well as plans for critical mineral collectives that ensure trusted supply chains.

While the strategy of imposing tariffs on Chinese-subsidised goods might offer temporary relief, history has shown that such actions can trigger trade wars, harming both consumers and industries. In the technology sector, where China’s state-backed industries around 5G and semiconductors dominate due to heavy government support, tariffs have led to price hikes and supply chain disruptions. The consequences—rising costs, retaliatory measures, and weakened global supply chains—underscore the risks associated with relying solely on this tactic.

A more promising path forward may lie in multilateral action by states to enhance the enforcement of trade rules. However, even this is no small feat. Achieving global consensus on such measures is complicated given China’s ability to wield significant influence in international institutions, such as the WTO, leaving the global community in a delicate balancing act, and perhaps more reliant on more restrictive groupings like the G7.

Leveraging regional trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the Regional Comprehensive Economic Partnership (RCEP), to include provisions on subsidies could create a framework for more effective management. Such agreements would allow member states to establish clearer rules on state support, particularly for industries where China has a distinct advantage. However, the success of this strategy hinges on the willingness of member countries to prioritise collective interests over individual national gains. So far, there has been little movement in this area.

The international community stands at a crossroads, and the path forward for China will require more than addressing external pressures but also internal reflection on the causes of trade tensions. While the challenges posed by China’s subsidies are immense, they also present an opportunity for a coordinated global response that could restore fairness to international trade. The alternative—a fragmented, protectionist trade environment—would only worsen the issues we seek to resolve.

Nikki Trewin is Australian Outlook Assistant Editor Intern at the AIIA. She is in her final semester of her Bachelor of International Studies at RMIT University, Melbourne. Daiki Sato is the events and public engagement intern at the AIIA. He is an undergraduate student at the School of Asia and the Pacific at ANU. Adrian Lu is the book review coordinator and Australian Outlook Assistant Editor Intern at the AIIA. He is an undergraduate student currently studying Law / Politics Philosophy and Economics at ANU.

To read the fresh perspective as it was published on the Australian Institute of International Affairs webpage, click here.

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Whether it’s cars, high-end electronics, or groceries, nowadays, we want things cheap, and we want them now. It is hard to overstate the impact that the rise of e-commerce has had on consumers’ buying habits, and the fashion industry is no exception. The rise of so-called “fast fashion” brands feels like the natural progression of the digitalization of commerce. Yet, in the drive to reinvent the fashion industry and cut costs, Chinese e-commerce sites like SHEIN and Temu are engaging in unacceptable practices and, in many instances, outright abuses of human rights.

The United States and other Western countries should not sit idly by and allow products produced with forced labor to contaminate our markets. To that end, it is heartening to see a new bipartisan effort to investigate the practices of SHEIN, Temu, and other such companies. However, the Biden administration’s proposal to effectively eliminate the de minimis tariff exemptions for all Chinese products drives in a nail with a sledgehammer. Rather than using such a broad policy to address the human rights violations and improper trade practices of some firms, the Biden administration should use the tailored authority provided to it under the Uyghur Forced Labor Prevention Act (UFLPA) and address human rights abuses by Chinese firms on a case-by-case basis.

SHEIN, Temu, and Forced Uyghur Labor

As the market for fast fashion continues to grow, SHEIN and Temu have become household names in the United States, offering ultra-cheap, trendy apparel that appeals particularly to younger consumers. However, behind these rock-bottom prices and overnight delivery lies a disturbing truth—these companies routinely engage in human rights violations and flout American trade laws.

According to a recent interim report by the House Select Committee on the Chinese Communist Party, both brands have been implicated in the exploitation of forced labor in China’s Xinjiang region, where the ethnic Uyghur population endures systemic oppression, forced labor, and detention under the Chinese government. Temu, in particular, has virtually no systems to ensure that its supply chains are free from forced labor and that products comply with human rights and trade laws like the UFLPA. This not only raises serious ethical concerns but also puts U.S. consumers in a position where their purchases may indirectly fund and perpetuate genocide in Xinjiang.

With the evidence against SHEIN and Temu as damning as it is, the obvious question is how have these companies managed to get around the numerous U.S. laws that prevent the import and sale of products manufactured using forced labor? One way these companies get around U.S. trade law is through the de minimis exemption from tariffs and customs enforcement. By shipping products in quantities valued under $800, companies like SHEIN and Temu can avoid import duties and disclosure requirements and skirt U.S. trade laws.

This exemption was never intended to serve as a workaround for large-scale e-commerce operations to flood the market with cheap goods, let alone those produced under forced labor conditions. In fact, according to the White House, “the number of shipments entering the United States claiming the de minimis exemption has increased significantly, from approximately 140 million a year to over one billion a year” over the last decade. The majority of this increase comes from just a handful of Chinese e-commerce companies, including SHEIN and Temu.

The Blunt Instrument of Ending The De Minimis Exemption

In response to the human rights issues connected to SHEIN and Temu’s continued exploitation of the de minimis exemption, the Biden administration recently announced new rules to eliminate the exemption for most Chinese goods. This move presents a strong stand against Chinese exploitation of U.S. trade laws and its own people. However, as with any broad policy, the potential unintended consequences cannot be overlooked.

First, eliminating the de minimis exemption entirely may not effectively stop SHEIN, Temu, and other such companies from importing goods illegally produced with forced labor. As we have seen in the past, companies with the resources and motivation to bypass labor laws often find new ways to evade them. In spite of decades of global efforts to prevent it, imports of coffee from South America, cocoa from West Africa, and precious metals from the Congo are still regularly tainted with slave labor. Without more targeted enforcement, the broad elimination of the de minimis exemption might only incentivize these companies to adopt more sophisticated methods of avoidance while continuing to engage in unethical labor practices.

The ineffectiveness of eliminating the de minimis exemption would likely be exacerbated by the enfeebled state of Customs and Border Protection (CBP). As the “boots on the ground” at U.S. ports and border crossings, CBP is the primary agency charged with enforcing U.S. import and export laws. But, due in no small part to the challenges of patrolling the southern border, CBP resources are spread increasingly thin. By one tally, fully implementing the Biden administration’s proposal would require between $8 billion and $30 billion in additional annual funding for CBP and thousands of new officers for an agency already racked by workforce shortages. Without addressing these inherent problems at CBP, simply repealing the exemption is unlikely to achieve the goal of preventing the import of products manufactured using forced labor.

Second, ending the de minimis exemption for all Chinese imports would likely have a significant negative impact on U.S. consumers and businesses. Many small and medium-sized American companies rely on importing goods from China—legitimate products that have no connection to forced labor or human rights abuses. These businesses would be hit with higher costs and increased administrative burdens, leading to higher consumer prices and disruptions in supply chains, amounting to billions of dollars in welfare losses. Research has shown that changes to de minimis rules will most heavily impact lower-income consumers. At a time when inflation is still a concern and consumers are already grappling with high costs, this broad-stroke policy could backfire economically.

Third, the administration’s argument for removing the de minimis exemption perversely invokes national security concerns to protect domestic apparel and textile manufacturers. The administration’s press release concludes, claiming that removing the exemption is critical to protecting the American apparel and manufacturing sector because of its importance to the defense industrial base. Programs specifically designed to support and protect textile manufacturing for critical government needs already exist, so any attempt to bolster these capabilities should begin with an inventory of existing programs and their funding. Furthermore, since 2016, when new de minimis rules came into effect, American exports of fiber, textile, and apparel by value have largely remained steady and reached their highest levels in 2022 and 2023. Attempting to privilege domestic manufacturers under the guise of national security dilutes the importance of addressing improper trade practices and undermines U.S. action.

Finally, such a sweeping measure risks eroding public support for more tailored and effective solutions. There is broad bipartisan agreement on the need to combat forced labor and human rights abuses in China, particularly regarding the plight of the Uyghur people. However, a blanket policy that increases costs for American businesses and consumers related to goods that pose little to no national security risk could undermine future efforts to deter the CCP’s malign practices related to trade and intellectual property. Both the Trump and Biden administrations have rightly focused on addressing strategic weaknesses and security threats posed by Chinese control over advanced semiconductors, digital platforms, and critical minerals. Such moves were focused on addressing specific threats in a narrowly tailored fashion. The administration should take a similar approach to SHEIN and Temu.

A More Targeted Approach

Rather than deploying a one-size-fits-all solution, the Biden administration should leverage the existing authority granted by the UFLPA to address the specific problem posed by SHEIN, Temu, and other companies that rely on forced labor. The UFLPA already provides a robust legal framework to prevent goods produced with forced labor from entering the U.S. market, presuming that all goods from Xinjiang are tainted unless proven otherwise. However, enforcement of the law has been uneven, allowing companies like SHEIN and Temu to continue their operations with minimal disruption.

The administration should focus on strengthening the enforcement of the UFLPA by increasing inspections and audits of companies with ties to Xinjiang, particularly those in the fast fashion industry. By ramping up targeted enforcement efforts, the U.S. can more effectively block products made with forced labor from entering the market without resorting to broad measures that affect legitimate trade. Perhaps more importantly, since Congress has determined on a bipartisan basis that both SHEIN and Temu have facilitated forced labor in Xinjiang by creating a market for such products and contravening U.S. trade laws such as the UFLPA, the Biden administration should consider using its authority under Section 5 of the UFLPA to sanction SHEIN, Temu, and individuals known to have facilitated their actions.

The United States has a moral and strategic obligation to prevent the importation of goods produced with forced labor, particularly from regions like Xinjiang, where the Chinese government is perpetrating gross human rights abuses. While the Biden administration’s proposed elimination of the de minimis exemption for Chinese goods is well intended, it is a blunt instrument that risks harming U.S. consumers and businesses without addressing the root of the problem.

A more targeted approach, focusing on enforcing the Uyghur Forced Labor Prevention Act and closing specific loopholes in the de minimis exemption, would be a more effective way to combat forced labor and hold companies like SHEIN and Temu accountable. By adopting a measured and focused strategy, the U.S. can advocate for human rights without compromising its economic interests.

Joshua Levine is the manager of technology policy at the Foundation for American Innovation.

Luke Hogg is director of policy and outreach at the Foundation for American Innovation.

To read the blog as it was published on The National Interest webpage, click here.

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Xi’s visit also conveyed a broader Chinese goal in the Rare Earths sector that goes beyond mining: maintaining leadership in the downstream industrial supply chains of processing, refining, and magnet production. While the semiconductor war gets more attention, there is another tech battle underway in the rare earths supply chains as China continues to tighten its control over what it calls a “state resource” and its supporting technologies. 

The Western rush to build China-free supply chains with both upstream and downstream industries is masking the bigger technological challenge of establishing a sustainable processing capacity. Given the stakes, a targeted approach is required to solve the processing tech puzzle through investments in R&D, international partnerships, and diffusion of alternate methods. 

Rare Earths, Rarer Tech? 

In 1992, while visiting Baotou, Inner Mongolia, one of China’s biggest rare earth mines, Chinese leader Deng Xiaoping famously said, “The Middle East has oil, China has rare earths.” He was referring to the country’s resource endowment of over 30% of the world’s reserves. But unlike the Middle Eastern oil producing countries who primarily drill and export crude, China built an entire ecosystem around the rare earths, from mineral production and processing to manufacturing finished products, and most importantly, rare earth magnets.

China has maintained leadership at every step up the ladder. Though its global production share dipped from a staggering 97% in 2011 to around 70% in 2022, it still controls over 85% of processing capacity. China has an effective monopoly over processing major heavy rare earths – Dysprosium (Dy) and Terbium (Tb), and Light Rare Earths – Neodymium (Nd) and Praseodymium (Pr).

Environmental impact is often cited as one of the main reasons for China’s emergence as a rare earth powerhouse, but the technological aspect is less discussed. From 1950 to October 2018, China filed over 25,000 rare earth patents, surpassing the US’ 10,000. Over decades, Chinese engineers perfected the solvent extraction process to refine REEs which plays a critical role in ensuring China’s primacy. Though the technology originated in the United States, environmental and regulatory concerns made domestic rare earth development unfeasible. 

Rare earths are clumped together in rocks, making their processing a complex undertaking. “All of them behave the same way, with very minor differences in chemistry. That means they bond with the same things under the same conditions, and they’re not going to separate from each other readily,” explained Dr. Isabel Barton from the University of Arizona. 

New Tech for Old Problems? 

Given the challenge of accessing China-controlled solvent extraction tech and its environmental costs, multiple research projects are underway to search for cleaner and more sustainable processing methods. One of them is a DARPA-funded program called EMBER (Environmental Microbes as a BioEngineering Resource) to use microbes to process and refine rare earths. A biologist and the Principal Investigator of the project, Marina Kalyuzhnaya, called it an “intensive program” and argued that a biological approach could play an important role. “The goal is to separate REEs, and biology might be specific enough or selective enough to keep individual minerals out of the complex mixture.” She added that the goal was to create “something completely sustainable” but conceded despite exciting breakthroughs, scalability for the project is at least 4-5 years away.

A Vision for Targeted Diversification 

Apart from investing in new tech, the US and other western governments have taken multiple national and international steps to diversify supply chains. Despite the efforts, Benchmark Minerals, a mining advisory firm, projects by 2028, China’s share in processing of both heavy and light rare earths would only drop marginally.

There are many reasons for the sobering predictions. For one, Western governments are trying to focus on all stages of supply chains simultaneously without prioritizing one over the other, causing inefficiency and resource wastage. Two, current policies divert attention from the bigger technological challenge of establishing sustainable processing and refining capacities outside of China. 

To resolve this, there is an urgent need to increase R&D investments for cleaner processing solutions that match or even surpass China’s cumulative investments. The US also needs to address the processing know-how gap as a strategic technological challenge and not just a pollution problem. While state-led investments to spur private interest is essential, the bid to onshore all components of the REE supply chains would be counterproductive in the long run. The US, along with its allies should create an REE-specific strategy and foster development of regional nodes. It took China nearly three decades to dominate REE supply chains; a well-executed diversification effort may not take as long. 

To read the column as it was published on the New Security Beat webpage, click here.

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Night really does follow day! On Tuesday (20 August) the European Union announced its planned anti-subsidy tariffs on Chinese electric vehicles, a hefty 36.3%.  

On Wednesday (21 August), China retaliated by opening an investigation into EU subsidies for cheese. Affected parties – the European Union, EU member states, dairy producers exporting to China – have twenty days to respond. 

Clever move? 

This move by China is either very clever or very stupid. Or possibly both. Let’s unpick it.  

The first observation to make is that the EU will not have been taken by surprise by the opening of this cheese subsidy case. China invariably retaliates when its trading partners impose restrictions on its exports. In its announcement of the investigation China in fact refers to consultations having taken place with the Commission two weeks ago.  

It is not impossible that it was even choreographed between China and the Commission, so that the Commission can demonstrate to EU member states that there will be a high price to pay if in November the EU imposes definitive duties on electric vehicles.

EU dairy producers in many member states pay the price for a trade spat in a wholly unrelated sector.  

Why cheese? European wine and charcuterie producers must be heaving a sigh of relief as I write, as they were assuming they would yet again be the target of the obligatory retaliation.  

China chose its target carefully. Cheese is a politically high-profile product in European eyes, it comes from a large range of member states – “there’s a cow in every member state” the saying goes. So, the pain will be distributed across the whole of the EU.  

Yet at the same time exports to China – that famously lactose intolerant nation – are limited. In 2023 the EU sent to China just € 190 million worth of cheese. That figure pales in comparison with China’s € 20 billion of electric vehicle sales in Europe now to be hit with a up to 36.3% extra duty.  

This means that the eventual imposition of anti-subsidy duties on Gouda and Pecorino Romano is unlikely to sway member states when they are called on in November to agree definitive duties on Chinese cars.  

China’s announcement is above all political and symbolic, aimed at creating a bit of leverage over the EU but calibrated so as not to represent the opening salvo in a real trade war. 

‘As close as lips and teeth’ 

So far so good. But from another angle one can argue that this Chinese move is misguided and it may come to regret it.  

The investigation was triggered by a request from the domestic industry. 

Knowing how intertwined government and industry are in China – “as close as lips and teeth” as the Chinese proverb has it – it is hardly fanciful to imagine that China’s government instructed industry to lodge the request.  

It is common knowledge that Beijing has a metaphorical drawer of oven-ready dumping and subsidy requests ready to brandish if political circumstances so warrant. 

China has taken great pains in recent years to replace a vacuum left by the United States by arguing that they are reliable multilateralists, wedded to the rule of law.  

An anti-subsidy case launched for purely political and tit-for-tat retaliatory reasons hardly inspires confidence in China’s attachment to those multilateral principles, quite the opposite. It blows China’s narrative out of the water.  Trust, once gone, takes an aeon to restore.  

EU agriculture subsidies proven WTO-proof 

The officials in the Chinese ministry of agriculture will have been tossing and turning in their sleep these last few days. It will be difficult for China to prove that EU cheese benefits from trade distorting subsidies paid to milk producers.  

As an EU official until last year, I was involved in a series of cases in which various trading partners were trying to prove that the income support to farmers paid by the Common Agricultural Policy somehow ended up as a subsidy for the finished product.  

We successfully demonstrated that, in the jargon, there is no “pass through” of money from the primary producers, whether it be with Canada on sugar, the US on table olives, or Australia and Peru on tomato paste or canned tomatoes. In all cases the World Trade Organization or our bilateral dispute settlement courts rejected the other countries’ claims.  

The EU also successfully rebutted claims that direct income support to farmers – who get their dosh irrespective of what they produce or even whether they produce – is product specific and thus a distorting subsidy.  

China will face the same arguments, facts and hurdles in its investigation, along with several WTO precedents and findings that they now cannot ignore.  

The European Dairy Association issued a breezily confident statement declaring the WTO conformity of the CAP toolbox of support schemes from which they benefit. They are right. 

The dog that chased a bus 

Chinese agricultural officials must feel even more ambivalent over the claim – set out in the relevant ministry of commerce notice – that the EU’s environmental payments to farmers represent a distorting subsidy.  

China is following in the EU’s footsteps by progressively paying its farmers to adopt eco-schemes and other forms of environmentally friendly farming practices.  

China would therefore be mortified if its own investigation into EU cheese subsidies were to conclude that green farm payments were trade distorting and thus countervailable.  

This would expose China’s own green subsidy schemes to challenge in the WTO and deal a systemic blow to any country providing green support. China will not want this to happen.  

I am reminded of the story of the dog that used to chase a bus. One day to its surprise it caught the bus. Having caught it, it did not know what to do with it. This is what China may have done in opening this anti subsidy case.  

I am confident nonetheless that if this investigation runs its course, China will determine, will have to determine, that the payment schemes to milk producers do not represent a subsidy to cheesemakers.  

Unless the political relationship with the EU sours dramatically, China will do little more than introduce some minor face-saving duties on cheese, if anything.  

Conclusion? The Chinese action is neither clever nor stupid. Only time will tell. 

John Clarke is a former Director for International Relations at the European Commission and senior EU trade negotiator. He previously headed the EU Delegation to the WTO and UN in Geneva. 

To read the commentary as it was published on the Borderlex webpage, click here.

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The EU’s dedication to advancing environmentally-friendly technologies and mitigating the impact of greenhouse gas emissions is being investigated following the implementation of tariffs on Chinese electric vehicles. This decision raises significant concerns regarding the alignment and stability of the European Union’s environmental and trade policies. This apparent contradiction highlights the complex interplay between economic interests, environmental objectives, and global trade dynamics.

The air quality issue throughout Europe is a mix of positive developments and persistent issues and challenges for the greener future. In recent years, there has been a noticeable decrease in pollution levels in numerous cities, thanks to the implementation of effective policies, local initiatives, and improved air quality management practices. Nevertheless, numerous urban areas continue to grapple with higher pollution levels that surpass the health recommendations set by the World Health Organization.

The ongoing problem of air pollution in EU urban areas has led to a concerning number of premature deaths, estimated to be around 400,000 each year. This highlights the urgent need for effective measures to improve air quality and protect public health. There are ongoing challenges in effectively communicating air quality issues, garnering public and political support for additional measures, and ensuring policy coherence across different administrative levels. Although there have been some positive outcomes from local initiatives such as the promotion of cycling, and introduction of low-emission zones, it is clear that further efforts are required to achieve consistent and comprehensive improvements in air quality throughout Europe.

Role of Vehicles in Europe’s Air Pollution

Air pollution continues to be one of the significant concerns for both public health and the environment in Europe, particularly in urban areas, where transportation plays a major role as a contributor. Despite recent advancements, pollution levels caused by vehicles, such as cars, vans, and trucks, still surpass the recommendations set by the World Health Organization (WHO). This unfortunate reality results in approximately 330,000 premature deaths each year in the EU. The annual health costs attributed to road transport pollution are estimated to be between €67-80 billion, with a significant focus on diesel vehicles.

The EU’s Ambient Air Quality Directive (AAQD) and Euro standards have been subjected to criticism for their perceived inadequacy in addressing these issues. The latest Euro 7 standards, scheduled to take effect in 2028, are widely regarded as ineffective and unlikely to have a substantial impact on emissions reduction. Although there have been some advancements, such as the implementation of zero-emission and low-emission zones in urban areas, there are still areas that need improvements. Implementing effective solutions, such as enhancing fuel quality and adopting cleaner technologies, is of utmost importance in mitigating pollution and safeguarding public health.

EU’s Environmental Policy

The EU’s environmental policy is driven by a commitment to precaution, prevention, rectifying pollution at its source, and holding polluters accountable. Its primary objective is to tackle pressing challenges such as climate change, biodiversity loss, and pollution. The policy is based on Articles 11 and 191-193 of the Treaty on the Functioning of the European Union (TFEU) and covers a range of environmental issues including air and water pollution, waste management, and climate change. In this respect, the notable advancements include the 2019 European Green Deal, which places a strong emphasis on environmental issues and sets the ambitious goal of achieving climate neutrality by 2050. The 8th Environment Action Programme (EAP) sets forth a comprehensive set of goals for the year 2030. These goals encompass a wide range of areas, such as reducing greenhouse gas emissions, building climate resilience, transitioning to a circular economy, eliminating pollution, and safeguarding biodiversity.

Horizontal strategies of the EU have encompassed various aspects such as sustainable development and biodiversity. The 2024 Nature Restoration Law aims to restore land, sea areas, and ecosystems. On an international level, the EU actively participates in global environmental agreements, including the Paris Agreement. The Aarhus Convention guarantees the involvement of the public in making environmental decisions. Implementation requires a coordinated effort at the national, regional, and local levels, with the support of tools such as the Environmental Implementation Review and the European Environment Agency (EEA).

EVs are Better for Environmental Sustainability   

A recent report from the European Environment Agency (EEA) highlighted the environmental benefits of battery electric cars compared to petrol and diesel vehicles. The report, “Electric Vehicles from Life Cycle and Circular Economy Perspectives,” emphasized the overall eco-friendliness of electric vehicles throughout their entire life cycle. Although, the production of EVs may result in higher emissions, but their overall impacts on greenhouse gases and air pollutants is significantly lower throughout their lifespan. At present, electric vehicles produce emissions that are approximately 17-30% lower than those of traditional petrol and diesel vehicles. This percentage could potentially increase to 73% by 2050 as the carbon intensity of the EU’s energy mix continues to decrease.

The EVs contribute to the improvement of local air quality by reducing emissions along with minimized release of particulate. In addition, the EVs help to decrease noise pollution, particularly in urban environments. The report highlights the potential for mitigating these impacts by implementing circular economy practices that prioritize the reuse and recycling of batteries.  The EEA highlighted the concerns rising in EU transport sector emissions since 2014. Preliminary data from 2017 reveals a significant 28% increase in emissions compared to 1990 levels. Despite significant increases in registrations of battery electric vehicles and plug-in hybrids in 2017, these types of vehicles still make up a relatively small portion of total new registrations. 

EU’s Protectionism Against Chinese EVs

In a recent statement on 8 May, 2024, Ursula von der Leyen, the President of the European Commission, expressed her concerns regarding the influx of affordable EVs from China into the European market. In response to this, the EU launched an investigation into manufacturing of EVs in China for potential subsidies in 2023. 

A regulation was enacted by the European Parliament on June 8, 2016, with the objective of safeguarding domestic industries within the EU from the impact of subsidized imports originating from non-EU countries. An official notice released on July 3, 2023, stated that Chinese electric vehicles were having a detrimental impact on the electric vehicle industry in the Union. The EU’s approach demonstrates a strong alignment between public and private sectors. European manufacturers and suppliers involved in the complaint were granted complete immunity and anonymity, a privilege that was not extended to Chinese firms. In addition, prominent companies such as Tesla and Volkswagen, who have manufacturing operations in China, are not subject to these tariffs. The EU has expressed concerns regarding the impact of China’s industrial overcapacity on EU-China trade. 

China, on the other hand, has accused the EU of engaging in “foul play.” China has raised objections to these tariffs at the World Trade Organization (WTO). The European market for electric vehicles (EVs) is significant, with projections indicating it will reach a value of USD 145 billion by 2024 and experience a growth rate of 12.5% by 2028. The electric vehicle market has experienced substantial growth, with a notable 25% surge in sales during the first quarter of 2024 in comparison to the corresponding period in 2023. The sales growth in 2022 was also 25%. 

On a global scale, electric vehicles (EVs) are projected to make up 20% of all vehicle sales. China is expected to dominate the market with a 45% share, followed by Europe with 25% and the US with 11%. Chinese manufacturers, including BYD, are strategically investing in European production facilities, such as a new plant in Hungary, in response to EU tariffs and trade restrictions. In addition, they are establishing collaborations with European EV companies to lower expenses and considering the possibility of manufacturing EVs in Europe, which could help minimize the effects of tariffs. In July, there was a significant decline of 45% in Chinese EV exports to the EU, despite the efforts made previously. Overall, the EU’s protective measures against Chinese EVs are motivated by considerations surrounding market competition and trade imbalances. Chinese companies are responding to the changing landscape by expanding their operations in Europe and forging important partnerships. However, the current trade tensions serve as a reminder of the challenges involved in international trade within the fast-paced electric vehicle industry. 

EU’s Concerns and Response 

The European Union’s investigation into Chinese-made electric vehicles (EVs) in 2023 underscores concerns regarding the potential unfair competitive advantage created by Chinese government subsidies. According to the EU, there are claims of significant state support for Chinese EV manufacturers, resulting in reduced production costs and enabling them to offer lower prices compared to their European counterparts. The market distortion has the potential to negatively impact European EV producers, resulting in a decrease in their market share and profitability. This, in turn, could lead to financial losses and put them at a competitive disadvantage. The investigation conducted by the EU seeks to evaluate the potential violation of trade regulations and the negative impact on the European industry caused by these subsidies. In response, the EU has the option to implement tariffs or other trade barriers in order to address these unfair practices and safeguard its domestic market.

On July 3, 2023, the European Commission implemented provisional countervailing duties on Chinese battery electric vehicles (EVs) in response to concerns regarding unfair competitive practices. The duties for BYD, Geely, and SAIC were determined to be 17.4%, 20%, and 38.1% respectively. These rates were established after conducting tests on electric vehicle samples and evaluating the subsidies provided. Companies that have not undergone testing are subject to a 20% duty, whereas those that have refused to cooperate are subjected to the highest rate. The EU’s action is intended to address the perceived imbalance caused by Chinese government subsidies, a matter that China disagrees with. The responsibilities will be applicable to electric vehicles that have been registered starting from March 7, 2023. 

Paradoxes of EU’s Environmental Policy

The EU’s tariff regime on Chinese EVs brings attention to certain contradictions within its environmental protection policies. Although the tariffs have been implemented to protect European manufacturers from unfair competition resulting from Chinese subsidies, there is a potential conflict with the EU’s environmental protection goals. The imposition of tariffs on electric vehicles could potentially impede their widespread adoption and hinder the overall progress in reducing emissions.

This short-term protection of domestic industries could potentially hinder the long-term shift towards cleaner technologies. In addition, it is important to consider the broader impacts of making EVs more affordable, as this can greatly contribute to global climate efforts. The tariffs fail to adequately acknowledge the environmental consequences of EV production materials or take into account the wider advantages of higher EV adoption, which could undermine the EU’s overarching environmental sustainability goals.

To read the analysis as it was published on the Eurasia Review webpage, click here.

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