Will Chinese auto investment jump Joe Biden’s tariff walls?

Welcome to Trade Secrets. It feels like the trade world is still reeling a bit from President Joe Biden’s tariff announcements last week — not just the news in itself but what’s to come. Just like the glory days of the Trump trade war, brace yourselves for another extended period in which everyone in the world, or at least on social media, suddenly has hot takes on subsidies and supply chains. Today’s main pieces are on the next stages in the game, in particular regarding electric vehicles. Charted waters is on digital nomads.

Come on in, the market’s lovely

So where do we go from here? How do the world’s other big economies react? There’s plenty of commentary about whether they’ll feel forced to follow America’s lead and raise tariffs to stop their producers being swamped by Chinese EVs kept out of the US market. (If they do, it will probably be via conventional anti-subsidy or antidumping tariffs rather than the US’s make-it-up-as-you-go-along Section 301s.)

But in any case the next stage of the game is already unfolding — the “tariff-jumping” phase where China starts investing on a large scale in those target markets to get around existing or prospective border barriers.

We went through this in the 1980s and 1990s, the Japanese car industry building plants in the US in response to Washington blocking its exports. In fact, this trend was already in place before the barriers came down — Honda first announced its plan to build a plant in Ohio in 1980 — but it certainly gave it an impetus.

How welcome would Chinese investments be? If all you care about is jobs and production at home, then obviously it’s a totally different situation to pushing out import competition: if you can’t beat ’em, welcome ’em in. The US car companies and particularly the labour unions in the 1980s and 1990s might not have been super-happy about foreign companies increasingly setting up in the union-hostile southern states, but those investments got plenty of support domestically.

Certainly, it’s a fairly open environment in the big economies outside the US. Brazil, for example, which was never realistically going to deliver its own indigenous electric vehicle industry, has actively welcomed BYD’s investment there.

In the EU, BYD is already setting up in Hungary (France has also explicitly signalled its openness to investment) and Chery has acquired a plant in Spain. European carmakers, including German manufacturers, are often willing to partner with Chinese companies.

In theory, as I wrote the other week, there could be a big scrap if the European Commission decides to use its new foreign subsidies regulation to go after Chinese carmakers manufacturing in the EU. In practice, if the member states and Europe’s indigenous car industry are all lined up behind inviting the Chinese in and forming partnerships them, there will be intense pressure on the commission not to disrupt the process.

Rising Sun, Hidden Dragon

The US itself faces a trickier situation, and one that has quite a different dimension to the Japanese tariff-jumping of the 1980s. Sure, there was plenty of Japan-bashing around then, extending beyond political discourse into popular culture. Michael Crichton’s Rising Sun was pretty wince-inducing stuff.

But Japan was still a US ally, and cars back then were metal boxes with internal combustion engines. China is a full-spectrum military, strategic and intelligence rival superpower, and the US commerce department in February started an investigation into the security risks of connected vehicles from China and other “countries of concern”, Biden referring to them as “smartphones on wheels”.

The tariffs Washington announced last week might have been authorised under a law to combat unfair trade, but clearly anything to do with EVs also has a national security angle. Doesn’t that also go for Chinese investment in the US? In fact, doesn’t it go double? If China-built smartphones on wheels on American streets are a security threat, surely huge data-rich manufacturing centres on American soil with hundreds of Chinese engineers and corporate executives will be even more so?

Well, intriguingly, presidential candidate Donald Trump doesn’t seem to think so, explicitly saying during a campaign event in March that China was welcome to set up in the US to build cars (transcript here, remarks around 32:41). And even if the US does want to block Chinese foreign direct investment in the US, it’s not entirely straightforward. The Committee on Foreign Investment in the United States (Cfius) has no jurisdiction over greenfield FDI, a rule it reiterated in a determination last year in a case involving a Chinese company building a corn mill in North Dakota.

Yes, the federal government could probably intervene in various ways to control greenfield Chinese FDI through permitting arrangements or similar. But that means taking an untested policy instrument to achieve a goal which might not have the broad political support that blocking imports does. China already has a bunch of battery investments and joint ventures in the US, and jumping tariffs via FDI is an obvious next stage of the game.

Charted waters

More evidence that the Covid-19 lockdowns have had some permanent impact on work patterns: the number of “digital nomads” — permanent remote workers — has slowed since the end of the pandemic, but is markedly up on the levels before it.

Trade links

SURPRISE! China indicates it will retaliate against the EU and US’s prospective tariffs with its own investigation into imports of allegedly subsidised thermoplastics.

Kyle Chan at the High Capacity newsletter looks at whether the Biden tariffs will work in boosting the US EV industry, plus some really interesting numbers in a blog post from the WTO on changing patterns of trade.

A European Centre for International Political Economy paper argues for using trade to boost the EU’s competitiveness.

A nicely nuanced and constructive piece on how the UK can improve commercial relations with the EU from Liam Byrne, Labour chair of the House of Commons business and trade committee.

An update on a recent Trade Secrets: the UAW autoworkers union failed (this time) in its attempt to unionise a Mercedes-Benz plant in Alabama.

Two bits of FT promotion: Peter Foster’s excellent Britain After Brexit newsletter has been rebranded and relaunched as The State of Britain, and Soumaya Keynes’s new podcast The Economics Show will launch soon.

Trade Secrets is edited by Jonathan Moules