US and EU prepare for trade war with China on Electric Vehicles as auto demand patterns change – Chemicals and the Economy

It’d been obvious for some time that Europe and the US were likely to push back against China’s decision to boost its manufacturing exports. And now the starting pistol is close to being fired for the start of a trade war.

The immediate cause is China’s plan to ramp up Electric Vehicle (EV) exports:

• China’s EVs are cheap and can support the achievement of Net Zero targets.
• Western automakers have forgotten how to make $25k cars, and are only now rushing to catch up. The problem is that it will take them years, rather than months, to reorganise.
• Whilst they are retooling, China’s imports might wipe out US and European auto industries. And these are responsible for 8.3% of all European jobs and support 4.5% of all US jobs.

Trading jobs in exchange for cheap consumer goods wasn’t a problem in the 1990s. Then, the US and Europe were happy to outsource textile and other industries to China. But that’s no longer true today.

SO WHAT’S THE CORE PROBLEM?

Households and NPISHs final consumption expenditure (% of GDP) – China, United States

1960 – 2022

The chart from the World Bank showing household and Non-Profit Institutions Serving Households (NPISH) final consumption expenditure, as a percentage of GDP, sums up the core issue:

• China’s domestic consumption has fallen, rather than risen, since joining the WTO in 2001. It was just 37% of GDP in 2022.
• US consumption has been rising and has been ~70% since 2000 – nearly double China’s level.

Essentially, therefore, the US has been acting as the ‘consumer of last resort’ in recent years.

This certainly provided US consumers with cheaper goods, but it also hollowed-out critical supply chains and failed to ensure that trade was a two-way street.

Essentially, China has chosen to overinvest in manufacturing exports and infrastructure. And Chinese consumers have effectively ‘paid the bill’ – in the form of lower wages and consumption.

CHINA IS LEADING THE WORLD IN EV SALES

CHINA EV PASSENGER CAR SALES & EV % 2016 – 2024

China is leading the world in terms of EV sales as the chart above shows. China’s EV sales will likely reach 50% of the market at some point this year.

But this is election year in the US and EU, so politicians are starting to react to the “threat” from Chinese EV exports:

• Influential US senators want to ban Chinese EVs, claiming they are an “existential threat” to the US auto industry
• And Europe is expected to unveil retrospective tariffs on Chinese EVs by July

In response, state-owned China Daily has already suggested the proposed barriers are:

“A pretext (to) poison the environment for China’s domestic development”.

MAJOR CHANGE IS COMING TO THE AUTO INDUSTRY

A trade war isn’t the only challenge about to hit the auto industry.

Google-owned Waymo is already successfully operating robotaxis in San Francisco and Phoenix, and it is planning to launch commercial services soon in Los Angeles and Austin.

Meanwhile in China, robotaxis are also taking off very quickly in major cities including Beijing.

By September last year, robotaxis had driven 44m miles (70m km) in both the US and China. As the Financial Times reports:

“Baidu, China’s rival to Google, recorded more than 730,000 ride-hailing trips last year. That compares with combined orders of more than 700,000 last year in Phoenix, San Francisco and Los Angeles, according to Waymo.”

So as the chart suggests, it seems that the world is now moving from today’s “Continuous instability” into “Growing disruption”.

Real wars are already escalating in Europe and the Middle East.  Trade wars are beginning. And demand patterns in key industries such as autos are starting to change very rapidly.