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Trade War Escalates into a Warmer Phase

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Photo: State subsidies are the foundation of China’s export success. Massive injections of state funds into Chinese exporters are causing significant concerns and objections from the US and EU governments, especially in sensitive areas such as microelectronics, green energy, and electric vehicles (EV). Source: Foxcom
Photo: State subsidies are the foundation of China’s export success. Massive injections of state funds into Chinese exporters are causing significant concerns and objections from the US and EU governments, especially in sensitive areas such as microelectronics, green energy, and electric vehicles (EV). Source: Foxcom

Dumping of electric vehicles and solar panels, technological assistance to Russia's aggression in Ukraine, muscle-flexing in the Taiwan Strait, and attempts to solve internal problems by expanding exports—these are the grievances against China expressed by both the US and the EU. It appears we are witnessing the start of a global trade war against an ambitious authoritarian regime that has somewhat overestimated its strength. However, coordinated actions between the US and the EU are not yet evident.


On May 30, US Deputy Secretary of State Kurt Campbell hosted Chinese Vice Foreign Minister Ma Zhaoxu during his four-day visit to the US. This contact aimed to demonstrate Washington's willingness to keep communication channels open during times of tension. Ma Zhaoxu’s visit followed US Secretary of State Antony Blinken's trip to Shanghai and Beijing in April. "As we continue to take steps to protect our interests and values, as well as those of our allies and partners, we also engage in face-to-face diplomacy with China to clearly and directly communicate our positions and intentions, and to make progress on bilateral, regional, and global issues that matter to the American people and the world," a State Department spokesperson told Voice of America.


Photo: US Deputy Secretary of State Kurt Campbell issued a direct call in Brussels for a coordinated response from the EU and the US regarding China’s export expansion. Source: X (formerly Twitter) Kurt Campbell.


It is important to mention three issues that Washington is trying to address to avoid a crisis. First, the tension in the Taiwan Strait; second, China’s support for Russia’s aggressive invasion of Ukraine; and third, the massive export expansion of China due to huge industrial surpluses. When Secretary of State Antony Blinken was in Beijing in April, he expressed "serious concern" about China’s support for Russia's defence industry, warning Chinese leaders that Washington could impose sanctions in this regard.


Following that visit, in May, the US increased import tariffs on Chinese electric vehicles, and this week, Kurt Campbell in Brussels on May 28 called on EU representatives to join trade restrictions against China. He reminded that China’s support helps restore Russia’s military capabilities, including long-range missiles, artillery, drones, and battlefield surveillance. Campbell insisted on the necessity for European countries and NATO to "send a collective message to China about its actions, which we believe are destabilising at the heart of Europe." It seems he received a warm reception in Brussels.


Here is how Kurt Campbell summarised the meetings with his European colleagues: "We were encouraged by the number of European countries that clearly expressed that it would be impossible to maintain normal relations with China while it secretly supports the most destabilising war in Europe since World War II." The discussions also involved the EU’s participation in measures against China’s export expansion, which harms developed countries on both sides of the Atlantic.


European top officials still have some concerns about possible retaliatory steps from China, particularly voiced by German car manufacturers and French winemakers. However, Campbell rightly argued that coordinated efforts by the EU, the US, and other developed nations leave China with no chances: "In the current environment, I think China recognises some vulnerabilities in its own economy, and therefore it cautiously avoids full-scale retaliatory measures, which we have seen in previous periods against Australia, South Korea, the Philippines, and others." "I do not think this should overly reassure us. But I do believe there is now an acknowledgment that the economic and commercial circumstances are more complicated from Beijing’s perspective," he added.


"In many respects, if steps are coordinated between countries, then it becomes harder to retaliate against just one or another country," was Washington's message clearly conveyed by Campbell.


Photo: European Commission President Ursula von der Leyen believes that protecting against Chinese imports is necessary, but protective tariffs should match the level of harm caused by excessive Chinese government subsidies to local manufacturers. Source: screenshot RTVE video.


The Source of Restrictions

As previously reported by The Gaze, on May 29, the IMF upgraded its forecasts for China's GDP growth for 2024 and 2025. Following the earlier prediction of 4.6% growth, the IMF now expects 5%. Growth is anticipated to be 4.6% in 2025 and down to 3.3% in 2029. These are alarming figures for China's leadership, as they consider a 6% GDP growth rate as their red line. Since these prospects are completely unacceptable from Beijing's perspective, they are taking an aggressively proactive approach, primarily by stimulating exports through state subsidies.


The massive influx of state funds to Chinese exporters is causing considerable concern and opposition from the governments of the US and the EU, especially in sensitive sectors such as microelectronics, green energy, and electric vehicles (EV).


However, it is not only in such high-tech industries. For example, the sharp increase in May in US import tariffs on medical gloves, syringes (25%), and face masks (50%) from China is quite indicative. There is even talk of further increases. This market should not be underestimated, as imports of these goods from China amounted to $640 million in 2023.


This situation serves as a telling example of decision-making and the expected consequences. In the US, it is understood that not all the market space vacated will be filled by American medical goods manufacturers. Still, replacing one large supplier (China) with domestic producers and many smaller foreign suppliers (Malaysia, Indonesia, Thailand) is a highly desirable scenario. This is because everyone remembers the severe shortage of these products during the COVID-19 pandemic due to the collapse of supply chains that relied on Chinese manufacturers.


What is Beijing's reaction to this? Chinese Foreign Minister Wang Yi stated that the US's move to raise tariffs indicates that some people in the United States might be "losing their minds," and these measures by the US government "will inspire China's 1.4 billion citizens to work even harder" instead of hindering China's development.


This is once again very typical: instead of trying to negotiate, Beijing is attempting to attack on the trade front. More precisely, Beijing is ramping up these attacks.

Due to the previous waves of Chinese export expansion, one of the first acts of President Joe Biden in office was an executive order to direct federal agencies to increase their procurement of goods made in the USA and to establish the Made in America office to oversee this process.

Photo: There are alternatives to Chinese manufacturers. Malaysian Prime Minister Anwar Ibrahim invites global microelectronics manufacturers to his country during the Summit Semicon Southeast Asia 2024. Source: X (formerly Twitter) Anwar Ibrahim.




Where the Matter Moves

The shift of focus to other Southeast Asian countries is already underway amid the China-US trade war and restrictions on China’s access to advanced microelectronics technology.


On May 28, Malaysian Prime Minister Anwar Ibrahim stated that Malaysia is the best choice for the global semiconductor industry as a "neutral and non-aligned location" for business. He made this announcement while presenting his country to leading chip manufacturers seeking refuge from the US-China technology war due to Washington’s sanctions. Anwar Ibrahim’s speech took place at the global conference at Semicon Southeast Asia 2024 in Kuala Lumpur, which gathered dozens of firms from Asia, Europe, and America.


According to government data, Malaysia is a key player in the global semiconductor industry, meeting 13 per cent of total demand in the assembly, packaging, and testing sector. The semiconductor industry’s contribution to Malaysia’s GDP is estimated at around 25 per cent. This indicates, at the very least, the presence of alternative manufacturing sites capable of offsetting the reduction in imports of many critical goods from China to the US and EU countries.


Under the US Chips Act, passed by Congress in 2022, chip manufacturers partnering with the US are prohibited from expanding semiconductor production in China or any country deemed a national security threat by the US government. This creates enormous incentives for corporations to invest in modern production facilities elsewhere, just not in China. Nvidia, Intel, Infineon, and Microsoft are already taking advantage of this opportunity in Malaysia.


Unfortunately, forming a unified position between the EU and the US is proving very challenging. For example, on May 21, just two weeks before the European elections, European Commission President Ursula von der Leyen indicated her inclination towards imposing protective import duties on Chinese goods, but selectively and on an individual basis, considering the specific damage caused to various sectors of the European economy.


Photo: A joint front against China’s export expansion is being prepared. US Treasury Secretary Janet Yellen believes that the United States and Europe need to respond to China’s excess industrial capacity in a "strategic and unified manner" to preserve the viability of manufacturers on both sides of the Atlantic. Source: X (formerly Twitter) Janet Yellen.


However, the US insists on a more active stance and swifter measures. US Treasury Secretary Janet Yellen also stated on May 21 that the United States and Europe need to respond to China’s excess industrial capacity in a "strategic and unified manner" to preserve the viability of manufacturers on both sides of the Atlantic. If this is not an invitation to join forces in the trade war against China’s export expansion, then what is it?


The matter appears to be progressing quite vigorously, although Washington desires even more activity. During her visit to Frankfurt on May 21, Yellen told reporters that the finance ministers of the G7 countries share the US’s concerns about China’s efforts to dominate environmentally friendly energy sectors but have yet to call for "detailed coordination" of measures following the high US tariffs on Chinese goods.


Exactly one week after Yellen’s calls, similar but more structured messages were announced to European partners by Kurt Campbell, as mentioned at the beginning of this article. The economic pushback against China is gaining momentum and scaling up.

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