Beijing's grand 'Don't tax my cars!' tour attempts to divide Europe, Plus Biden asks Congress to close China's 'de minimus' trade loophole -- China Boss News 9.20.24

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What happened

China's top trade official, Wang Wentao, is currently on a high-stakes mission in the European Union.

His goal? To prevent the imposition of up to 35.3 percent tariffs on Chinese EVs.

After lobbying local officials in Rome and Berlin, Wang aims to persuade the European Commission's trade boss, Valdis Dombrovskis, to reject the new rates.

But he is facing stiff resistance in Brussels.

China has been reluctant to engage with the EU's concerns about its support for EV manufacturers, and Wang is attempting to rally support from more China-friendly EU countries to challenge the tariffs while also seeking a negotiated resolution.

But news sources say these strategies will likely cancel out each other, potentially causing fewer countries to oppose the tariffs.

"China is stuck," a senior Brussels-based trade lawyer said.

Meanwhile, experts are sounding the alarm over China's economy, which experienced another slowdown in August. Measures of factory output, consumption, and investment all fell below expectations.

The jobless rate also increased unexpectedly to a six-month high, and the weakening has raised concerns about the government's ability to reach its annual growth target of 5% for 2024.

Concurrently, home prices are rapidly declining amid waning consumer confidence and deflationary pressures.

It takes a steely constitution to reject compromise in one of your biggest export markets amid one of the worst domestic economies in decades.

Either China's back is against the wall, or government planners have incredible nerve.

In Beijing's case, it's both. Here's why.

Why it matters

No feasible (Leninist) alternative

Policymakers face challenges in the complex economic environment, as China's dependence on infrastructure investment to stimulate growth worsens its debt vulnerabilities.

The excessive focus on domestic investment amid low demand has also contributed to deflationary pressures, leading to price declines and compelling companies to trim wages or lay off employees to reduce expenses.

"We need to strengthen fiscal policy, which is more effective at addressing deflation, while adjusting monetary policy further to keep it accommodative," a policy adviser told Reuters news staff.

But the wheel of Chinese industrial policy has turned with repeated instances of excess production for decades.

According to Zongyuan Zoe Liu, Maurice R. Greenberg Fellow for China Studies at the Council on Foreign Relations and the author of Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions, who wrote one of the best overcapacity explainers in Foreign Affairs that I've seen all year, Chinese factories in key sectors designated by the government still sell their goods at a loss to meet local and national political objectives.

"This oversight does not stem from ignorance or miscalculation; rather, it reflects the Chinese Communist Party's long-standing economic vision. As the party sees it, consumption is an individualistic distraction that threatens to divert resources away from China's core economic strength: its industrial base," Liu says.

In other words, the party remains steadfast in its ancient Leninist interpretation, which espouses that China's low consumption and high savings rates are the bedrock for the capital accumulation needed to continue modernizing and strengthening the state.

As Liu also noted, China's politico-economic model quite usefully integrates the party hierarchy into every economic sector, reinforcing political stability.

"Because China's bloated industrial base is dependent on cheap financing to survive—financing that the Chinese leadership can restrict at any time—the business elite is tightly bound, and even subservient, to the interests of the party. In the West, money influences politics, but in China it is the opposite: politics influences money," she wrote.

Said differently - in Beijing's view- without overcapacity, there would be no Chinese Communist Party.

'We got Germany and Spain'

Politico's account of Wang's tour revealed a divide-and-conquer approach, a strategy that involves combining negotiations with a push for a coalition within the EU against the proposed tariffs. The plan aims to weaken the EU's unified stance and increase the chances of the tariffs being rejected.

By Tuesday, it was evident that Wang had some success in Germany, as senior EU sources told the South China Morning Post that "Berlin has been phoning other capitals in a late bid to get them to oppose the duties during a vote planned for September 25."

Some say the impending vote by EU countries on whether to adopt the tariffs is a pivotal moment, with far-reaching implications not only for the future of Chinese EV imports but also for EU-China relations.

The Commission's findings and its ability to sway the vote will be crucial.

However, Spanish Prime Minister Pedro Sánchez's unexpected reversal of support, in what can be described as one of the fastest flip-flops on Chinese trade policy in the West, has added a new layer of complexity to the situation.

Less than two months ago, Spain had backed the Commission's proposal. But after meeting with Chinese leader Xi Jinping last week, Sánchez acknowledged the need to reconsider the position, raising concerns from analysts about his foreign policy judgment.

A prominent trade lawyer told Politico that the Commission has put off notifying member states of its subsidy findings until after the meeting with Wang, when it can better assess the extent of negotiations required with each EU country before proceeding.

Still, analysts expect that China's Wang and the EU's Dombrovskis will have a tough time finding consensus.

The European Commission believes that the tariffs are necessary to protect European automakers from unfair competition. It has already refused China's offer to set price floors on exported EVs, a decision that could further escalate tensions and complicate the ongoing trade negotiations.

Others argue that even if tariffs are imposed, Chinese EVs will not likely become uncompetitive.

They highlight the larger context of geopolitical tensions—including China's support for Russia's invasion of Ukraine— and say the clash over tariffs is symbolic.

"It's not about the […] margin they're going to lose. It's a political battle," said Alicia García-Herrero, senior fellow at Bruegel think tank and chief economist at French investment bank Natixis, told Euractiv.

García-Herrero also said that she "[didn't] think [China] can argue they have 15 [member states votes against the tariffs] because that would be a lot. But they can argue that they're building up [votes]."

"If Europe really cannot get its act together on this… [we] are not going to get our act together on anything," she added.

This Week's China News

The Big Story in China Business

BIDEN ASKS CONGRESS TO CLOSE CHINA'S DE MINIMUS TRADE LOOPHOLE: The Biden administration has asked Congress to enact legislation that will block the influx of low-cost products from China by e-commerce giants like Temu and Shein, eliminating the "de minimis" exemption for items valued at $800 or less, by the end of the year, several news outlets reported.

Secretary of Commerce Gina Raimondo emphasized the need for fair competition and highlighted the significant package increase under the $800 threshold, mostly from Chinese e-commerce companies.