Analysis: China treads carefully in global trade disputes, eyes Southeast Asia as key market amid Western tariff pressures

SINGAPORE: As Western governments pile on tariffs, Beijing on its end, is likely to tread carefully to avoid triggering a global trade war, analysts say, because it realises what’s at stake for its economy – and in the process, could adapt its trade strategy by finding a silver lining in Southeast Asia for imports of its goods as the West steps up barriers. 
For months, China has been at heads with Canada and the European Union (EU), which have both followed Washington’s lead and imposed tariffs on Chinese imports, namely electric vehicles (EVs), batteries and solar panels, as well as Chinese steel and aluminium. 
But even as Beijing announced on Monday (Sep 9) the start of a year-long “anti-discrimination” investigation in retaliation to Canada’s 100 per cent surtax on all Chinese-made EVs, the reality is that China’s economy simply cannot afford to engage in a trade war, analysts say. 
“The current economic situation in China is not in good shape,” said Dr Chen Bo, an economics professor at Huazhong University of Science and Technology in Wuhan.
“Beijing definitely understands how costly the trade war is. I don’t think it has any intention to trigger a trade war with any countries or economies, particularly with the EU. This is kind of a lose-lose game.”
China’s economy is also “much weaker than two years ago,” said law professor Mr Henry Gao from the Singapore Management University, also a Dongfang Scholar chair professor at the Shanghai Institute of Foreign Trade. “Thus it might not withstand the negative effects of retaliations,” Mr Gao said.  
Beijing has set a goal of achieving 5 per cent real GDP growth for the year. In the second quarter, the economy grew by 4.7 per cent compared to the same period last year, which economists point out is significantly below expectations. This follows a 5.3 per cent growth recorded in the first quarter.
According to a Reuters poll released this week, China’s exports grew at their fastest pace in more than a year, rising more than expected in August as manufacturers rushed out orders ahead of expected tariffs. Import figures however, fell short of expectations, the Reuters report said.
In a move to curb low-value shipments that allows China-founded e-commerce companies like Temu and Shein to ship their products more easily to the US, the Biden administration has come up with new steps that would prohibit this. 
Companies are no longer exempt from tariffs simply by shipping goods that they claim to be worth less than US$800, under the “de minimis” threshold, which US lawmakers have called a “loophole” that has allowed Chinese imports to evade tariffs and ship narcotics to America without customs inspection.
According to White House officials, the volume of packages entering the US under the US$800 threshold has exploded to more than 1 billion last year, from around 140 million a decade ago. They attributed most of the growth to Chinese e-commerce firms.
 
Meanwhile, the subject of tariffs came up during this week’s US presidential debate, with former president Donald Trump vowing that China would “pay a higher price” in the global trade war and proposed imposing additional tariffs of 60 to 100 per cent.
“I took in billions and billions of dollars, as you know, from China,” Mr Trump said. “In fact, (the current Biden administration) never took the tariffs off because it was so much money. They can’t. It would totally destroy everything that they’ve set out to do.”
Responding, Vice President Kamala Harris said Mr Trump had “invited trade wars” during his tenure that were harmful to the US economy. “Let’s be clear that the Trump administration resulted in a trade deficit, one of the highest we’ve ever seen in the history of America,” she said.
The Biden administration on Sep 13 locked in tariff hikes on billions of dollars of Chinese goods, including a 100 percent duty on electric vehicles and 25 percent on EV batteries. It will take effect on Sep 27.
Following the lead of the US, Canada will impose a 100 per cent tariff on imports of Chinese EVs that’s due to come into effect on Oct 1. Apart from that, it also plans on a 25 per cent surtax on imports of steel and aluminium products from China, effective Oct 15.
Meanwhile, media reports citing a source familiar with the matter, say the European Union has lowered the proposed tariff on imports of Tesla cars built in China, while it broadly maintained other planned punitive duties it set in July on Chinese-made electric vehicles. 
The European Commission has said it will impose extra duties of up to 38.1 per cent on imported Chinese electric cars. 
Tesla’s proposed tariff rate will reportedly drop to 7.8 per cent, from 9 per cent. For BYD, there was no change to its 17 per cent tariff. Geely will have a new rate of 18.8 per cent, down from a previous 19.3 per cent.
A peak rate of 35.3 per cent would apply to SAIC and other companies not cooperating with probe of alleged Chinese subsidies
The 27-member European Commission is due to vote in October on whether to adopt additional duties on Chinese-made electric vehicles, on top of its standard 10 per cent import tariff.
The EU has considerable investments in China’s new energy vehicle (NEV) sector, said Dr Chen, with big name companies like Volkswagen, BMW and Mercedes-Benz already heavily involved. While tensions remain high, there might be potential for the two economies to “find a way to mitigate tensions” and compromise, he said. 
China accounted for around 30 per cent of sales for the German carmakers in the first quarter.
Volkswagen, Europe’s largest carmaker, cautioned that the negative impact of tariffs would outweigh any potential benefits, particularly for the German automotive sector. 
Mercedes-Benz echoed this concern, stating that as an exporting nation, Germany did not benefit from increased trade barriers. BMW also criticised the proposed tariffs, calling them “the wrong way to go”.
“The EU could still impose some kind of tariffs on Chinese EVs, whereas the Chinese government may make some kind of commitment on subsidy reduction, and also allow EU agricultural products to enter China without the penalty tariffs,” Dr Chen added. 
The EU has also been dependent on China for Chinese-made EVs and its technologies, said Ms Alicia Garcia-Herrero, chief economist for Asia Pacific at Nataxis, which gives Beijing “much more leverage”. 
“I would say the EU is much more cautious with its tariffs…(and is) more worried than Canada, which is ironic because it is so much bigger,” Ms Garcia-Herrero said. 
Analysts, however, were less optimistic about the ongoing dispute between China and Canada. 
As it currently stands, bilateral relations between China and Canada remain tense in recent years, following the 2018 arrest of Huawei chief financial officer Meng Wanzhou on a US warrant in Vancouver, and Beijing’s retaliatory detention of two Canadians on espionage charges, amid accusations of Chinese interference in Canada’s 2019 and 2021 elections. 
Adding to this was an announcement on Monday from China’s Ministry of Commerce of a year-long anti-dumping investigation into Canadian rapeseed imports. 
“Canada has ignored WTO (World Trade Organization) rules and violated its commitments at the WTO,” said a ministry spokesperson, adding that officials had “requested consultations” with their Canadian counterparts over the matter. 
“(This) is a classic unilateral and trade protectionist act that seriously damages the rules-based multilateral trading system and disrupts global industrial and supply chains for (Chinese) EVs as well as steel and aluminium products,” the spokesperson said.  
Canada’s trade policies will continue to closely mirror those of the US, said economics professor Dr Chen. 
“Canada will just look to the US…If the US does actually cut some of the penalty tariffs imposed on Chinese EVs and other imports, maybe Canada will do the same. Otherwise, Canada will remain just as tough as the US on China.” 
Commenting on the situation, Ms Garcia-Herrero expressed doubts about Beijing’s actions. 
“China cannot use retaliation as strictly or as powerfully as it thinks,” she said, adding that Beijing may have also overplayed its hand in previous trade disputes and tensions with the US, as well as Australia and South Korea.
For instance, China in 2020 had imposed bans and duties on Australian products, when geopolitical disagreements with Australia turned into a full-blown trade war. 
Though it scrapped the last remaining tariffs on wine in March and ended the three years of punitive levies, observers have voiced that producers may be reluctant to bank all their hopes in one seemingly attractive market in the near future.
“China thinks it has a lot of leverage, but it backfires because countries start fearing China, and therefore they want to de-risk,” she said. 
While China’s trade measures have led to huge falls in Australian exports of the targeted goods to China, many of the affected Australian industries have found new markets in countries like Vietnam, Indonesia and Thailand.
And too strong a response from Beijing could backfire and add to the “a tremendous level of fear of China”, and “populism in the West over China”, says Mr Daniel Senger, managing partner at the Shanghai-based global advisory firm Wilton Partners. That adds to “impulsive” responses when it comes to policies on China, especially from politicians seeking office, he noted.
China views its EVs as “a comparative advantage in terms of both lower cost and higher sophistication” to what the West can currently offer… and believes they are being unfairly treated and inconsistent with WTO rules,” he told CNA. 
“But Beijing seems to understand that its wolf warrior diplomacy was highly unpopular and even resented by many trade partners, especially in developed countries.” 
Chinese foreign ministry spokeswoman Mao Ning on Aug 22 said the EU should work with China “in the same direction to discuss a proper settlement and avoid escalations”, while the China Chamber of Commerce to the EU has expressed that such measures could heighten trade tensions between China and the EU and send a negative signal to global cooperation and green development efforts.
One potential middle ground could be to allow lower-end affordable Chinese EVs that Europe and North American could not possibly produce economically, as well as expanding Chinese EV production in Europe, Mr Senger adds.
So Beijing would be careful this time round and might even adopt a “milder” approach, says SMU’s Mr Gao.
Any trade war between China and the West would inevitably have spillover effects, analysts say, and one side that would seek to benefit is Southeast Asia. 
China has been the region’s largest trading partner for 14 consecutive years and trade volume between countries reached record highs of US$722 billion in 2022. 
Southeast Asian countries could benefit in a few ways. 
“The first is to capture spillover volume (from China) at low prices,” said Mr Warwick Powell, an adjunct professor at the Queensland University of Technology. 
“The second is that Chinese firms may expand their presence in (the region) as a platform to export to the EU and North America. This has been the pattern already.”
The region could see both positive and negative impacts in the aftermath of a potential tariff war. 
“If the sanctions on China are so high that it will force more Chinese and foreign capitals previously located in China to move part of their production capacities out, the natural choice, or the easiest choice, would be Southeast Asia so the supply chain actually could be enlarged,” said Dr Chen. 
Going forward, new Chinese EVs could also be exported from these Southeast Asian nations to the EU to the US, said law professor Mr Gao.
But this could also present challenges for EV manufacturers in the region who may struggle to compete. 
According to Hong Kong-based Counterpoint Research, Chinese brands accounted for 70 per cent of all EV sales in Southeast Asia last year, with carmaker BYD firmly in the lead.
Vietnamese electric carmaker VinFast Auto is struggling to gain ground in the highly competitive EV market. It delivered just 9,689 cars in the first three months of the year, well off the pace to meet its annual 100,000 target. Last year, some 34,855 vehicles were sold, most of which went to related parties.
But even as China attempts to pivot and direct more exports to countries in Southeast Asia, it also faces pushback in the region.
Indonesia, a growing global powerhouse and Southeast Asia’s largest economy, has been eyeing heavy duties on textile imports. Thailand has also expressed concerns about the recent influx of cheap products from China, saying industry groups have been unable to compete.
Malaysia opened its own anti-dumping investigations on Chinese plastic imports in August, along with polyethylene terephthalate imports.
“The government will impose a provisional anti-dumping duty at the rate that is necessary to prevent further injury to the domestic market,” Malaysia’s Ministry of Investment, Trade and Industry said in a statement released on Aug 9.
Six years on, the trade war shows little signs of easing and the months ahead especially following the outcome of this year’s US presidential election will be crucial, analysts say.
While Mr Senger tells CNA it’s “not clear” how much of the increased tariffs is due to election rhetoric or will be realised, it is “more likely to happen under a Trump presidency since there is a precedent with the launch of the trade war and its escalation during his administration”.
Citing the recent progress with the US-China Financial Working Group and the US secretary of state Antony Blinken’s several recent private meetings with Chinese foreign minister Wang Yi, Mr Senger adds that “it seems to indicate a more cooperate path under Harris, assuming Harris will keep Biden’s diplomatic team and policies in place”.
“The new US president will be elected in November so policies could also be affected,” said economics professor Dr Chen Bo. 
“As we all know, these trade sanctions reflect US intentions as well.”