However, ASEAN faces increasing pressures from four key trends, each of which is accelerating, pointing to a more challenging time ahead for ASEAN policymakers and businesses. These developments are increasingly putting ASEAN in the middle of economic challenges and global reactions to China and its industrial overcapacity.

1. China’s exports to ASEAN are growing rapidly, exceeding its exports to the United States and the European Union (EU) since 2023, and up a further 12% in 2024. While most of this growth has been in intermediate goods, supporting ASEAN’s own exports to advanced economies, increasingly it is also in final goods, displacing local industry and jobs. Meanwhile, ASEAN exports to China have declined 3% since 2022, contributing to growing trade deficits and incipient trade tensions.
2. China’s industrial overcapacity, in lower-end as well as advanced manufacturing sectors—manifesting in surging volumes of artificially low-priced Chinese exports—is displacing ASEAN exports to third markets, threatening the region’s broader industrial health and development.
3. ASEAN is increasingly becoming the key offshore manufacturing base for Chinese companies, particularly in the clean energy sector. While this investment can support the region’s energy transition and enhance global competitiveness in these important technologies, these products are at the center of overcapacity tensions with China, threatening to put ASEAN in the crosshairs of global trade responses.
4. While ASEAN has benefited from integration into Chinese supply chains, the United States, the EU, and other economies, including Japan and India, are intensifying their scrutiny of exports from Chinese companies operating in or processed through third countries.

ASEAN governments now face a double balancing act: managing growing economic integration with China while contending with mounting pressure from advanced economies to reduce reliance on Chinese supply chains. At the same time, ASEAN must balance leveraging Chinese cheap imports and growing investments to drive industrial growth against the risk of these inputs overwhelming domestic industries and limiting their own industrial development. These tensions ASEAN faces are already building and are likely to be sharpened and accelerated under new Trump administration tariffs and China’s decoupling efforts. These evolving tensions also cast doubt on the extent to which China can meaningfully shift exports to ASEAN and other emerging markets as it faces growing trade restrictions from the United States and the EU.

To address these challenges, ASEAN must prioritize strengthening trade tools and enhancing regional coordination to manage import surges, while continuing to invest in its own competitiveness. Diversifying its supply chains from increasing reliance on China will be critical to reducing vulnerabilities. Leveraging institutional frameworks under the ASEAN-China Free Trade Agreement (ACFTA) and the Regional and Comprehensive Economic Partnership (RCEP) can help ASEAN navigate external pressures while safeguarding its industrial growth. At the same time, the U.S. and other major economies should proactively engage ASEAN on their overcapacity and de-risking concerns related to China, to help ASEAN remain a key partner in their own supply chain diversification efforts.

Introduction

China’s industrial overcapacity has risen to the top of the global trade agenda, fueled by nonmarket policies to boost certain industries, import substitution efforts to reduce reliance on foreign inputs, and imbalanced macroeconomic policies holding back domestic demand. These policies have led to an unprecedented surge of exports, with China’s manufactured goods trade surplus surging from roughly $1 trillion in 2018 to more than $1.8 trillion in 2023, entrenching global market concentration in key sectors and deepening supply chain dependencies. Beijing’s increasing use of export restrictions on critical inputs where it has a dominant market share, such as gallium, germanium, and rare earth-processing equipment accentuates this concern and underscores the need for diversification.

While much of the focus has been on China’s dominance in clean energy sectors such as electric vehicles (EVs), solar panels, and batteries, overcapacity is spreading across a broader range of industries, including steel, petrochemicals, semiconductors, and electrical machinery. In the EV sector, capacity utilization in China plummeted last year, with more than half of the sector operating at a loss, as a result of overinvestment and excess supply being exported—with China overtaking Japan as the largest auto exporter in 2023. As domestic EV sales in China have lagged rapid capacity expansion, Chinese manufacturers are increasingly relying on third-country markets to absorb their products. Similarly, production of solar panels and lithium-ion batteries in China is expected to exceed total global demand by as much as two to three times over the next few years.

So far, attention has largely focused on U.S. and EU trade responses to these unsustainable trends. The United States has imposed tariffs of 100% on Chinese EVs, 50% on solar cells, and 25% on lithium-ion batteries, while the EU has introduced tariffs of up to 45% on Chinese EVs and initiated counter-subsidy investigations in several sectors, including wind, solar, and electric trains. However, the impacts of China’s overcapacity are not limited to these advanced economies. Countries such as Turkey, India, and Brazil are experiencing surges of Chinese manufactured goods imports, spurring new trade restrictions and incipient trade tensions—a trend likely to intensify.

The ten ASEAN countries, some of the closest and most economically integrated emerging markets with China, stand at the epicenter of these shifts. ASEAN overtook the United States and the EU as China’s largest export market in 2023, with Chinese exports to the region increasing by an additional 12% in 2024, while ASEAN exports to China rose by only 2%. Indonesia and Thailand faced a starker imbalance, with Chinese imports surging by nearly 18% and 14%, respectively, in 2024, while their exports to China declined by 4% and 5%, respectively. This influx of Chinese goods, including intermediate goods for reexport and consumer goods for ASEAN markets, has widened trade deficits and intensified pressures on local industries.

While ASEAN has benefited from increased Chinese investment and greater integration into global supply chains—now accounting for nearly 8% of global exports—it faces mounting challenges. As ASEAN absorbs more of China’s exports, both in intermediate and consumer goods, this is likely to provide a sustained disinflationary impulse, helping keep inflation in check across the region. The region’s increasing import dependence on China threatens domestic business and employment, as export opportunities to China diminish. ASEAN is also becoming a test bed for large-scale offshore manufacturing by Chinese companies, even as advanced economies’ scrutiny of Chinese-linked supply chains poses risks to the region’s access to key export markets.

This issue paper examines how China’s industrial overcapacity is impacting ASEAN economies across key sectors, analyzes responses by ASEAN governments and China, and offers policy recommendations going forward.

Four Trends Reshaping ASEAN amid China’s Overcapacity

China’s industrial overcapacity is reshaping regional and global trade patterns, and ASEAN finds itself increasingly exposed to the consequences. Four interrelated trends are driving this shift, creating a more challenging environment for ASEAN economies.

1. Surging Chinese Imports and Trade Imbalances—Alongside Supply Chain Integration

Amid U.S.-China trade tensions and Western efforts to de-risk by reducing reliance on China, ASEAN member states have benefited from greater integration into Chinese supply chains. By 2023, China accounted for 20% of ASEAN’s trade, up from 12% in 2010. However, alongside these benefits, ASEAN has experienced rapidly rising imports of Chinese goods, while its own exports to China have grown more slowly or stagnated, leading to a widening trade deficit that now exceeds $190 billion.

Traditionally, the majority of China’s exports to ASEAN are intermediate goods, which have supported ASEAN’s own export industries by providing cheaper inputs. Recent analyses indicate that ASEAN’s trade deficit with China has been more than offset by ASEAN’s growing surplus with the rest of the world, particularly the United States, highlighting that the benefits of ASEAN-China economic integration partly depend on booming U.S. final demand.

However, a growing proportion of Chinese exports appears to now target ASEAN as an end market—a development that ASEAN businesses and governments may start to view with more caution. Unlike the processing trade, which creates local jobs, this shift poses greater risks to local industries, as finished goods imports priced at artificially low prices can displace domestic production and employment and deepen economic dependency. Thus far, the impact has been felt most immediately in low-value goods, such as textiles, furniture, and food and beverages, raising concerns in countries including Thailand, Indonesia, and Singapore.

For example, Indonesia is grappling with a surge of Chinese goods sold through e-commerce platforms that have severely undercut local manufacturers. The textile sector has been particularly hard hit, with 80,000 workers laid off in 2024 and 280,000 more jobs at risk in 2025 as 60 companies plan further cuts, according to Indonesian officials. Vietnam has similarly faced an influx of cheap Chinese products through cross-border e-commerce platforms, an estimated 4 to 5 million low-value orders daily, amounting to almost $2 billion per month.

China’s steel overcapacity has also emerged as an immediate threat to ASEAN economies. As domestic demand for steel in China has plummeted and production has yet to correct, China’s steel exports surged in 2023, reaching the highest levels since its last major steel overcapacity round in 2016, and global exports rose a further 23% in 2024. Much of this surge has gone to ASEAN, which received nearly 30% of Chinese steel exports in 2023. Vietnam was the largest market for Chinese steel exports globally, with four other ASEAN countries among China’s top ten export destinations. This surge of cheap steel has led to the imposition and ongoing consideration of further trade restrictions or antidumping duties in Indonesia, Malaysia, Thailand, and Vietnam.

China’s global aluminum exports also surged 17% in 2024, with Vietnam and the Philippines emerging as the top export destinations in the first half of last year. To avoid duties, Chinese producers ship aluminum to Vietnam, where it is extruded—often by Chinese companies—and then exported to the United States, prompting U.S. aluminum extruders to file a new antidumping case on imports from Vietnam.

The global economy is only experiencing the early stages of these trade shifts, with pressures and disruptions to domestic industries in ASEAN likely to increase—especially as China doubles down on industrial production and shows little interest in taking the needed steps to curtail production or promote domestic demand.

2. China’s Surge of Low-priced Exports Threatens ASEAN Industrial Development

Beyond the visible import surges in the sectors highlighted above, China’s industrial overcapacity also poses an increasing challenge to ASEAN’s broader industrial production and development. ASEAN has relied significantly on exports to fuel its industrial development—and its global exports have steadily grown. Export price deflation from Chinese manufacturers is exerting relentless pressure on manufacturers in ASEAN and beyond, however, eroding their export markets in sectors such as petrochemicals and electrical machinery. As significant a threat to ASEAN is surging Chinese production and eventual overcapacity in sectors that ASEAN economies are also targeting to drive their future growth.

Thailand, ASEAN’s most industrialized economy, has borne the brunt of this trend. It’s manufacturing sector—accounting for 25% of GDP—has faced significant upheaval, including factory closures, layoffs, and declining industrial output. Thailand’s Kasikorn Research Center estimates that 4,300 Thai factories have closed in the past two years—in the furniture, electronics, garment, auto, and steel sectors—and expects the trend to worsen in 2025. Malaysia and Singapore may soon face similar challenges as overcapacity in China expands into additional advanced manufacturing sectors. Meanwhile, economists in Indonesia and other ASEAN countries worry that China’s export machine will limit their opportunities to industrialize.

Underscoring the macroeconomic significance, the Bank of Thailand (BOT) has highlighted the adverse effects of China’s manufacturing overcapacity on Thailand’s exports. In multiple public reports, the BOT has linked these headwinds to China’s “dual circulation” policy, which prioritizes domestic self-sufficiency. This policy has reduced Thai exports to China while excess production has flooded ASEAN markets, further contracting Thailand’s export competitiveness. Other ASEAN governments to date have been reluctant to name the issue publicly—though they may be forced to confront it more directly as the threat to their industries grows. The sectors that follow are not facing as visible export surges but may be more significant for ASEAN economies.

Petrochemicals: A Case in Point

Petrochemical production and exports have been a traditional strength of ASEAN economies—though this sector is under pressure from China. In pursuit of self-sufficiency, China has expanded petrochemical capacity at a significantly greater rate than other economies despite being a higher-cost producer. This has led to excess capacity that is expected to persist for at least a few years as new Chinese production comes online. Whereas China used to be the largest importer of key products such as polypropylene, including from Singapore and Vietnam, China’s exports of the product exceeded its imports for the first time in May 2024. Exports to Indonesia, Vietnam, and Thailand are now surging as China’s petrochemicals imports from ASEAN collapse.

This overcapacity poses risks to production and employment in multiple ASEAN economies for which the chemicals sector is an important source of jobs and a key growth driver. For example, the sector accounts for an estimated 10% of GDP in Indonesia, 7% in Malaysia, 5% in Thailand, and 3% in Singapore. The risks are compounded by forecasts from consultancy Wood McKenzie that predict that nearly one-quarter of existing production globally may be forced to shut down due to weak margins. These ASEAN economies could face further capacity shutdowns, job losses, and declining economic contributions.

Construction and Electrical Machinery: Growing Pressures

Construction machinery is also experiencing growing Chinese overcapacity, following rapid production growth and declining domestic demand. Major U.S. and Japanese manufacturers, such as Caterpillar, Komatsu, and Hitachi have sizeable manufacturing facilities in Indonesia and Thailand that will face fierce competition as exports from China surge, potentially tying into Belt and Road Initiative (BRI) projects. More broadly, Thailand and Malaysia have substantial electrical machinery sectors that face an increasing threat from China’s exports.

Semiconductors: An Emerging Risk

Potential Chinese overcapacity in mature-node or foundational semiconductors, following massive Chinese investment in the past few years, is a risk that ASEAN governments and businesses need to prepare for. It is a growing concern for policymakers in the United States, the EU, and Northeast Asia, threatening to depress global prices and put at risk existing production and recent investments, such as the U.S. CHIPS Act. These chips are relatively small (cost wise) inputs into finished goods and are challenging to address through tariffs. The Biden administration in December 2024 launched a new Section 301 investigation on foundational semiconductors, handing it over to the Trump administration to pursue. Advanced economies are likely to take additional steps to prevent a surge of Chinese imports from damaging their semiconductor industries. ASEAN producers could face risks to production that involve Chinese inputs or firms.

At the same time, ASEAN is both investing in and benefiting from G7 efforts to diversify the semiconductor supply chain. Singapore already accounts for roughly 10% of global semiconductor manufacturing, responsible for 7% of the city-state’s GDP. Malaysia, while focused more on semiconductor packaging, assembly, and testing, derives an estimated 25% of GDP from the sector. Thailand recently announced investments in advanced production of power semiconductors in the country, while Vietnam is also making a big bet on the sector. However, the potential oversupply from China could complicate these efforts and impede growth plans.

Medical Devices: A Sector to Watch

The medical devices sector is also a target of China’s industrial policies, while being a growth priority for ASEAN economies. ASEAN has seen a steady increase in medical device imports from China following the implementation of the Regional Comprehensive Economic Partnership (RCEP) agreement in 2022, reaching $4.4 billion in 2023. This growth reflects the ambitions of China’s Made in China 2025 strategy, which prioritizes the medical device sector aiming to replace foreign products in its domestic market and then expanding exports. In January 2025, the European Commission found that China is engaging in discriminatory practices in the government procurement of medical devices, highlighting growing international scrutiny in this industry.

3. ASEAN as a Key Offshore Manufacturing Hub for China

ASEAN is rapidly emerging as a key offshore manufacturing base for Chinese companies, which invested a record $17.6 billion in 2023 contrasting with $7.5 billion in 2020. This dramatic uptick is driven by a mix of manufacturing, EVs, technology, mining, and infrastructure development, including digital and renewable energy projects. This investment surge reflects a combination of factors, including China’s desire to avoid trade barriers in advanced economies, seek locations with lower wages, sell to local markets, and capitalize on ASEAN’s strategic position as a gateway to global markets.

ASEAN governments have been nearly uniformly welcoming of and seeking out increased Chinese FDI, even in countries such as the Philippines, where geopolitical tensions persist. ASEAN governments have understandably seen this investment as essential to their drive to grow their economies and gain a competitive advantage in the sectors of the future, particularly where Chinese firms have leading technology and market positions. This includes China’s “new three” sectors of EVs, solar panels, and batteries, in which Chinese manufacturers are building capacity in ASEAN to produce for both domestic and global markets.

At the same time, the growing presence of Chinese manufacturing operations in ASEAN introduces complexities. While Chinese investments support ASEAN’s energy transition and industrial diversification, they also risk displacing existing production and supply chains with potentially negative effects on employment and local suppliers. Chinese companies have often exhibited greater vertical integration or reliance on other Chinese suppliers, in contrast to legacy multinational enterprises that have become more embedded in local value chains. In industries facing consolidation as a result of overcapacity, Chinese firms may face government pressure to shut down overseas operations rather than domestic ones, increasing the risks for ASEAN economies dependent on these investments.

Electric Vehicles (EVs)

As tariffs on Chinese EVs take effect in the United States, the EU, Canada, and emerging markets such as Turkey and Brazil, ASEAN has become more important both as an overseas production base and as an end market for Chinese companies. While ASEAN governments see Chinese investment in EVs as a driver of industrial modernization and economic growth, the influx of Chinese EVs and their vertically integrated supply chains raises concerns for local industries.

By 2026, Chinese companies plan to produce more than 1 million vehicles in ASEAN countries, with approximately 600,000 of these expected to be EVs—more than half of China’s overseas production capacity. Countries such as Thailand, Indonesia, and the Philippines are positioning themselves as regional hubs for EV production, benefiting from Chinese investments and government policies supporting EV adoption.

Chinese EV Sales in ASEAN: Can Emerging Markets Offset Lost Advanced Economy Demand?

China’s EV overcapacity highlights a broader shift: as advanced markets impose barriers, Chinese automakers are pivoting to emerging markets such as ASEAN. With a rapidly growing middle-income population of more than 200 million and supportive government policies for EV adoption, ASEAN presents an opportunity to absorb some of China’s excess capacity. Thailand and the Philippines ranked among China’s largest EV export markets in 2024, according to the China Passenger Car Association, while Indonesia is among the fastest growing.

However, ASEAN faces significant limitations to serving as a sizeable end market for Chinese EVs. Outside their capitals, populations in Indonesia and the Philippines are spread across thousands of islands, making charging infrastructure more challenging. Motorcycles dominate these markets and are likely to retain a significant share.

In Malaysia, ASEAN’s second-largest auto market, domestic brands Perodua and Proton control two-thirds of the market, and the government will not be eager for them to be supplanted by Chinese brands—though Proton has benefited from its partnership with China’s Geely. In Vietnam, where Chinese EVs are entering the market, domestic champion VinFast is a competitor making EVs an industry where imports from China are more of a direct threat, rather than an input to Vietnam’s export machine.

While ASEAN offers growth opportunities for Chinese automakers, structural and market-specific challenges suggest it is unlikely to fully offset the demand lost in advanced economies.

Thailand, ASEAN’s leading auto producer—accounting for more than 10% of GDP and 12% of exports—has targeted Chinese EV investment to maintain its competitive edge. The country eliminated tariffs on Chinese EVs under the ASEAN-China Free Trade Agreement (ACFTA) and in 2022 announced reduced import and excise duties, along with subsidies, to attract investment. To qualify for these incentives, foreign manufacturers must produce at least as many vehicles in Thailand as they import. These policies secured more than $1.5 billion in new production facilities from Chinese manufacturers, including BYD, which inaugurated its first overseas EV factory in Rayong, Thailand, in July 2024. This facility, capable of producing 150,000 vehicles annually, is BYD’s largest overseas production base to date.

These policies have had unintended consequences for Thailand’s domestic production and supply chains. A surge in Chinese EV imports has pressured local production, primarily by Japanese joint ventures. Subaru closed its factory in Thailand in December 2024, and Suzuki and Nissan have announced that they will close factories in Thailand by the end of 2025. Equally significant has been the impact of local auto parts suppliers, with media reports indicating that at least a dozen businesses have shut down as Chinese EV manufacturers primarily rely on their own supply chains.

Batteries

ASEAN economies are benefiting from Chinese EV battery investments—balanced by investment from Japanese and Korean firms—though over time, as in other sectors, they face risks from China’s overcapacity and dominance in the sector. Indonesia, Vietnam, Thailand, Malaysia, and the Philippines are all seeking to build domestic battery production, including through large investments by Chinese market leaders. Indonesia has the largest nickel reserves globally and 50% of the world’s nickel production, helping it secure a $5.8 billion investment from China’s Contemporary Amperex Technology Co., Limited (CATL). Vietnam’s VinFast is developing its own lithium-ion battery technology while at the same time partnering with China’s Gotion in a joint venture. Meanwhile, Chinese SVOLT Energy began producing EV battery packs in early 2024 through a partnership with Thailand’s Banpu Next.

Local content requirements for EV subsidies in ASEAN, both national policies and under RCEP, encourage Chinese manufacturers to use batteries produced there, but broadening exports to global markets may prove challenging. Indonesia and Thailand aim to develop domestic lithium processing as well, as a core input to batteries, yet China’s control of more than 70%–80% of the lithium value chain highlights a risk from Chinese coercion, such as denial of export licenses by China.

Solar Panels

ASEAN has emerged as a key production hub for Chinese solar manufacturers, particularly for export to the United States, to avoid U.S. antidumping and countervailing duties imposed on exports from China and other markets. Thailand, Malaysia, Vietnam, and Cambodia have developed significant solar panel production from Chinese-owned solar companies, accounting for an estimated 40% of solar module production capacity outside of China and more than two-thirds of U.S. solar imports in 2023. Increasingly, Chinese solar exports are targeting ASEAN as an end market also, which may benefit the green energy transitions in these economies.

In 2022, the Biden administration ordered a two-year tariff reprieve on solar panel imports from Malaysia, Thailand, Cambodia, and Vietnam to prevent disruptions in U.S. solar panel deployment while domestic manufacturing scaled up. The moratorium expired in June 2024, and in December, the U.S. Commerce Department announced preliminary tariffs of 21% to 271% on imports of Chinese solar panels from these countries, with a final decision expected in mid-2025.

These duties have led to significant disruptions in ASEAN’s solar manufacturing sector. According to Chinese and local media, Longi Solar halted five production lines in Vietnam and began winding down operations in Malaysia, while Jinko Solar closed a plant in Malaysia, and Trina Solar initiated maintenance shutdowns in Thailand and Vietnam. Some manufacturers have shifted production to Indonesia and Laos, which currently do not face U.S. tariffs.

While Chinese investments in solar manufacturing have supported ASEAN’s renewable energy transitions, the region’s heavy reliance on such investments to serve third-country markets exposes it to production relocations driven by tariff policies. Strengthening local value chains and diversifying market strategies will be important for ASEAN to mitigate these risks.

Steel

China is also ramping up investment in steel production in ASEAN, exacerbating global overcapacity concerns and risking antidumping measures being applied to ASEAN economies. The OECD warns of worsening steel overcapacity globally, with ASEAN economies at risk of becoming both production hubs and dumping grounds for excess Chinese steel. The Philippines is welcoming Chinese investments to revive its steel industry, including a recent announcement of a $1 billion investment by a Chinese company to build a steel manufacturing plant, while Chinese investment has generated more blowback in Indonesia and Vietnam.

4. Heightened Scrutiny from Advanced Economies: Risks for ASEAN’s Role in Chinese Supply Chains

ASEAN’s deepening integration into Chinese value chains, while a driver of economic growth, poses new risks as the United States and other advanced economies ramp up scrutiny of trade diversion or tariff circumvention by Chinese companies operating through third-country markets. The U.S. crackdown on solar panel exports from Chinese companies in ASEAN is likely a harbinger of more to come. As developed economies work to reduce their reliance on Chinese inputs in critical supply chains, ASEAN’s dependence on these inputs for their manufacturing sectors threatens its access to these developed markets. Other emerging markets may impose similar trade restrictions, encouraging Chinese investment and production in their domestic markets rather than welcoming goods produced by Chinese companies in ASEAN.

Both the United States and the EU have been developing a broader set of economic tools driven by a heightened focus on economic and national security. These extend beyond traditional trade remedies to encompass broader supply chain security, particularly in sectors that are critical for defense, energy, and technology, as well as human rights, labor, and environmental concerns in their supply chains.

For the United States, the Inflation Reduction Act (IRA) incentives for EVs already include tough Foreign Entity of Concern (FEOC) provisions, withholding U.S. subsidies for vehicles with significant inputs from companies in China or controlled by China. While the Trump administration may seek to roll back some parts of the IRA, it is likely to retain, or tighten further, any FEOC restrictions targeting China. The Department of Commerce has also expanded its scope for trade investigations to include transnational subsidies, enabling greater scrutiny of Chinese companies operating in third countries. Lastly, Commerce’s first major rule making under the Information and Communications Technology and Services Supply Chain (ICTS) authority on connected vehicles could effectively bar imports of Chinese EVs produced anywhere. This authority is expected to be used on additional high-tech ICTS products in the future.

The EU has rolled out a number of new tools that could impact ASEAN exporters with Chinese supply chain ties, including its expansive Foreign Subsidies Regulation. The EU’s Carbon Border Adjustment Mechanism (CBAM) may add compliance costs and scrutiny, particularly in carbon-intensive goods such as steel, aluminum, and cement but potentially also provide leverage for ASEAN economies to press investors from China to meet higher environmental standards and reduce carbon intensity.

Other major economies are developing similar measures, albeit at a slower pace. Japan is considering broadening its antidumping duties to cover products diverted through third countries while strengthening its ability to investigate suspected circumvention. India is exploring policies to address Chinese exports entering through ASEAN to avoid duties.

Together, these initiatives point to a potentially far-reaching push toward stricter rules of origin and enhanced security requirements in trade, posing significant challenges for ASEAN economies. As economic security and supply chain diversification take on greater importance, new rules and applications of these concepts are likely to proliferate going forward. Moreover, uncertainty around these evolving policies could slow Chinese investment into ASEAN as an alternative production site, as companies hesitate to commit resources without assured market access.

Responses to China’s Industrial Overcapacity: ASEAN’s and China’s Approaches

As ASEAN contends with increasing pressures from these trends, each country’s response reflects its unique economic structure, trade ties, and strategic priorities. At the same time, Chinese companies and the government are pursuing their own strategies to maintain their competitiveness and manage growing scrutiny.

How Is ASEAN Responding to Chinese Overcapacity?

China’s industrial overcapacity has impacted individual ASEAN nations’ economies in similar, yet different ways, with each country responding based on its unique economic structure and relationship with China. Many ASEAN business leaders have voiced concerns about the impact of low-cost Chinese imports on local industries, calling for stronger trade defense tools and protective measures to shield vulnerable sectors. Policymakers face the difficult task of balancing protection of domestic industries with maintaining important economic ties to China. They are strengthening their trade toolbox and working to diversify their economies and export markets, aiming to harness the benefits of Chinese investment without compromising local industries.

Thailand: Struggling to Compete in Manufacturing

Thailand, with ASEAN’s most diversified manufacturing sector, faces the greatest threat from Chinese overcapacity. In response, the Thai government has implemented antidumping duties on Chinese steel products ranging from 3.22% to 145.31% and is considering further measures in other industries such as aluminum. The Federation of Thai Industries also reported that more than 12 million tons of steel capacity financed by Chinese firms is being built in Thailand, prompting calls for government intervention to restrict China-backed steel mills to protect domestic manufacturers. Supavud Saicheua, Chairman of the National Economic and Social Development Council, highlighted growing concerns among Thai policymakers, stating, “The Chinese are now trying to export left, right and centre. Those cheap imports are really causing trouble.”

Thailand’s experience in the EV sector reflects the complex balancing act it faces. The government actively seeks Chinese investment to position Thailand as the hub for EV production in Southeast Asia but faces concerns over the limited benefits for local suppliers due to the vertical integration of Chinese supply chains.

Thailand has also begun to address the influx of low-value goods from China. In 2024, the government approved the collection of a 7% value-added tax (VAT) on imported goods sold for less than $41 (1,500 baht), a move partly aimed at leveling the playing field for domestic producers. Additionally, an interagency task force was established to review and revise measures, aiming to enforce compliance with global trade rules while addressing concerns about illegal and underpriced imports

Vietnam: Beneficiary and Competitor Challenger

Vietnam is the largest beneficiary of supply chain shifts thus far, attracting significant Chinese investment, particularly in its electronics and solar panel manufacturing sectors, which have boosted Vietnamese exports. While welcoming Chinese trade and investment, Vietnam has also implemented trade restrictions to protect key industries, including antidumping duties and ongoing antidumping investigations on imports of steel, textiles, and wind turbines.

The steel industry remains particularly vulnerable with local producers struggling to compete with China’s scale and pricing. The Vietnam Steel Association has called for additional trade remedies and stricter regulations on the quality of imported steel, but industry experts warn that existing trade remedy tools are inadequate, as Chinese goods continue to undercut domestic production costs.

Vietnam is also addressing a surge of e-commerce imports from China by planning a VAT on low-value imports and also promoting domestic consumption of Made-in-Việt Nam products. These efforts aim to support local businesses and reduce reliance on foreign goods, reflecting Vietnam’s dual role as a key beneficiary of Chinese investment and a competitor in manufacturing.

Indonesia: Resource Nationalism and Industrial Ambitions

Indonesia’s response has been shaped by its resource nationalism and ambitions to move up the value chain, particularly in the EV and battery sectors. Jakarta has welcomed substantial Chinese investment in its nickel and battery industries, viewing this as crucial for developing its EV supply chain. However, concerns are growing as the government struggles to enforce high environmental standards in Chinese-backed nickel-smelting operations. In regions where these operations are concentrated, pollution has become a major issue, raising questions about whether the economic benefits justify the environmental costs.

Additionally, much of the value-added processing still takes place in China, limiting the positive effects on Indonesia’s economy. Indonesian economist Faisal Basri estimates that Indonesia only receives 10% of the value-added from Chinese mining investments, with little boost to household income in affected areas. In his first state address, President Prabowo Subianto emphasized the need for Indonesian citizens to benefit more and capture more value from the country’s natural resources.

In December 2023, Indonesia attempted to tighten monitoring of more than 3,000 imported goods, but the regulation was reversed after some domestic industries argued it disrupted the flow of essential materials for local production. The government has since shifted its approach, considering steep tariffs on a range of imported goods, including textiles and consumer products, while also establishing a task force to crack down on illegal imports and review antidumping measures. Officials have emphasized that these measures are not aimed at any particular country but are part of a broader strategy to protect and promote local industries. Critics, however, worry that such tariffs could violate the country’s trade obligations and potentially trigger retaliation from China. Some industry experts suggest that instead of relying on tariffs, tighter monitoring of import channels to address illegal imports, alongside efforts to boost productivity and competitiveness within domestic industries, would be a more effective and sustainable solution.

Despite these concerns, Indonesia continues to pursue Chinese investment across multiple sectors. In the textile industry, where job losses have been significant, government officials have secured commitments from major Chinese companies to build large textile factories that promise to create tens of thousands of jobs. More broadly, in late 2024, Indonesia’s Investment Minister Rosan Roeslani announced $7.5 billion in new commitments from Chinese firms across sectors such as automotive, petrochemicals, and solar panels.

Malaysia: Beneficiary Thus Far, but Risks Growing

Malaysia has enjoyed significant benefits from supply chain shifts, with booming economic growth in 2024 driven by an influx of investment, including from China. However, a widening trade deficit with China, particularly in low-value goods, has raised concerns among small and medium-sized enterprises (SMEs). To address this, the government introduced a 10% tax in January 2024 on items priced below $150 (RM500) bought online and delivered from abroad, aimed at leveling the playing field for local businesses.

Malaysia has taken a measured approach toward Chinese overcapacity, reviewing its antidumping legislation, while launching antidumping investigations into steel and plastic-packaging imports. The government has also encouraged Chinese FDI in the automotive sector, including China’s Geely Holdings partnering with Malaysia’s Proton to develop EVs. However, Malaysia also prohibits imports of lower-cost EVs while providing incentives for using local components, thereby limiting China’s market access.

Malaysia continues to balance protecting local industries while maintaining its role as a regional investment hub. As Prime Minister Anwar Ibrahim has stated, Malaysia aims to be a “neutral and nonaligned location,” navigating global trade tensions with a focus on economic openness and strategic neutrality.

Philippines: Navigating Chinese Pressures amid Limited Integration

The Philippines faces unique pressures from Chinese overcapacity despite having low integration into Chinese manufacturing supply chains. While this limited role in China-centered export production offers some protection, surging imports of low-cost Chinese goods, particularly in steel, machinery, autos, and consumer products, have challenged domestic manufacturers and widened the trade deficit to more than $33 billion in 2024. South China Sea tensions have complicated economic ties and raised concerns about retaliation, with China cutting banana imports from the Philippines by nearly 50% in 2024.

In response, the Philippines has sought to balance its economic ties with China by strengthening partnerships with the United States and Japan, while also advancing diversification efforts through new free trade agreements—recently concluding one with South Korea and actively negotiating with the United Arab Emirates and the EU.

Singapore: Leveraging Chinese Investment while Managing Risks

Unlike other ASEAN nations, Singapore’s economy—focused on finance, technology, and professional services—is less exposed to pressures from Chinese overcapacity. Its trade surplus with China and strong high-value exports help offset rising imports in areas such as advanced chemicals, refined and specialty metals, and industrial machinery. In 2023, Singapore attracted more than 40% of ASEAN’s inward FDI from China, with companies including Alibaba, ByteDance, and Shein establishing regional headquarters.

To safeguard critical sectors amid growing scrutiny of foreign investments, Singapore enacted the Significant Investments Review Act in January 2024. Senior Minister Lee Hsien Loong has acknowledged overcapacity concerns in specific sectors such as steel and solar panels but views China’s primary challenge as macroeconomic imbalances, such as its high savings rate and low domestic consumption, rather than systemic manufacturing overcapacity. He emphasized that Southeast Asian companies must respond by upgrading, transforming, and competing at a global level.

China’s Strategies and Corporate Responses to ASEAN Concerns

Chinese authorities have been slow to meaningfully respond to ASEAN concerns on the growing trade imbalance, pushing for more trade integration. Chinese leaders have made half-hearted promises to increase imports from ASEAN, thus far mostly on low-value-added fruits and vegetables. Chinese officials have focused on touting the benefits of global value chains and Chinese investment, explaining growing trade deficits as reflecting market conditions.

In response to local criticism and pressure, Chinese companies have started to increase their use of local inputs. In July, Thailand’s Ministry of Industry required Chinese EV manufacturers to use at least 40% local components when assembling EVs to support Thailand’s automotive supply chain. In response, China’s Changan Automobile promised to begin production with 60% local content and increase this proportion to 90% over time, with similar promises from Shanghai-based Neta Auto. However, Chinese EV manufacturers have recently asked to delay requirements to produce in Thailand the same number of vehicles they have imported from China.

Chinese EV manufacturers are reportedly already facing competing pressures between the objectives of host governments and the priorities of Chinese authorities. ASEAN governments seek to leverage Chinese FDI to build domestic industrial capabilities and move up the value chain over time. At the July 2024 opening of its new Rayong plant, BYD promised to “bring technology from China to Thailand.” Bloomberg reported in September that Beijing was advising its automakers to ensure that key technology and production stayed in China, while exporting “knock-down” kits to foreign plants—essentially enabling the assembly of vehicles overseas from key parts produced in China.

China has also placed a priority on upgrading the ASEAN-China Free Trade Agreement (ACFTA)—to at least maintain a public narrative of increasing connectivity even as tensions grow beneath the surface. The two sides announced the substantial conclusion of upgrades to this agreement at the October 2024 ASEAN-China Summit, including new chapters on the digital economy and the green economy. The update also includes a chapter on supply chain connectivity—likened by one ASEAN contact to the Indo-Pacific Economic Framework’s (IPEF’s) supply chain cooperation agreement. Language on easing transactions for SMEs may be a nod to the growing concerns among ASEAN SMEs, but the Chinese government has appeared to be effective in preventing public criticism from ASEAN governments on the increasingly imbalanced trading relationship.

Meanwhile, China’s broader economic strategy offers little immediate signs of a rebalancing through boosting domestic consumption or even reducing low-value manufacturing—as it seeks to grow advanced manufacturing. With China’s economy and labor markets facing serious headwinds, local governments may be even less likely to let unprofitable Chinese companies and factories shut down, meaning ASEAN countries will face continued low-cost competition from China across a range of industrial sectors, challenging policymakers’ plans to use these industries to spur ASEAN’s next phase of growth.

While unspoken publicly, a key factor cautioning ASEAN from criticizing China or imposing trade restrictions is the risk of retaliation and coercion from China. China often imposes retaliatory tariffs in response to other countries’ tariffs on Chinese goods and has extensively used informal regulatory or trade restrictions to punish countries taking such actions. China is the largest source of tourism in ASEAN, providing a significant economic contribution to ASEAN economies. Much of this is through organized tour groups from Chinese state-owned agencies, giving China an easy tool to turn off tourist flows by canceling these tours—as China did during its 2012 South China Sea dispute with the Philippines.

Policy Implications and the Path Forward

ASEAN policymakers and businesses face a more challenging environment ahead as they navigate growing pressures from China’s industrial overcapacity and shifting global trade dynamics. To address these pressures, ASEAN members will need to enhance their trade response mechanisms and strengthen regional coordination to push back on China where necessary. Diversifying sources of industrial inputs and foreign direct investment will also be critical to maintaining ASEAN’s export opportunities and managing risks going forward.

Building on existing efforts, the following recommendations are offered to help ASEAN address these challenges.

1. Strengthen Trade Tools and Regional Coordination
   • Enhance Trade Response Mechanisms: ASEAN member states should strengthen national antidumping and countervailing duty frameworks, building institutional capacity to investigate and enforce trade remedies effectively. A regional mechanism for sharing best practices and standardizing procedures could enhance consistency and enforcement, reducing the risk of intra-ASEAN trade friction.
   • Develop a Regional Trade Remedy Database: Enhance the ASEAN Trade Repository (ATR) to track trade remedy cases, including antidumping and countervailing duties. This expanded platform would facilitate transparency and enable more coordinated responses to trade surges.
   • Address E-Commerce Imports: ASEAN should collectively tackle the influx of underpriced imports on digital platforms by incorporating targeted e-commerce provisions into the ongoing negotiations of the Digital Economy Framework Agreement (DEFA). These provisions should aim to establish fair competition, enhance transparency, and promote accountability on digital platforms to ensure a level playing field for local businesses.
   • Engage China on Overcapacity and Trade Imbalances: ASEAN should leverage its position as China’s top trading partner to push for constructive dialogue on overcapacity and trade imbalances, starting with sectors where ASEAN firms face the greatest pressure. As part of this effort, ASEAN should leverage institutional frameworks under the RCEP, particularly its Joint Committee and its Committee on Goods, alongside mechanisms within the ACFTA, to address trade surges and promote more reciprocal market access. These platforms provide mechanisms to enhance cooperation on trade remedies, ensure effective implementation of agreements, and improve transparency. An ACFTA upgrade, substantially concluded in October 2024, introduces new provisions on supply chain connectivity, competition, and technical standards, which may offer additional avenues to address overcapacity concerns.
2. Increase Supply Chain Monitoring and Industry Coordination
   • Develop an ASEAN Supply Chain Early Warning System: ASEAN should develop a digital platform to monitor supply chain disruptions, import surges, and shifts in global markets. This system would enable timely identification of vulnerabilities and coordinated responses, drawing lessons from similar mechanisms by other groups, such as U.S.-Japan-Korea and UK-U.S.-Australia.
   • Create a Private Sector Supply Chain Working Group: To enhance supply chain resilience and information sharing, ASEAN could create a working group of private sector leaders and regional businesses. This group would provide real-time market insights, feedback on trade disruptions, and industry-specific data support for policy decisions. This would provide ASEAN economies with tools to identify risks early and better coordinate responses.
   • Collaborate with Dialogue Partners: ASEAN should deepen engagement with dialogue partners such as the United States, the EU, and Japan through formal mechanisms to address supply chain vulnerabilities and economic resilience. Coordination with these partners would enhance ASEAN’s capacity to monitor and respond proactively to trade disruptions.
   • Enhance Enforcement against Illegal Imports: ASEAN should strengthen regional enforcement mechanisms to combat illegal imports and ensure compliance with trade regulations. Expanding successful initiatives, such as the 1st Joint Customs Control (JCC) Operation to cover broader product categories would be a positive step. Accelerating the implementation of the new generation ASEAN Single Window, including interoperability with the private sector and dialogue partners, could also improve monitoring and strengthen regional enforcement.
3. Promote Strategic and Sustainable Investment
   • Investment-Screening Mechanisms: ASEAN governments should enhance or establish narrowly focused investment-screening mechanisms to address national security risks in strategic sectors. Building on models such as Singapore’s 2024 Significant Investments Review Act, which targets specific critical entities, such a mechanism should focus on mitigating security risks and excessive dependencies while avoiding broad restrictions that could deter beneficial investment. Sharing best practices regionally could help maintain flexibility for national priorities while enhancing transparency and investor confidence and discouraging overly broad application of investment screening for protectionist purposes.
   • Promote Sustainable and Diversified Investment across ASEAN: Building on existing initiatives, ASEAN should strengthen sustainable investment standards to attract responsible FDI aligned with regional growth goals. Common investment principles should emphasize transparency, accountability, local industry development, and technological capacity, particularly in strategic sectors including EVs and critical minerals. To diversify investment sources and reduce reliance on any single country, ASEAN governments could introduce incentives—such as tax benefits, streamlined regulations, and preferential market access—that support projects meeting these standards.
   • Strengthen Domestic Industries and Regional Integration: Workforce development is widely recognized by economists and industry experts in ASEAN as one of the most effective ways to maximize FDI benefits and enhance industrial competitiveness. ASEAN should prioritize targeted investments in workforce skills, productivity, and innovation to attract high-value FDI and support high-value-added production. This includes incentivizing technology adoption, advancing industrial upgrading, and establishing regional R&D hubs and logistics centers. Strengthening intra-ASEAN trade and supply chains, while expanding export markets and diversifying trade ties, will enhance regional resilience and drive sustainable growth.

Recommendations for the United States

U.S. engagement with ASEAN is crucial as the region navigates Chinese trade pressures and U.S. supply chain priorities. The current administration should prioritize collaboration on supply chain resilience and diversification, particularly as concerns grow about Chinese industrial overcapacity and potential U.S. decoupling measures. The U.S. government could do the following:

1. Negotiate Sector-Specific Supply Chain Agreements: The United States could collaborate with ASEAN countries on targeted agreements in strategic sectors such as semiconductors and green technologies. These agreements should combine aligned standards and provisions for trade facilitation and supply chain resilience and consider trade benefits, including tariff reductions, where appropriate.
2. Strengthen Critical Minerals Cooperation: Agreements with key ASEAN suppliers, particularly Indonesia, the Philippines, and Vietnam, would secure sustainable and resilient supplies of critical minerals. These agreements should incorporate trade benefits and technical support for sustainable processing. Alongside these agreements, the United States should expand the role of ASEAN countries in frameworks similar to the Mineral Security Partnership (MSP).
3. Supply Chain Information Sharing and Risk Assessment: The U.S. Department of Commerce’s Supply Chain Center, building its own capacity over the past few years and rolling out a new diagnostic supply chain risk assessment tool—known as SCALE—could offer technical assistance focused on risk assessment tools and data analytics. Additionally, the United States and other G7 countries should include relevant ASEAN economies in discussions on China’s industrial overcapacity in specific sectors, such as legacy semiconductors, and how to address this risk.
4. Targeted Development Finance: The U.S. government could increase the U.S. Development Finance Corporation’s investments in sectors such as renewable energy, digital infrastructure, and advanced manufacturing focusing on areas where ASEAN faces gaps in current investment to provide a tangible alternative to Chinese investment.

ASEAN’s ability to successfully navigate the challenges posed by China’s industrial overcapacity will be crucial for the region’s economic future. By strengthening trade tools, enhancing supply chain mxfonitoring, fostering industrial competitiveness, and implementing investment standards, ASEAN can mitigate these risks. Proactive measures, both immediate and long term, are essential to ensure that economic integration with China supports rather than undermines ASEAN’s own industrial development aspirations while building a more resilient and sustainable regional economy.

To read the full issue paper as it appears on the Asia Society Policy Institute website, click here.

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For more than two decades, China has worked to free itself from dependence on Western technology while making the West dependent on Chinese products. It protects priority industries and subsidizes them into becoming export juggernauts. 

China engages in economic coercion. Its civil-military fusion strategy powers a significant buildup of its military, surveillance, and disruptive capabilities. Its aggressive territorial claims in the South and East China Seas, and its threats to Taiwan’s integrity, present real risks of military conflict. Beijing and Moscow’s declaration of a “no limits” strategic partnership, and China’s active support for Russia’s war on Ukraine, threaten US and European security, interests, and values. 

Although the transatlantic partners are closer in their assessments of the China challenge today than they were four years ago, they approach Beijing from different strategic positions, with different tools, and with different senses of urgency. They have allowed their own bilateral squabbles to get in the way of robust transatlantic efforts to address Chinese aggression. These simmering problems could boil over in 2025.

This series analyzes the impact of China’s rise on transatlantic ties and presents ideas about how to forge a constructive partnership to meet the China challenge. It is based on a yearlong series of CEPA-sponsored workshops of leading European and US experts that I chaired together with Lucinda Creighton under the Chatham House Rule.

The basic question we addressed is whether Donald Trump’s new administration and Europe’s new leaders believe their own bilateral disputes are more or less important than the need to adopt joint or complementary approaches to China. Does the Trump administration believe it can and should fight predatory Chinese economic practices on its own, or forge a broad coalition of countries that could impose far greater costs on China than individual efforts? Are Europeans willing and able to bridge their own considerable differences over both China and Trump’s America to help lead such a coalition? 

A joint approach to China should be guided by three Ds: deconflict, disentangle, and deny. The US and Europe should deconflict their own bilateral ties so they do not endanger transatlantic cooperation on China. They should disentangle their economies from uncomfortable dependence on China. And they should deny critical technologies, data, or goods to China that could advance Beijing’s military capabilities and revisionist goals.  

To deal with China, the transatlantic partners first need to deal with each other. A transatlantic accord could include European commitments to boost defense spending to 3% or more of gross domestic product by the end of the decade; bolster support for Ukraine; diversify from Russian energy; buy more US-produced liquified natural gas and other energy exports, agricultural products, and defense equipment; and refrain from levying unilateral digital services taxes on US firms. The US, in turn, could commit to maintain an active role in NATO, ensure Ukrainian security and sovereignty, refrain from imposing preemptive tariffs, and explore effective global tax reform. 

The two parties should streamline the US–European Union (EU) Trade and Technology Council, now ensnared in an unwieldy tangle of many working parties, with three strong pillars. Pillar One would focus on mitigating US-EU disputes and advancing bilateral cooperation. It could include efforts to strike a quick trade deal to avoid a transatlantic trade war, finalize the Global Arrangement on Sustainable Steel and Aluminum, conclude critical minerals agreements, reduce trade costs by expanding conformity assessments, improve transatlantic risk assessments, and ensure that new EU laws such as the Digital Markets Act do not privilege Chinese and Russian tech over US firms. NATO allies should invoke Article 2 of the North Atlantic Treaty to promote defense-related innovation, and enhance screening of foreign investment in security-related infrastructure, companies, and technologies.

Pillar Two would address the China challenge: extending sanctions on Chinese actors for supporting Russia’s war efforts; improving and expanding coordination on export controls; restricting data flows to China, Russia, and other countries of concern; sharing information on nonmarket policies affecting digital trade; and improving inbound and outbound investment screening. 

Pillar Three would include areas in which the US and the EU could address China-related issues by working with like-minded partners. These include strengthening and expanding cooperation on critical minerals, energy security and climate change; coordinating and enhancing efforts to counter Chinese theft of intellectual property; supporting the use of trusted vendors in digital technologies; reviving and expanding US-EU-Japanese talks on nonmarket economies; and promoting a “Free Road Initiative” to help allies develop more secure and resilient connectivity options. 

It is an ambitious agenda. Any effort to forge joint or complementary US-European approaches to China could be a bridge too far. Yet the high stakes warrant exploring what a transatlantic deal on China might look like.  

To read the full Comprehensive Report, please click here.

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The return of Donald Trump to the White House represents a multi-dimensional challenge for Europe. Trump is promising to hit European countries with broad-based tariffs, curtail US support for Ukraine, and seek sharp increases in European defense spending. Elon Musk’s support of European far-right parties and an emerging alliance between Trump and US tech firms is likely to further test Europe’s resilience and unity. European leaders are scrambling to minimize the damage. Several have met with Trump since his election victory to warn against a bad peace deal for Ukraine. Meanwhile, the European Commission has prepared a welcome package for the Trump team in the hope of heading off a transatlantic trade conflict. How the standoff plays out will have major implications for transatlantic relations, Europe’s relationship with China, and broader G7 unity in the face of mounting economic and security challenges coming from Beijing.

Déjà vu

“Trade wars are good, and easy to win,” Donald Trump tweeted in March 2018, as he unveiled plans to impose tariffs on US imports of steel and aluminum on national security grounds. Later that month, his administration followed through with tariffs of 25% on steel and 10% on aluminum. The move prompted the European Union to retaliate with tariffs of its own, file a complaint against the US at the WTO, and introduce safeguard measures to shield its own steel producers. The US steel and aluminum tariffs and EU countermeasures would remain in place for the remainder of Trump’s first term, weighing on transatlantic relations. They came against a backdrop of transatlantic sparring on a range of other trade and financial issues, from the long-running subsidies dispute between Airbus and Boeing to EU member state plans to introduce a digital services tax that would hit US tech firms. Trump’s threats to retaliate against the digital tax plans were the inspiration for the EU’s anti-coercion instrument.

Still, threats by the Trump administration to impose tariffs on European cars never came to fruition. During a visit to the White House in July 2018, Jean-Claude Juncker, then president of the European Commission, was able to avert car tariffs and diffuse trade tensions with promises to ramp up purchases of US soybeans and energy products, and by making clear that the EU would retaliate forcefully against any new US tariffs. This seven-year-old episode has provided European leaders with a glimmer of hope as they scramble to prevent a new transatlantic trade conflict under a second Trump administration that they hoped would never come. They have their work cut out for them. During the 2024 US election campaign, Trump promised to impose across-the-board tariffs of 10-20% on all US trading partners except China (which he threatened with even higher tariffs of 60%). Close Trump aides have warned in private and public forums in recent months that Europe is likely to be hit hard. Since his victory in November, Trump has shown few signs of backing down from his threats. Last month, he described trade relations with Europe as a “disgrace” and accused the bloc of refusing to buy any American goods. In reality, US goods exports to the EU hit a record high of $370 billion in 2023. But that did not prevent the US goods trade deficit with the EU from rising to $220 billion in that year, up from about $160 billion in 2017, when Trump’s first term started.

Trump’s grievances against Europe do not end with trade. He has railed against European countries for failing to meet commitments made at a NATO summit in 2014 to increase their defense spending to 2% of GDP. Seven EU countries failed to hit that threshold in 2024, and many more achieved the goal only thanks to a late spending push fueled in part by a desire to avoid Trump’s wrath. A more immediate concern in Europe surrounds Trump’s commitment to Ukraine. He has criticized the outgoing Biden administration for providing billions of dollars in financial and military support for Kyiv, questioned the efficacy of US sanctions against Russia, and promised to end the three-year-old war in a single day. With a war raging on its eastern border, Europe’s reliance on US security guarantees gives Trump significant leverage that is likely to color the EU’s response to any US trade measures.

On top of this, messages from Trump and his entourage over the past weeks suggest Europe may face a more fundamental challenge from the new administration. Trump has expressed a desire to secure US control of Greenland, an autonomous territory of EU member state Denmark, refusing to rule out the use of military force or economic coercion to secure the island. His political ally, advisor, and financial backer Elon Musk has injected himself into European politics by actively supporting the far-right Alternative for Germany (AfD) party in the run-up to a February election and by calling for the resignation of UK Prime Minister Keir Starmer.

Compared to Trump’s first term, the EU enters 2025 in a more vulnerable position. The bloc has barely grown for the past two years and it faces an increasingly aggressive Russia, which is making gains in Ukraine, thanks in part to support from China. However, the EU is also arguably better prepared for Trump than it was eight years ago, when his victory surprised many and his policies and governing style were not well understood. The EU in 2025 is more pragmatic and transactional compared to 2017. To avoid a trade war, safeguard NATO, and ensure that a bad peace deal is not forced on Ukraine, many European countries are prepared to make commitments to the new administration that would have been unthinkable in Trump’s first term.

The EU’s offer to Trump

It is no secret that many EU leaders, including those in the top positions at EU institutions in Brussels, were hoping for a Kamala Harris victory on November 5. But they also set about preparing for their worst-case scenario, creating a dedicated transatlantic taskforce under returning European Commission President Ursula von der Leyen and cobbling together a “welcome package” for the new US president with three main components: trade, China, and security. There have been several high-level meetings between European leaders and Trump since his victory in November, including one with France’s Emmanuel Macron in Paris and with Italy’s Giorgia Meloni at Trump’s Mar-a-Lago retreat in Florida.

While Ukraine was discussed, it is unclear whether Macron and Meloni were able to delve into detail on the tariffs with Trump. Neither has there been a substantive, high-level conversation between the leaders of EU institutions and Trump in recent months, raising questions about whether the Commission has been able to fully present its package to the president-elect and his team before he enters the White House on January 20. Von der Leyen, notably, spent a week in the hospital with severe pneumonia in early January, hindering plans by her team to meet with Trump before his return to the White House.

Though not included in the package, surely one of Trump’s key demands will be an end to an array of EU cases against big US tech firms like Amazon, Apple, Google, Meta, and X that have resulted in investigations and billions of euros in penalties for offenses ranging from unpaid taxes and content moderation failures to anti-trust and data privacy violations. In early January, days after announcing an end to Meta’s third-party fact checking program, founder Mark Zuckerberg made clear that he hoped to enlist Trump’s support in pushing back against European policies that impose stricter limits on his company. The Commission is reportedly reassessing investigations launched last March against Apple, Meta, and Google under its Digital Markets Act (DMA) in a sign that it may consider scaling back those probes. But it will face pressure from member states to enforce rules contained in the DMA and the Digital Services Act, which obliges platforms to police online content or face fines.

Besides the obstacles to an amicable resolution of the transatlantic digital divide, there are two important problems with the EU’s offer. First, the EU has few indications from the incoming US president, or from members of his team, that he is prepared to ditch his tariff pledge in exchange for European concessions. Trump suggested in a social media post in late December that EU purchases of US oil and gas might be enough to avert a trade conflict. But there have been no other public clues about his readiness to negotiate. And given Trump’s history of railing against Europe, it is unlikely that the tariffs are merely an attempt to build up leverage.

Europe’s message that a transatlantic trade conflict would suck EU resources away from China is likely to fall on deaf ears. Many of the officials in Trump’s orbit believe that Europe will be forced to align with the US on China regardless, because of US long-arm measures (for example on export controls) or because the EU will have no other choice than to raise trade barriers once US tariffs are imposed on China, to prevent Chinese exports from being diverted into Europe and decimating European industries.

Second, member states have not endorsed the Commission’s offer. The hope in Brussels is that Berlin, Paris, and other capitals would swing behind it if the Trump team were to signal that it is open to a deal. But elements of the “package” are highly contentious in some European capitals, especially those that involve China policy. The outgoing and (most likely) incoming government in Germany, for example, is opposed to tariffs as a tool to protect European industry against Chinese exports, due to a combination of free-trade fundamentalism and fear of Chinese retaliation. There is also resistance in European member states that produce advanced technologies, for example the Netherlands, to more wide-ranging export controls that would further limit sales to China. Countries like Hungary and Slovakia that have cultivated close ties with China will resist any attempts to condition Chinese investments in Europe or impose restrictions on Chinese technology in connected vehicles.

Three scenarios

We see three main scenarios for how transatlantic relations could develop in 2025, each with different implications for EU policy toward China. We believe the chances are slim that the EU can avert US tariffs altogether. We also believe the Trump administration is likely to take a more targeted and phased-in approach to imposing tariffs on US trading partners (including China) than he promised during the election campaign, out of concern about the impact on the US economy and inflation of a “big bang” approach.

A sharp increase in EU defense spending appears to be baked in. The endgame for Ukraine is much harder to predict, although there have been signs recently that Trump is ready to abandon the unrealistic 24-hour timeline for a peace deal that he floated during the election campaign.

Finally, we believe the likelihood of a détente between the EU and China is low, regardless of how transatlantic relations develop. Trump is likely to increase tariffs on China sharply (even if 60% tariffs from day one look unlikely). This will divert Chinese exports to Europe, forcing Brussels to respond with more robust trade defense measures of its own. That will deepen trade tensions between the EU and China, even if some member states might seek to limit the damage to their economies by sidestepping Brussels and seeking an accommodation with Beijing.

Grand bargain (10% chance)

The best-case scenario for Europe would be Trump embracing a deal with the Commission that leads him to withhold tariffs altogether (or impose tariffs that are far more limited than what he promised during the campaign) in exchange for commitments by EU member states to make significant purchases of US goods, spend more on defense (including support of Ukraine), and toughen up on China.

Under this scenario, a bad peace deal that plays into Russia’s hands and is made over the heads of Kyiv and Europe would be avoided and clashes over election interference and digital policy would be kept under wraps. EU member states would embrace a deal with Trump because it would avert hard-hitting US tariffs and ensure a continued (if diminished) security role for the US in Europe.

This would give European Commission President Ursula von der Leyen leeway to pursue an accelerated de-risking agenda vis á vis China—despite ongoing reluctance among member states, notably on the economic security front. The Commission would make aggressive use of its trade defense tools against China, including the imposition of safeguards and roll out of new cases under the Foreign Subsidies Regulation. The EU would pursue closer alignment with Washington’s own export control regime, and the debate over outbound screening and restricting connected vehicle technology from China would shift into higher gear.

Despite accelerated transatlantic convergence on China policy, coordination between Washington and European capitals would remain bumpy, with the Trump administration showing little patience with Europe and favoring pressure tactics over dialogue, and with threats to impose unilateral measures to force faster EU alignment. Yet coordination would be better than in other scenarios, paving the way for joint action on several fronts.

In contrast, relations between the EU and China would deteriorate quickly, with Beijing retaliating against EU countries and firms with tit-for-tat tariffs, export controls on critical raw materials, the targeting of EU firms in China, and state-sponsored consumer boycotts or targeted investigations.

Managed mess (70% chance)

Our base case scenario foresees Trump re-introducing the steel and aluminum tariffs from his first term and imposing additional tariffs on EU member states that are either targeted or at the low end of expectations.

The EU would almost certainly respond by reimposing its rebalancing tariffs and introducing targeted new tariffs on US products. This tit-for-tat would cast a cloud over transatlantic relations, especially as US tariffs would deepen Europe’s economic woes. But both sides would agree to refrain from further escalation.

In this scenario, one can envision Trump paring back US military and financial support for Ukraine, insisting on a ceasefire and a significant European role in monitoring it. EU countries would be compelled to ramp up defense spending and support for Ukraine. Yet, a complete transatlantic breakdown could be averted if Trump kept Kyiv and European capitals involved in negotiations and committed to ongoing but limited US military support. The EU could take symbolic steps to limit its penalties against US tech firms without fundamental changes to its policies. Elon Musk’s forays into European politics would continue but at a low simmer.

Despite heightened US-EU tensions, we would not see a meaningful improvement in EU-China relations. Instead, a dual-track China policy would emerge. The Commission would continue to push its tough-on-China agenda in areas where it had authority, for example trade defense and level playing field tools. At the same time, divisions over China policy would deepen within the EU, with a group of countries—from Germany, Austria, Hungary, and Slovakia to Spain and Portugal—pushing back against more drastic EU measures and shooting down the EU’s economic security agenda.

In the absence of a US-EU truce, von der Leyen would lack the political capital to push for closer alignment with the US on export controls, outbound screening, and connected vehicles. Individual countries might seek to reduce tensions and preserve economic ties with Beijing as growth concerns mounted, further weakening the Commission’s position and impeding the emergence of an EU consensus on China policy. Against this backdrop, transatlantic cooperation on China would likely become increasingly challenging, with the US resorting to unilateral measures to try to force alignment. Divisions over China and US policy would become a severe test for the EU.

Perfect storm (20% chance)

This scenario foresees a more fundamental breakdown of transatlantic relations driven by wide-ranging US tariffs against Europe, an accelerated withdrawal of US security guarantees and support for Ukraine, and active interference by the Trump administration in European politics.

Within days of taking office, Trump could decide to impose across-the-board tariffs on the EU at the higher end of the 10-20% range promised during the election campaign. He could also reinstate Section 232 steel and aluminum tariffs and threaten to introduce Section 301 tariffs in response to digital services taxes pursued by European member states. The EU could respond with wide-ranging tariffs on US products, setting the stage for a major transatlantic trade war.

Trump could set a tight deadline for ending US military and financial support for Ukraine, insist on a ceasefire that gives Russia control over Ukrainian territory it controls, and refuse to allow US troops to help monitor the ceasefire. Cooperation within NATO and the G7 would become increasingly challenging and transatlantic dialogue on China would break down, with the US increasingly using unilateral measures to try to force EU alignment.

Compounded by continued interference in European politics and policymaking, especially in the digital sphere, anti-US sentiment would spread as Trump was blamed for deepening Europe’s economic woes and poisoning the European political debate. There would be high potential for EU divisions, with member states pursuing different agendas vis à vis the US, Russia, and China. Commission trade defense resources would shift away from China to focus on the US, leaving less capacity to manage economic spillovers from China.

Within the EU, political pushback against tough-on-China policies would spread, leading Brussels to try to dampen down tensions. Although trade and security relations would likely remain strained (with China’s continued support for Russia a major burden on the relationship), the EU could adopt a more transactional approach, looking for a negotiated solution to the rising tide of Chinese imports and ways to bring back a more positive bilateral agenda (like cooperation on the green transition and certain technological fields) in exchange for commitments by Beijing on market access and promises to use its influence with Russia.

Signs that the US and China were pursuing a follow-up to their “phase one” deal could also trigger a more conciliatory EU approach to Beijing. Conversely, deepening economic woes in China resulting from US tariffs could leave Beijing more open to making token concessions to Europe to preserve market access.

European leadership test

The return of Donald Trump presents a massive challenge for Europe’s security, economy, and liberal democratic values that continue to guide policy in the 27-nation bloc—even if they are increasingly under threat. Trump’s second term as president is likely to upset long-held assumptions about the transatlantic relationship, multilateral groupings like the G7 and NATO, and the broader US-led international order that has existed since World War Two.

While we believe transatlantic accommodation is possible, there is a greater likelihood that ties will be characterized by friction and confrontation in the economic and security realms. The more aggressive the Trump administration is with Europe, the greater the risk that divisions within the EU widen, and the greater the temptation will be for Europe—especially its member states—to seek some sort of accommodation with Beijing. We would not rule out a gradual pivot towards a more transactional EU approach to China that leaves the door open to more economic cooperation, for example through managed trade agreements.

Nevertheless, we view the chances of a meaningful EU-China détente as slim. Even in a “perfect storm” for transatlantic relations, the EU will be scrambling to shield itself from Chinese exports diverted to the European market because of a sharp increase in US tariffs on China. Under all three scenarios, the EU could resort to greater trade defense tools to restrict the inflow of Chinese imports and shield European industry in a more systemic way. Other aspects of the EU agenda on China, however, are likely to suffer if transatlantic ties grow increasingly confrontational. For example, the Commission’s economic security agenda—which foresees a more restrictive approach to export controls, inbound and outbound investment screening, and connected vehicles—will face even greater hurdles if the European economy is being hit by US tariffs.

The hit to the European economy is most acute in a “perfect storm” scenario but could also be severe under a “managed mess,” or even under a “grand bargain” if China retaliates forcefully against the EU for working closely with Washington. This would have knock-on effects on EU politics, potentially boosting populist fringe parties, and on EU unity, with member states pursuing their own agendas and undermining EU institutions.

In the past, major disruptions or crises have led to leaps forward in EU integration. However, at a time of increasing polarization, political uncertainty in large member states like Germany and France, and a potential breakdown of the post-war alliance with Washington, will a crisis be sufficient to force policy consensus within the EU and push the bloc toward a collective goal? For this, bolder leadership and vision will be required, particularly in big capitals like Berlin and Paris.

To read the research as it was published on the Rhodium Group website, click here.

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We use an advanced model of the global economy to consider a set of scenarios consistent with the proposal to impose a minimum 60% tariff against Chinese imports and blanket minimum 10% tariff against all other US imports. The model’s structure, which includes imperfect competition in increasing-returns industries, is documented in Balistreri, Böhringer, and Rutherford (2024). The basis for the tariff rates is a proposal from former President Donald Trump. We consider these scenarios with and without symmetric retaliation by our trade partners. Our central finding is that a global trade war between the United States and the rest of the world at these tariff rates would cost the US economy over $910 billion at a global efficiency loss of $360 billion. Thus, on net, US trade partners gain $550 billion. Canada is the only other country that loses from a US go-it-alone trade war because of its exceptionally close trade relationship with the United States.

We provide context in terms of the current trade conflict, primarily between the United States and China, and enumerate a set of scenarios based on the proposed blanket tariffs. Results suggest the United States is the biggest loser in a comprehensive trade war with the rest of the world. We also consider a potential transatlantic alliance, where Europe joins the United States in tariffs against China. Transatlantic cooperation reduces US losses and leads to sharp losses for China, highlighting the benefits of cooperation relative to the proposed go-it-alone strategy.

State of Play

The 2018 US-China trade war was a major economic conflict initiated by the United States that targeted alleged unfair trade practices by China, such as intellectual property theft, forced technology transfers, industrial subsidies, and currency manipulation. The conflict escalated through rounds of tariff impositions, retaliatory measures, and negotiations, significantly affecting global markets and supply chains.

The United States imposed tariffs on over $250 billion worth of Chinese goods, targeting industries like technology, machinery, and consumer products. China responded with tariffs on about $110 billion of US goods, affecting agriculture, automobiles, and other sectors.

Multiple rounds of negotiations occurred between 2018 and 2019. The two countries reached a temporary truce with the “Phase One” trade deal in January 2020, where China agreed to purchase more US goods, particularly agricultural products, and address some intellectual property concerns. China did not, however, meet any of the additional purchase commitments. China made some progress toward greater intellectual property protection in certain areas yet continues to tolerate flagrant intellectual property theft in others. Both economies have suffered from reduced market access and higher costs for businesses and consumers. The conflict also disrupted global supply chains, particularly in consumer technology products, and hit US farmers hard due to China’s retaliatory tariffs.

Also, in 2018 the United States imposed a 25% tariff on steel and a 10% tariff on aluminum imports, affecting a wide range of countries, including EU members, South Korea, and Japan. The US administration justified the tariffs on the grounds that a robust domestic steel and aluminum industry was necessary to ensure the availability of critical materials for defense and infrastructure projects despite a memorandum from the Secretary of Defense stating that the “[Department of Defense (DoD)] does not believe that [steel and aluminum imports] impact the ability of DoD programs to acquire the steel and aluminum necessary to meet national defense requirements”.

The steel and aluminum tariffs sparked significant backlash, leading to retaliatory tariffs by several countries. Eventually, the United States negotiated managed trade deals with some countries, such as Canada, Mexico, and the EU. Australia escaped relatively unscathed, but other 3 countries were forced to negotiate exemptions or quota systems, such as South Korea, Brazil, and Argentina.

The tariffs increased costs for US manufacturers that rely on imported steel and aluminum, leading to higher prices for US manufacturers, and consumer goods like cars and appliances. US steel and aluminum producers saw benefits in terms of higher domestic prices. The overall effect on jobs was mixed, with some gains in the metal industries but larger losses in sectors reliant on metal imports and in the sectors that were targets of retaliation, namely US agriculture.

In sum, the 2018 trade war generated losses for China and the US economy. The Biden-Harris administration kept the punitive tariffs on China and the steel and aluminum (national-security) tariffs in place, which remains a point of contention in US trade policy.

Recent proposals

In 2024, during his campaign for a second term, former President Donald Trump proposed imposing a 60% tariff against imports from China and a 10% tariff against imports from everyone else in an apparent effort to increase the number of manufacturing jobs in the United States and boost domestic industries. Most economists would agree that tariffs at this scale will backfire by undermining US economic performance.

Results

The results show both the United States and China suffer losses from the 2018 tariffs, with US losses equivalent to $81.3 billion and $63.3 billion for China. Imposing a 60% tariff on China and 10% tariff on everyone else unequivocally leads to additional losses for the United States. As a technical note, the economic model evaluates policies based on changes in household welfare, so we can interpret the $81.3 billion loss for the United States as the dollar value of the extra consumption that private households could have had in the absence of the tariffs.

United States

Specifically, with a 60% tariff on China, US losses grow to $560.7 billion; and, if China retaliates, US losses are $665.4 billion. If the United States were to impose the 60% tariff on China and a 10% tariff on everyone else, US losses are $511.0 billion; and, if everyone retaliates in kind, US losses grow to a shocking $911.8 billion.

China

China suffers across almost all scenarios, and China’s losses are greatest when the United States and EU cooperate. Specifically, if the United States were to impose the 60% tariff on China, China’s estimated losses are equivalent to $70.6 billion. But if China retaliates, their losses reduce to $50 billion because the retaliation shifts the terms-of-trade in their favor. As with any large country, tariffs increase export prices relative to (net-of-tariff) import prices. If the United States were to impose the 10% tariff on other countries, China’s losses shrink to $26.2 billion, reflecting a further improvement in the terms of trade as European and other goods become relatively less expensive due to less US demand. When everyone retaliates against the United States, the closest scenario here to a US-led go-it-alone global trade war, China actually gains $38.2 billion. As discussed in the introduction, a global trade war between the United States and the rest of the world creates significant opportunities for China in terms of new export opportunities in Europe and less expensive non-US imports. China suffers the most when the United States and EU cooperate. Specifically, welfare losses for China are between $26.2 billion and $70.6 billion when the US pursues a go-it-alone strategy. When the United States and EU cooperate, China’s welfare losses reach $261.3 billion to $464.1 billion.

European Union

The EU economy gains from the US-led trade wars mostly because of trade diversion. That is, with the United States and China imposing tariffs on each other, the EU has greater access to lower priced imports from China, and effectively gets preferential treatment for its goods in both the US and Chinese markets. The EU benefits the most ($234.6 billion) when they let the United States go it alone, under the “ALL6010” scenario. In that scenario, the United States imposes tariffs against China and all other countries, and everyone retaliates in kind against the United States, which is the closest scenario to a US-led global trade war. EU importers benefit from lower prices and EU exporters benefit from greater preferential market access.

Other countries

Other countries such as Canada, Mexico, South Korea, and the rest of the world mostly experience net gains from a US-China trade war. Canada and Mexico, however, experience losses when the United States imposes 10% tariffs on all other countries and they retaliate in kind, reflecting the tightly knitted supply chains across North America.

Specifically, Canada and Mexico experience a loss when the United States imposes tariffs on China and all other countries. When other countries retaliate, Mexico goes back to a net gain while Canada continues at a loss. This is attributed to the fact that, although both Mexico and Canada have strong ties to US markets, Canada’s trade with the United States is biased toward increasing-returns-to-scale sectors. In this regard, shrinking trade between the United States and Canada implies a greater cost for Canada. South Korea and other OECD countries gain from the US-China trade war scenarios—South Korea’s net gains reach $48.9 billion

US-EU Cooperation

Transatlantic cooperation on tariffs against China, as a punitive measure for intellectual-property violations and other unfair-trade practices, are more effective in terms of greater losses for China and easing the burden on the United States. Specifically, if the United States and EU were to cooperate and impose tariffs against China simultaneously, with the United States imposing 60% tariffs and the EU imposing a minimum of 25% tariffs, US losses reduce to $435.6 billion and China’s losses increase to $261.3 billion. If China retaliates against the United States and EU in kind, US losses remain mostly the same, but China’s losses increase to $464.1 billion.

EU cooperation, however, comes at a cost for the EU’s economy. The EU goes from a $234.6 billion gain (in “ALL6010”) to a $77.8–$103.8 billion gain in the cooperation scenarios.

These results highlight three important nuances of US-EU cooperation: (a) securing EU cooperation eases US economic losses from the trade wars; (b) US-EU cooperation sharply increases the net losses to the Chinese economy; and, (c) cooperating with the United States comes at a cost for the EU and reduces their net gains from the trade wars.

Conclusion

In conclusion, the analysis presented here reveals that escalating US tariffs, particularly the proposed 60% tariff against China and 10% tariff against all other trade partners, would impose substantial economic costs on the United States. We show that while China and other US trade partners may experience some losses, the United States would bear most of the global efficiency cost, with potential economic losses surpassing $910 billion if all countries retaliate. Interestingly, many of the US’s trading partners, including the EU, South Korea, and other OECD countries, stand to benefit from trade diversion as US goods become less competitive globally

The findings further underscore that transatlantic cooperation in imposing tariffs against China would mitigate some of the US’s losses while amplifying the economic pain for China. This cooperation comes at a cost, however, for the EU in terms of the forgone benefits of letting the United States go it alone. Overall, the results highlight the complexities and far-reaching consequences of a “fortress America” protectionist trade policy, where, in the context of a global trade war, the United States stands to lose the most, both in terms of economic welfare and global competitiveness.

To read the article as it was published on the Yeutter Institute webpage, click here.

To read the full article, click here.

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As the clean energy transition accelerates, critical minerals such as cobalt, lithium, and rare earth elements have become buzzwords in business, international relations, and sustainability.

Yet amid the scramble for these well-known resources, another metal – antimony – has quietly emerged as another keenly contested resource. With China’s recent announcement of export restrictions on this metal, the challenges of balancing supply and demand are intensifying, raising concerns over supply chain vulnerabilities and fuelling a new form of competition among great powers.

Antimony, a lustrous silvery-grey metalloid, is scarce in nature and unevenly distributed globally. It is, however, critical for producing high-tech and defence products, including flame-retardant materials, certain semiconductors, and superhard materials. As with many critical minerals, China dominates the global antimony supply chain. The country holds the world’s largest deposit, accounting for approximately 32% of global antimony resources, yet it produces more than 48% of global output.

China’s move to restrict the export of antimony, ostensibly to safeguard “national security and interests”, is set to take effect on 15 September. While these restrictions are not explicitly targeted at any specific country, the geopolitical implications are significant. China has gradually reduced its antimony production over the past few years to limit strategic stockpiling. As a result, the announcement has driven up prices, potentially disrupting global supply chains. The impact is particularly acute for the United States, which sourced 63% of its antimony imports from China.

China’s export control of this critical metal might appear a calculated move within the broader framework of resource nationalism. Beyond safeguarding strategic resources and preventing over-exploitation, these controls reinforce China’s leadership in the global antimony industry, enhancing its influence over the international allocation of this critical mineral. This move, thus, is not just about acquiring and protecting resources; it is also about denying rivals a strategic advantage.

Antimony is one of the few elements classified as a “critical” or “strategic” mineral by countries including the United States, China, Australia, and Russia, as well as the European Union, underscoring its special geopolitical value. Following similar restrictions on germanium, gallium, graphite, and rare earths, China’s export control of antimony marks another move to leverage its dominance in global supply chains. This action serves as a response to US efforts to limit the availability to China of critical technologies such as high-end chips .

China’s anitimony announcement has not gone unnoticed by markets. In Australia, the response has been notably positive. Larvotto Resources, a leading exploration and pre-development company focused on high-demand commodities including antimony, saw its share price surge as it possesses the rights to operate the Hillgrove Gold-Antimony Project, the eighth-largest in the world. The assumption is that Australia will fill the market gap left by China. In an effort to counter China’s dominance in critical mineral supply chains, the United States had forged partnerships with resource-rich countries including Australia.

However, China’s export restrictions target antimony oxides with a purity of 99.99% or higher, as well as other high-purity antimony compounds (99.999%). Producing such high-purity chemical compounds requires advanced processing technologies, and export controls with this high-purity threshold are likely aimed at restricting the export of high value-added antimony products and advanced processing technologies. These ultra-pure products are used in specialised industries, including high-end electronics, optics, and defence applications.

Australia’s ability to mitigate the risks associated with China’s dominance remains limited. China is a net importer of antimony metal. Currently, 86% of Australia’s antimony exports are sent to China for processing. Investing in processing capacity and infrastructure for lower-grade antimony products may offer limited strategic value for the United States, as these products will still be available under China’s restrictions. Conversely, developing high value-added processing technologies to produce high-purity antimony products carries significant risks, particularly if China decides to retaliate in trade or lift these restrictions. In the latter case, even if alternative processing technologies become available in Australia, the market – including the United States – may still turn to China for more cost-efficient products, potentially rendering Australia’s investments obsolete.

Navigating these dynamic complexities and maintaining an independent policy in the face of great power competition will be a true test of political acumen for Australian policymakers.

The competition over antimony is merely the latest manifestation in the great power rivalry that centres on technological supremacy. Each side is manoeuvring to secure critical materials and technologies, define future systems, and outpace the other in innovation.

The underlying issue is a deepening lack of trust between these global powers. This mistrust fuels the tug-of-war over resources, with nations viewing control over materials as crucial for maintaining technological dominance.

However, this relentless pursuit of supremacy comes with significant downsides: fragmented global supply chains, rising resource nationalism, and intensified trade restrictions. Cooperation gives way to competition, and technological progress risks becoming a zero-sum game.

To read the article as it was published on the The Interpreter webpage, click here.

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China’s subsidies have multiple goals as identified by the authorities from promoting the green transition to increasing resilience and self-reliance. However, because of the peculiarities of the Chinese economic system and China’s rising role in the world economy, China’s subsidies have been the target of several complaints and retaliatory measures by its trading partners. Specifically, against a backdrop of lackluster domestic demand in recent years, China’s subsidies to its manufacturing sector are under close scrutiny because of their potential repercussions on the global markets of subsidized products. To analyze this issue, we empirically investigate the effects of China’s subsidies on its trade flows over the period 2009-2022. By assessing the importance of China’s subsidies in shaping its exports and imports, we intend to shed light on the implications that China’s industrial policy can have for its trading partners.

Our empirical approach builds upon and extends the design used in Rotunno and Ruta (2024). It exploits detailed data on subsidies and other policy instruments from the Global Trade Alert (GTA) database. For our sample period going from 2009 to 2022, these data provide information on the existence of subsidies at the product level implemented by China and other countries. The database, which tracks policy changes based on online sources (official government documents and firms’ financial reports), includes in its definition of subsidies to firms both monetary and in-kind transfers (e.g., state aid and preferential access to land and other factors of production), and policies that entail a transfer of risk to the government (e.g., loans and loan guarantees), and losses in government revenues (tax breaks). Importantly though, the database lacks information about the monetary value of subsidies, as well as ‘legacy’ subsidies introduced before 2009. These two limitations of the data are expected to attenuate our estimates of the impact of subsidies on trade flows. Intuitively, they imply categorizing as non-subsidized some products that actually received subsidies before 2009 and treating all subsidized products in the same way regardless of the size of the subsidy.

A first look at the data suggests that China is the largest user of subsidies measured by the number of policy interventions. By 2022 there were approximately 5,400 subsidy policies introduced since 2009 and in force in China, representing 95 percent of all GTA policies introduced by the country. These subsidies are concentrated in a few industries. Over the period, 20 percent of the sectors received over 50 percent of the subsidies. Importantly, the products and sectors that are targeted vary over time. In the earlier period of our sample, subsidies targeted more traditional industries such as mining of metal, paper and textile, while products such as solar panels, batteries and electric vehicles have been more frequent targets of new subsidies towards the end of the sample (possibly in relation to the Made in China 2025 industrial program), pointing to a shift in strategic sectors in China.

Our empirical analysis aims at assessing the trade effects of China’s subsidies. We use variation over time across subsidized and non-subsidized products and industries, and allow the effect of subsidies to differ between China and other countries in the sample. In our empirical specification, we add fixed effects controlling for the influence of time-invariant, product and country-specific factors, and dummies for the adoption of other GTA policies (e.g., import and export restrictions, local content requirements, government procurement policies). Because of possible endogenous selection into subsidies, other concomitant policy-driven and structural shifts, and retaliatory policies following China’s subsidies (which should bias downwards any export effect specific to China), we interpret the estimates as descriptive of the evolution in exports and imports of subsidized products relative to other products after the subsidy.

Our results point to significant effects of China’s subsidies on its trade flows. On the export side, exports of subsidized products are 0.9% higher (relative to non-subsidized products) after China’s subsidies– an effect that is not statistically different from that found for other countries. The magnitudes of these direct percent effects are economically meaningful. The export effect on total exports is equivalent to one sixth of the average yearly percent increase in product-level exports. This average effect masks significant heterogeneity across destination markets and sectors. Our estimates suggest that exports of subsidized products from China to other G20 emerging economies (G20 EMs) are 2.1% higher after the subsidy than exports of other products to the same destinations. Furthermore, the export effects of China’s subsidies vary considerably across sectors. Within electrical machinery– one of the new ‘strategic’ sectors– for instance, exports of subsidized products are found to be 7% higher than exports of other products after China’s subsidies.

On the import side, China’s subsidies are found to depress imports of targeted products relative to imports of non-subsidized products– an effect that is not found for other countries. Across origin countries, the implied effect on imports of subsidized products is stronger for Advanced Economies (AEs)– a 3% and 4.8% decrease in imports of subsidized products from G20 AEs and other AEs, respectively. Electrical machinery and metals are among the sectors where China’s subsidies have strong import-substitution effects. Our estimates therefore suggest that China’s subsidies have increased the country’s share in export markets and reduced its share in import markets of subsidized products.

The effects of China’s subsidies are amplified by supply-chain linkages—i.e. the ‘indirect’ effects of subsidies. We use China’s input-output table in 2007 to measure the exposure of downstream sectors to subsidies in upstream industries (through cost shares) and the exposure of upstream sectors to subsidies in downstream industries (through sales shares). As the input output table provides linkages by industry in China, we aggregate the subsidy and trade data at the industry level. The results reveal strong effects of subsidies propagating from upstream industries. More subsidies given to supplying industries are associated with higher exports in the buying industry. To appreciate the implied magnitudes of our estimates, consider the case of subsidies provided to the steel industry, which is the main supplier of inputs to the automotive industry (10 % of its total costs). The empirical results imply that increasing subsidies to steel by the number observed over 2015-2022 is associated with a 3.5% increase in exports of autos from China. These indirect effects are concentrated on exports to G20 AEs.

The findings on the indirect effects of subsidies are consistent with upstream industries expanding supply and lowering their prices following the deployment of subsidies. This upstream effect allows industries downstream to become more competitive in export markets. Results from import regressions point to a negative effect of upstream subsidies on imports in downstream sectors. This result suggests that upstream subsidies allow downstream industries to also expand domestically and substitute for imports. Finally, the effects of subsidies given to downstream industries on trade in upstream sectors are statistically significant and with the expected sign (negative on exports of the supplying industry), but weaker than the effects of subsidies upstream — a result that accords well with findings on the US and South Korea Lane.

As a third step in the analysis, we distinguish between the export price and quantity effects to contribute to the current debate on “overcapacity”.  The heart of this debate is that, in a situation of slow growth in domestic demand, Chinese subsidies could create a mismatch between domestic demand and supply for certain products, leading to increased supply in world markets which manifests itself in higher export quantities and lower prices. Conceptually, the impact of a subsidy on export quantities and prices is more complex and can be interpreted in different ways. A positive effect on export quantities and a negative effect on export prices are consistent with a subsidy creating excess supply domestically and higher quantities and lower prices in export markets. However, larger export quantities and lower prices can also be the result of subsidized firms realizing efficiency gains and lowering export prices, leading to expansion in foreign markets. Moreover, other combinations of the price and quantity effects are suggestive of different dynamics. For instance, positive export price and quantity effects indicate that subsidies are contributing towards quality upgrading rather than excess supply, while negative export price and quantity effects could be rationalized by trading partners imposing countervailing duties or other trade remedies to offset the trade impact of the subsidies.

We contribute to this debate by assessing the direction in which China’s subsidies over the period of analysis have impacted export prices and quantities of targeted products, controlling for the influence of other factors such as macroeconomic policies and demand and supply shifts for specific products. We find evidence that China’s direct subsidies increased export quantities and lowered prices in certain heavy and construction-related industries such as metal products and furniture. For the electrical machinery industry, which includes products at the centre of recent trade controversies such as lithium(-ion) batteries and solar panels, we find evidence suggesting that direct subsidies contributed to quality upgrading (increases in export prices and quantities). We do not find evidence that subsidies reduced significantly export prices for this sector also when we account for the indirect effect of upstream subsidies on downstream exports, at least up to 2022. For autos, we find some evidence that the combination of direct and upstream subsidies has increased export quantities and reduced export prices in world markets. Finally, the point estimates for other industries are consistent with situations where subsidies lead to greater market concentration or inefficiencies (higher prices and lower quantities), or lower prices and quantities– the latter could be explained by the retaliatory policy responses of major trading partners.

This paper relates to the literature on the trade implications of industrial policy and, specifically, on the cross-border spillovers from China’s policies. There is a long-standing debate in economics on the potentially distortive effects of industrial policies on trade. The more recent literature has exploited historical data to identify the effects of industrial policy on trade and economic growth. Recent sectoral studies have found evidence that China’s policies led to significant reallocation of global market shares in the shipbuilding industry and in the lithium-ion battery Barwick and others (2024) industry. Other studies highlight the potential spillovers of China’s policies enacted under the country’s five-year plans. Cen, Fos, and Jiang (2024) find that China’s production and employment expanded in industries targeted by these plans (relative to other industries), while the opposite happened in the same US industries– these negative ‘direct’ effects on US industries were partly offset by positive effects through supply chain linkages. These effects of the China’s expansion in the world economy linked to industrial policy are reminiscent of the literature on the “China shock” in the 2000s. In counterfactual simulations, Ju and others (2024) find that China’s industrial policies raised welfare in both China and the US by targeting industries with relatively large external economies of scale. Our results that China’s subsidies increase the exports of targeted products and industries are also consistent with firm-level evidence from Girma and others (2009) and Girma, Görg, and Stepanok (2020).

We contribute to this literature in several ways. First, by exploiting comparable data across countries, we are able to put China’s experience with subsidies in a cross-country perspective. Second, by elucidating conceptually and empirically the mechanisms that can and cannot lead to effects of subsidies consistent with excess supply, we offer a first contribution to discuss these issues through the lenses of analysis and data. Needless to say, more data and especially sectoral studies would be needed to fully unpack these difficult questions.

The rest of the paper is organized as follows. Section II describes the data used in the analysis and presents some trends in China’s use of subsidies. In section III, we explain the empirical strategy and discuss the associated results on the direct and indirect trade effects of China’s subsidies. Section IV presents the results on the impact of subsidies on export prices and quantities, and section V concludes by summarizing the main findings and outlining some important avenues for future research on the role of China’s subsidies.

To read the summary as it was published on the International Monetary Fund webpage, click here.

To read the full working paper, click here.

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European Union countervailing duties (CVD) on certain types of electric vehicles (EVs) from China went into effect provisionally on 5 July. The duties are being imposed based on a European Commission finding that China’s EV subsidies represent potential injury to EU industry as it transitions away from the internal combustion engine. EU imports of EVs from China are surging, but still represent a small share of EU car sales. Most imports from China originate from joint ventures of EU and Chinese manufacturers, and from Tesla, which is the largest importer. 

In the meantime, China is starting its own investigation into some EU exports, such as cognac. The EU has initiated consultations with the government of China to resolve the dispute, as it must do under the World Trade Organisation Subsidies and Countervailing Measures Agreement. Under WTO rules, China cannot retaliate unless it challenges the EU measure and a dispute settlement panel rules in its favour.

The CVDs range from 17.4 percent to 37.6 percent of the import price, on top of the EU’s 10 percent tariff on imported vehicles. They represent a formidable barrier in an industry where average profit margins are typically in the range of 4 percent to 8 percent. The CVDs will affect all EVs imported from China regardless of whether the original equipment manufacturer (OEM) is Chinese, American or European. Here, we offer an economic and political (as opposed to legal) analysis of the CVDs.

Methodology behind the CVDs

The Commission methodology for identifying subsidies and countervailing them is well established. Reflecting the importance of the EV sector, the regulation implementing the CVDs is the result of a comprehensive investigation, encompassing extensive consultations with Chinese firms, EU firms, the Chinese government and Chinese trade associations. Identifying subsidisation in China’s opaque system is challenging, especially since, as the regulation documents repeatedly, the Chinese government and several of the Chinese entities covered were uncooperative. 

The regulation details how the Chinese government has prioritised the EV value chain (materials, batteries, vehicles) since 2010. Of course, the EU and the US are also prioritising EVs in their quest for decarbonisation. However, the Chinese state and Communist Party hold large sway over the Chinese economy, including state-owned and private corporations and powerful industry associations. Thus, the Chinese government adopts a ‘whole of society’ deployment of plans and instruments, including subsidies, as part of its industrial policy.

To determine whether imports from China are subsidised, the Commission chose a sample of three Chinese OEMs to conduct its investigation, namely BYD, Geely and SAIC. It set the CVD for all other cooperating firms at the average of the three. Curiously, Tesla, the largest exporter from China to the EU, was not chosen and has asked for a separate investigation.   

We assess how the four main sources of countervailable duties –below market supply, preferential financing, grants and land usage – are calculated. Though it is evident that that various forms of non-market incentives in the Chinese EV sector exist, they may be significantly less than suggested by the Commission’s methodology. 

• Below market provision of batteries and their inputs. The reference used to compute the subsidy are the differences between the export and domestic prices of batteries (for SAIC and Geely) and of lithium iron phosphate (a key battery input, relevant for BYD which produces its own batteries). But many exporting firms price to market (Parker, 2016), and the fact that the export price of these inputs is higher than the domestic price is not necessarily because of subsidies. The markets for EVs, batteries and minerals in China are known to be exceptionally competitive and in a price war, while in the EU car prices and consumer purchasing power are much higher.

• Preferential financing. Using its standard methods to try to establish a market-based rate as a counterfactual to the preferential financing received, the Commission assigned a credit rating of B to the three sampled Chinese firms and attributed a correspondingly higher spread compared to prevailing market rates to their borrowing and equity. The B rating, far below investment grade, is extremely low for large, modestly profitable firms, such as the sampled Chinese OEMs. For example, almost no firm in the S&P 500 is rated B or below. Moreover, credit ratings are available for Geely from the major international agencies, and they are higher than B.

• Preferential financing. Using its standard methods to try to establish a market-based rate as a counterfactual to the preferential financing received, the Commission assigned a credit rating of B to the three sampled Chinese firms and attributed a correspondingly higher spread compared to prevailing market rates to their borrowing and equity. The B rating, far below investment grade, is extremely low for large, modestly profitable firms, such as the sampled Chinese OEMs. For example, almost no firm in the S&P 500 is rated B or below. Moreover, credit ratings are available for Geely from the major international agencies, and they are higher than B.

• Grants. The government of China provides a subsidy to manufacturers for each vehicle sold. In economic terms, both consumer and producer subsidies have the effect of increasing the incentive to produce. However, the Chinese subsidy, unlike the EU subsidy, is not available to importers and the Commission is correct in arguing that it is countervailable for that reason. Still, the scheme was discontinued as of December 2022, and even though some benefits continue to accrue to Chinese producers because payments are staggered, its distortive effects are fading by now. The Commission Regulation states that some Chinese provinces are introducing their own schemes but does not provide evidence of this.

• Land use. Land in China is owned by the state. Provinces subsidise EV producers by allowing them use of land at below market price. The Commission uses the price of land use – rent – in Taiwan as the reference point. However, Taiwan is far more densely populated than China and its income per capita is three times higher. Land prices tend to be correlated with income and density, so the reference price appears too high.

The risk of injury

Adopting a kind of ‘infant industry’ argument normally associated with developing countries, the Commission Regulation argues that the EU EV sector is too young to withstand Chinese competition. But while some of the key success factors in EVs (eg battery technology) are different from the combustion-engine vehicle sector, the value chains of the two sectors have many common elements. This is most evident in the popularity of various types of hybrid vehicles. It is well known, of course, that the EU’s OEMs are among the world’s most successful.

To make a historical analogy, in the 1970s and 1980s, Japanese and then Korean OEMs appeared to threaten the European automotive industry, but they became established in the EU market only over decades and after large investments. European OEMs adjusted to them by greatly increasing productivity and quality and by adding innovative features. Chinese OEMs still have a minuscule share of the EU automobile market, while EU OEMs are in the process of rapidly developing their own lower priced EVs and investing in battery technology and manufacture, often in joint ventures with Chinese producers.

The post The European Union’s Proposed Duties on Chinese Electric Vehicles and Their Implications appeared first on WITA.

In addition to the three EV manufacturers mentioned, other EV producers in China that cooperated with the EU investigators received a weighted average duty of 21 percent. All other producers that did not cooperate were hit with the top 38.1 percent. These anti-subsidy duties come on top of the European Union’s regular 10 percent tariff on EV imports from China.

These new EU anti-subsidy tariffs are on par with those imposed following previous EU anti-subsidy investigations concerning imported goods from China. Rhodium Group estimates that collaborating Chinese firms in earlier investigations have faced new duties of an average of 19.7 percent. Meanwhile, in earlier EU anti-subsidy investigations, the exports of non-cooperating firms, such as coated organic steel products, received new duties of 44.7 percent, while Chinese exported truck and bus tires to the European Union in some cases were subjected to new duties of over 50 percent.

Imposing the lowest tariff on BYD, a leading firm that is opening a production facility inside the European Union, gives the company an advantage in the EU market. Its stock price has predictably benefitted. Similar circumstances pertain to Geely, which also has EU production facilities and enjoyed a relatively low additional tariff. By contrast, SAIC, which is the largest Chinese owned EV exporter to the European Union via its MG brand, has no current or planned EU production location. Its tariff will probably encourage it to locate EV production inside the European Union. As discussed in a previous blog, these circumstances add up to something functionally akin to Japan setting up auto production in the United States to avoid tariffs threatened in the 1980s.

Assuming that all EU-owned EV producers in China, as well as Tesla, cooperated with the EU investigation, they too face relatively low additional tariffs of 21 percent for EV exports to the European Union. And as researched by Rhodium, some China-based EV producers will suffer commercially from tariffs at this level. Rhodium estimated approximate differentials in profit rates for sales of EVs produced in China in both the Chinese and German EV markets, relying on available EV model manufacturer suggested retail prices. China-based EV producers like BMW, Tesla, and probably other foreign EV producers operating in China, as well as the Chinese company that makes the Nio, will face significant challenges for their future export profitability relative to their sales in China. The 21 percent tariff exceeds these firms’ estimated profit margin for sales in the German market, making exports from China unprofitable. However, these producers, of which most have EU-located production facilities, now instead have a commercial incentive to relocate EV production to Europe. It should here be noted, though, that the Commission in its announcement made clear that Tesla “may receive an individually calculated duty rate” later, and hence possibly face lower future commercial headwinds from these tariffs.

All told, the Commission has acted carefully after mounting a substantial anti-subsidy investigation, involving over 100 location visits and dozens of Commission staff, as discussed in an earlier blog post. New tariffs signal the political willingness—within World Trade Organization (WTO) rules—to confront Chinese EV trade practices while providing incentives for Chinese EV producers to locate production inside the European Union. And applying the lowest tariffs on BYD, the EV market leader in China and clearly the biggest commercial threat to EU car companies, points to the Commission following the facts of the case rather than being guided by crude protectionist instincts. This approach could set the stage for further cooperation in the future.

The Commission’s tariff announcement was for “provisional tariffs” on EV exports from China to the European Union, while “definitive tariffs” must now be set within four months. Definitive anti-subsidy tariffs, however, must be approved by a majority of the EU member states in the EU Council. Some member states may try to get the Commission to revoke or alter the proposed tariff levels to promote smoother trade relations with China in the auto sector. The final political review of the tariffs will also provide individual EV producers in China with the opportunity to seek their own (like Tesla) individually calculated (lower) definitive duty rate.

But the Commission’s cautious and fact-driven approach fostering more investment in Europe will make it harder for EU member states to challenge its decision. Perhaps the scope of the application of the top 38.1 percent tariff to non-cooperative firms can be negotiated at the margin, but it seems unlikely that the lower tariffs around the 20 percent level will be altered.

Will China respond to the European Union’s careful approach? Some retaliatory action against specifically targeted EU exports to China may be inevitable. These actions could affect EU agricultural imports as well as internal combustion engine (ICE) vehicles with large engines, or even aircraft, although given the global duopoly of Airbus and Boeing, the European Union is unlikely to punish the former to the benefit of the latter. China will also not want to antagonize German and other European car manufacturers that are among its allies in the fight against these new EV tariffs. Targeting the EU car industry for retaliation might be self-destructive. Various politically sensitive agricultural products hence seem a more likely trade outcome. China has now initiated an investigation into EU exports of pork and pork by-products to China.

Obviously, China has various other political and financial tools to retaliate. It could delay or redirect planned investments selectively to European countries backing the tariffs. Beijing is likely to take its time before responding to measure various countries’ reactions.

For China, the commercial bottom line is that the European market is important, especially because the US market has been closed off by the Biden administration’s tariffs, while Turkey (40 percent) and Brazil (35 percent by 2026) have recently introduced new EV tariffs that are even higher than EU levels. Beijing has every incentive to avoid an escalatory trade war with the European Union in the EV sector.

Finally, because the European Union followed WTO rules in its investigation of Chinese subsidies, it is signaling that it is not following the “rogue” path of the Biden administration justifying its EV tariff action on national security grounds. So perhaps Beijing will hold its fire also for political reasons.

The Chinese government might take this dispute in the EV sector to the WTO, perhaps as part of its Multi-Party Interim Appeal Arbitration Arrangement, to which both China and the European Union are parties. Such a move would help China to be seen as playing by the rules, unlike the United States, and it could even signal a potential settlement of the EU-China dispute on EVs.

To read the full blog piece as published by the Peterson Institute for International Economics, click here.

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Unlike President Trump’s across-the-board import tax increases on Chinese goods in 2018 and 2019, the tariff increases announced on 14 May 2024 by the Biden Administration will affect just 14 product categories. The Biden Administration prefers selective decoupling from China, which is restricted to a limited number of sensitive sectors. Just $18bn of Chinese imports are expected to be affected, less than 5% of total Chinese annual imports to the United States.

This isn’t another Trump-style tariff war

The very fact that President Biden felt he had to take this high-profile measure is a testament to three factors:

• The tightness of November’s US presidential election.
• Biden’s desire to shore up his base vote in key swing states comprised mainly of trade union members working in traditional manufacturing sectors, and their families.
• How few friends China has in Washington, D.C.

In terms of corporate impact, there are two drivers: timing and the scale of current sourcing from China.

Some goods shipped from China — including aluminum, cranes, electric vehicles, face masks, lithium-ion batteries, and steel — will face higher import tariffs this year. The disruption could be felt very soon, and procurement managers will already be reviewing sourcing alternatives.

Higher tariffs on semiconductors won’t be rolled out until 2025, providing a strong incentive to bring forward any plans to import from China. Ironically, this may create the very export surge from China that the Biden Administration says it wants to prevent. However, China is not a big supplier of semiconductors to the USA in the first place.

Natural graphite, magnets, and medical gloves shipments from China won’t get hit with higher tariffs until 2026. This will delay any supply chain responses, especially if President Biden is re-elected and if there are doubts that he will follow through on these tariff measures.

As mentioned above, the other consideration is the amount of sourcing from China in the first place. In the case of EVs, China already faces 25% tariffs, and few are currently shipped to the USA.

In summary, the near-term disruption for supply chains will be concentrated on a small number of products. This is not welcome for the firms affected, but Biden’s May 2024 tariff moves do not presage widespread upheaval. Indeed, some analysts have argued that Biden’s recent tariffs amount to election-year window dressing and were designed to look tough but disrupt little. Optics matter. To date, Chinese retaliation has been uncharacteristically modest, reinforcing assessments that Biden’s May tariff move was electoral smoke and mirrors.

So, is Biden’s move no big deal? 

Not so fast. Where Trump was erratic and transactional in his dealings with China, Biden’s team has been methodical and persistent. Current US Administration officials deemphasize decoupling from the Chinese economies but reckon there needs to be “a small yard and a high fence.” By this, they mean that some sectors and technologies are — or should become — off-limits to Chinese buyers, firms, and investors. A ramping up of restrictions on inbound and outbound investments and technology sales involving all or selected Chinese firms has been the hallmark of Biden’s first-term trade policy.

Indeed, the May 2024 tariff measures apply to some sensitive sectors where China is effectively excluded from US markets. Those tariff measures often involve eye-watering increases in import taxes (up to 100% in some cases and far in excess of what Trump imposed), which is a testament to the height of the fence Biden seeks.

If the Biden team could state once and for all the commercial deals it is prepared to allow and those it doesn’t, then executives could plan. However, technology evolves over time — as do Chinese tactics to circumvent US controls — and, not unreasonably, Washington, D.C., reserves the right to change the terms of commercial engagement with China.

This raises fears that the yard will expand over time and the fence will get higher — even if Biden wins re-election. Such situations clearly call for scenario planning. After all, Trump’s plans for higher tariffs on China’s imports are well known.

The other big unknown is how China will ultimately respond. The Biden team informed Beijing weeks in advance of its tariff hikes — probably on the grounds that no one likes surprises. So far, Beijing has turned the other cheek and has not hit back. Many trade policy analysts reckon China won’t retaliate too forcefully or publicly for fear of increasing the odds Biden will lose being re-elected. The argument that clinches it for many observers is surely that President Xi and his new team don’t want to see Trump return to the US Presidency, not least because of the latter’s threat to impose an additional 60% across-the-board tariffs on US imports from China.

I am not so sanguine. President Xi’s newish team is widely regarded as very nationalistic and may want to burnish these credentials by striking back against US exports at a time of their choosing. Moreover, given Donald Trump’s self-professed admiration for “strong men” (a group that includes Xi), the Chinese may estimate that for all Trump’s bluster, they can reach a deal with him that is preferable to anything Biden’s team is likely to offer. We will see how long Beijing holds its punches.

Is this episode over? Are any other trade policy threats on the horizon?

Biden’s team probably hopes it has done enough to protect its standard bearer against accusations of going soft on China, but that doesn’t mean that trade diplomacy is over for the year. US policy has been to systematically cultivate support from other Western governments for its approach to Chinese commercial relations. In this regard, developments at the G7 are what to watch.

Created in the 1970s and expanded, the G7 is a club of Europe’s four largest economies (France, Germany, Italy, and the UK), as well as Japan, Canada, and the United States. Their government leaders and ministers meet often. In fact, for some time now, US officials have sought to persuade counterparts in the G7 that Chinese industrial policies, subsidies, and outright trade restrictions are a first-order threat to Western living standards.

If last week’s G7 Finance Ministers and Central Bankers’ communiqué is anything to go by, the US has succeeded. The third paragraph of this declaration states: “We will enhance cooperation to address non-market policies and practices and distortive policies, including those leading to overcapacity through a wide range of policy tools and rules to ensure a global level playing field. While reaffirming our interest in a balanced and reciprocal collaboration, we express concerns about China’s comprehensive use of non-market policies and practices that undermine our workers, industries, and economic resilience.”

The way the G7 works is that prominent statements found high up in the Finance Ministers’ communiqué tend to find their way into their Leaders’ Declaration. Ultimately, the question is whether the G7 will back these words with deeds. A similar declaration in June 2023 by the US and five allies (three are G7 members) went nowhere — or, at best, can be viewed as coalition-building. Given the divisions in Europe between firms and governments over the merits of decoupling with China, concerted action by the G7 against China this year is far from assured.

Still, the fractures in the world economy are widening. Executives who operate or source from Chinese firms in sectors where there is said to be excess capacity in China should be on alert. Those sectors include, at minimum, aluminum, cement, construction, electric vehicles, solar panels, and steel. That Chinese exports blocked from the US can be deflected to other foreign markets means executives from Western Europe, Japan, and emerging markets need to keep trade policy developments on their radar as well.

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

To read the full column as it was published by IMD, click here.

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Why 10 percent? Why all countries? There is no other reasonable explanation than that Trump considers all trade to be “unfair” in some respect, or at least disadvantageous.

This isn’t normally the way presidents act when it comes to tariffs. Additional tariffs are generally imposed very selectively, under trade remedy statutes crafted by Congress. They are actions taken pursuant to a finding that a particular product is involved in a specified unfair trade act, or it may be that the new tariff is a surgical retaliatory measure to open a market for a specified American product.

Many uncertainties surround Trump’s proposals.

We don’t know why 10 percent was chosen or why it would remain at 10 percent once imposed, but we do take Trump at his word on tariff matters—think about his fulfilling his pledge on day one of his time in office to withdraw the United States from the Transpacific Partnership (TPP) negotiated by President Barack Obama with Asia Pacific countries. He also already applied tariffs at a level of his choosing, first to steel and aluminum imports, and then to most imports from China, which netted out to 19 percent, a third of what he is promising now.

But didn’t President Biden just put on massive tariffs on Chinese goods? It is true he kept his predecessor’s blanket China tariff and then added some very high selective tariffs of his own. The new Biden tariffs place 50 percent tariffs on semiconductor imports from China. But that trade is modest, just under $1 billion a year. This compares with US chip imports from all sources that amount to about $6 billion each month.

The number of Chinese EVs being imported into the United States is even harder to detect (most press articles on the new tariffs on EVs contain no data), but only about 2,000 of these vehicles entered the United States from China in 2024 Q1. The EV tariff is a pre-emptive strike against these imports, not because they caused injury to the domestic automobile industry, but because they might prevent the industry being served by domestic American companies. The 100 percent tariff could be circumvented. Transplants could come in, but the United States, as opposed to France, has not put out the welcome mat for Chinese car investment. The bottom line is this new Biden measure affects $18 billion in trade coverage at present, as compared with total US merchandise imports of $ 3.826 trillion in 2023.

There is no reason to assume that the US tariff would not be met with additional foreign tariffs. The European Union, Canada, and Mexico retaliated immediately when Trump put on the steel and aluminum tariffs in 2018. Does the United States then go another round of escalating tariffs at that point? Or does it all get sorted out, as it did pretty much in that case? Even so, it is high stakes game, and what is at stake is the health of the US economy and that of the rest of the world.

The indiscriminate imposition of tariffs would no longer be confined to a trade war with China, if that is where the United States is headed, but a war against trade itself. It is time to remember some largely forgotten economic history. Fifty years ago, in 1970 when the Congress was considering import quota legislation, trade speeches were larded with allusions to the dangers of Smoot-Hawley level tariffs and “beggar-thy-neighbor” policies. Everyone knew then what those terms meant. The 1930 Tariff Act was a bidding war of members of Congress trying to give import protection to their constituents. The Congress, which under Article I of the US Constitution has authority over commerce, raised tariffs on imports to an average of 47 percent. This caused immediate retaliation from about a dozen countries, including Canada and Mexico. A year later, Great Britain abandoned its free trade policy, authorizing its Board of Trade to impose tariffs of up to 100 percent of value. The Board imposed tariffs of up to 50 percent immediately. Economists agree that high tariffs broadened and deepened the Great Depression, when US unemployment reached 25 percent and we nearly lost our democracy.

These are not yet the conditions we face today. US tariffs average around 3 percent, and unemployment is under 4 percent. Despite the headline-grabbing numbers for the high Biden tariffs, this is not Smoot-Hawley.

Unlike the Biden tariffs, the Trump plan is for increased tariffs on all products from all countries. It is not just America First; it is America Alone. Politicians and the public, here and abroad, are getting used to the idea of having higher tariffs, de-sensitized to the fact that high tariffs ought not to be the new normal. They are in fact added taxes on us, and having them will have real costs.

Beyond this, there is a risk of contagion. US treasury secretary Janet Yellen has invited other countries to follow the United States in its imposition of China tariffs. Given that there is an undeclared US trade war with China, this is not surprising, although it is not normal for modern secretaries of the treasury to be tariff proponents. Europe is also expected to act by putting into place much milder tariffs on EVs from China. This is likely be followed by a Chinese response in kind, already being bruited about, affecting luxury autos. Where would this end?

The impact of an unlimited trade war between the United States and China is one thing. China accounts for 16.5 percent of US imports, still relatively small compared with the nation’s experience in 1930. But the next administration, depending on the outcome of the election, could be working on building tariff walls, this time against world trade.

Only trade experts can readily tell that the two, Trump and Biden, are not using tariffs in the same way. The American public and foreigners looking on can be excused if they don’t see a difference. In the 1930s, President Franklin D. Roosevelt led the way back from Smoot-Hawley and blanket trade protection. A second Trump administration, freed from an awareness of history, may lead the world toward experimenting with blanket protection, tight-rope walking over an economic abyss. If Biden, sometimes compared to Roosevelt because of his federal programs, is given a second chance, he will need to be clear that his trade policies will be designed to be good for America and good for America’s friends abroad. The American president was formerly seen as “leader of the free world.” That honor requires a trade policy that other nations can emulate, that can be both to their advantage and ours.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics.

To read the full blog piece published by the Peterson Institute for International Economics, click here.

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