The Zeekr brand car factory in Ningbo, China, last month. Photo / Gilles Sabrié, The New York Times
Heavy subsidies for industry, together with weak sales in China, have set the stage for an export boom, raising fears of factory job losses elsewhere.
For decades, China has moved methodically to dominate ever more industries, from toys and clothing in the 1980s to semiconductors and renewable energy today. China now produces a third of the world’s manufactured goods — more than the United States, Germany, Japan, South Korea and Britain combined. Its trade surplus in these goods is equal to one-tenth of the entire Chinese economy.
And those exports keep increasing, causing alarm about China’s manufacturing “overcapacity” among its biggest trading partners. Top leaders in the United States and Europe have begun calling on China to dial back how much it sells to the world and to increase its imports. On Tuesday, President Joe Biden raised US tariffs sharply on imports from China of electric cars, solar panels and other high-tech manufactured goods.
Almost a decade ago, China launched an ambitious program called Made in China 2025. The plan was for China to replace key imports in 10 advanced manufacturing industries by making its own products. The state-controlled banking system directed loans to those key sectors.
Fast forward 10 years, and China’s domestic economy is hurting mostly because of a housing market crash. Leaders in Beijing have ordered increased lending for many of the same manufacturing sectors to compensate for slower consumer spending and are stepping up exports.
For China’s economic policymakers, the strategy is familiar.
It works like this: Regulators restrict the investment options of Chinese households, which have little choice but to deposit enormous sums of money into banks at low interest rates. The banks then lend the money at low rates to startups and other businesses. According to China’s central bank, net lending for industry swelled to US$670 billion last year from US$83 billion in 2019.
Beijing instructs local governments to help the chosen industries. The assistance takes the form of cheap land for factories, new highways for freight trucks, bullet train lines and other infrastructure.
The Kiel Institute for the World Economy in Kiel, Germany, calculated in a study that more than 99 per cent of Chinese companies whose stock trades publicly received direct government subsidies in 2022.
China keeps factory wages low, which helps the competitiveness of its manufacturers. Residence permits limit the ability of rural families to move permanently to cities, where they would qualify for better job benefits. Independent labor unions are banned, and would-be organizers are detained by police.
Those programs have helped China grow in many industries, fanning fears in the United States and elsewhere that factory jobs could be lost. US tariffs are now targeting exports in some of China’s largest and fastest-growing industries.
The auto sector is a prime example of how China has been able to move so fast to gain manufacturing dominance.
Just four years ago, China was a weakling in car exports, shipping 1 million low-priced cars a year mainly to less-affluent markets in the Mideast and elsewhere. China has since surpassed Japan and Germany by a wide margin to become the world’s largest car exporter. Shipments are running at an annual pace of nearly 6 million cars, sport utility vehicles, pickups and vans.
Three-quarters of these exports, particularly to Russia and to developing countries, are cars with gasoline engines, which fewer buyers in China want. Battery electric cars are cheaper to buy in China, and electricity to charge them is cheaper than gasoline.
China’s top leaders have heavily subsidized the research and production of battery electric cars for the past 15 years.
Companies are ramping up their manufacturing of battery electric cars and building a fleet of ships to export them to distant markets, particularly in Europe. Automakers are introducing 71 models of electric cars in China this year, many of them loaded with advanced features and selling for less than comparably equipped cars in the West.
China started off far behind the West in electric car batteries — and Chinese officials knew it.
By 2011, Beijing had begun requiring Western companies to transfer key technologies to operations in China if they wanted consumers in China to receive the same subsidies for imported electric cars that were being offered for cars made in China. Without the subsidies, automakers such as General Motors and Ford Motor could not compete with electric cars made in China.
Multinational automakers responded by pressuring their South Korean suppliers, which at the time led the electric car battery industry, to build factories in China. Beijing went further in 2016 and declared that even electric cars made in China would only qualify for consumer subsidies if they used batteries from factories owned by Chinese companies. Even automakers such as South Korea’s Hyundai abandoned the Chinese factories of South Korean battery manufacturers and switched their contracts to Chinese battery companies including CATL.
Chinese companies now produce the majority of the world’s electric car batteries. Technological breakthroughs over the past several years have meant the cars can achieve greater range.
According to a new report from the Atlantic Council, a research group in Washington, China’s exports of lithium-ion batteries leaped to US$65 billion last year from US$13 billion in 2019. Nearly two-thirds of these exports went to Europe and North America. Much of the rest went to East Asia, where the batteries are often assembled into products that end up being sold to Europe or North America.
China has long made solar panels a top priority to limit its dependence on imports of oil and other fossil fuels along sea lanes controlled by the United States or India, another geopolitical rival. A tenfold expansion of China’s solar panel manufacturing capacity from 2008 to 2012 caused the world price of solar panels to drop about 75 per cent. Many US and European factories closed.
Three of China’s largest solar panel producers suffered financial collapses of their own as prices plunged, saddling banks with losses on loans. Smaller rivals in China were able to buy their factories for fractions of the original construction cost. This second generation of companies was then able to make panels more cheaply and invest in cutting-edge research.
Chinese companies make almost all of the world’s solar panels. The country’s exports of solar cells, which the Biden administration is raising tariffs on, have more than doubled in the past four years, to US$44 billion last year. China is ramping up twice as fast its exports of solar wafers, a key component.
Export controls by the United States have limited the sale to China of the most advanced semiconductors, which comprise about 5 per cent of the market, and the technologies to manufacture them. But Chinese companies, benefiting from enormous government subsidies, have become more competitive in the other 95 per cent of the market.
The chips made by China are used in a range of equipment in the West, including many cars. Even gasoline engines in cars are controlled by semiconductors often made in China.
The November election has put political pressure on Biden to show that he is taking a tough stand toward China.
Trade issues have also become enmeshed with security concerns. Russia’s war in Ukraine is showing that wars may be decided in part by which side can make more drones, artillery shells and vehicles.
China contends that its rising trade surpluses are the legitimate result of the competitiveness of Chinese companies.
Jorge Toledo Albiñana, the European Union’s ambassador to China, disagreed. “In Europe,” he said in a speech last week, “there is increasing pressure to react to what is widely seen as a worsening lack of level playing for our companies and investors.”
This article originally appeared in The New York Times.
Written by: Keith Bradsher
Photographs by: Gilles Sabrié
©2024 THE NEW YORK TIMES
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