Reuters World News - Protectionism - Listen to episode 1 of Reuters Econ World

Episode Date: May 25, 2024

Listen to the first episode of our new podcast. Host Carmel Crimmins and China bureau chief Kevin Krolicki discuss recent moves by the US to impose tariffs on China’s hot industry – EVs. What is protectionism versus good local policy, how have we arrived at this point, and what does it all mean for consumers and the planet? Plus, we take you on a ride to a real world example, Beijing. Sign up for the Reuters Econ World newsletter here. Visit the Thomson Reuters Privacy Statement for information on our privacy and data protection practices. You may also visit megaphone.fm/adchoices to opt out of targeted advertising. Learn more about your ad choices. Visit megaphone.fm/adchoices

Every weekday on Reuters World News, we bring you the most important stories from around the globe in just 10 minutes. But are you excited by economics, puzzled over a key concept, and find yourself wanting more? Well, our new podcast, Econ World, is for you. Every week, Carmel Crimmons will tap the biggest brains inside and outside Reuters to do a deep dive into an economic buzzword and a real-life example of it in practice. This week's inaugural episode is on protectionism and how that is playing out in the electric vehicle industry in the US and China. Spoiler alert, there's also sheep and a car

that can play the wedding march. Don't say I didn't warn you. Take a listen and follow the podcast using the link in the description. You can also sign up the accompanying newsletter also in the description. Let's take a listen now. There's nothing new about protectionism. We're talking today about US tariffs on China.

electric vehicles. But back in the 14th century, it was English taxes on wool exports to the low countries. Edward I even ordered the extermination of wolves to protect the English wool industry. That's cold. The point is, slaughter of wildlife may have fallen out of fashion, but the urge to protect domestic industry hasn't. In fact, protectionism is back, big time. Though nowadays it's a bit of a loaded term. Because promoting companies at home and discriminating against those from abroad goes against the principles of free trade. But it can boost local labour forces, depending on which side of the tariff you live on. Well, on today's episode of Econ World, welcome, by the way, this is our very first show.

We'll unpack this loaded term. In fact, that will be our mission every week, to pick a buzzword or phrase and really dive deep into the economic principles and ideas, driving the biggest news around the world. And so today, protectionism. We'll look at the U.S.-China trade war and what it means for consumers and the planet. I'm your host, Carmel Crimmons, in Dublin. In the beginning, the U.S.-China trade relationship

was going to be a win-win situation. At least, that's how Bill Clinton saw it back in 2000. For trade with China will not only extend our nation's unprecedented economic growth, it offers a chance to help to shape the future of the world's most populous nation. And for many years, it did seem like that vision laid out

on the south lawn of the White House had become reality. China's entry into the World Trade Organization, paving the way for it to become the world's factory. Western consumers got cheaper prices. Companies got higher profits. China saw its economy surge and hundreds of millions of people

were pulled out of poverty. But the trade relationship also created, problems. U.S. manufacturing jobs were lost. And Beijing never did get on board with the U.S.-led liberal democratic order. It deploys industrial policy on a vast scale. Tax breaks and subsidies are used to nurture domestic industries from solar panels to the auto sector. But one man's industrial policy is another woman's protectionism. The West accuses China of swamping its markets with cheap products. And it's had enough. President Biden is hiking tariffs on a range of Chinese imports, including a 100% duty on Chinese EVs.

Folks, look, I'm determined that the future of electric vehicles will be made in America by union workers, period. And Europe is considering a similar move. As China doubles down on the supply-side support strategy to address its own economic downturn, our economies cannot absorb this. It's not only only dangerous for our competitiveness, it also jeopardises our economic security. The EU's anti-trust commissioner, Margrethe Vesteya, speaking in New Jersey in April. So what does this mean for China and the US?

To get into this topic, we thought we'd focus on a category of Chinese exports that's attracted more attention than any other. Cars. And we have the perfect person to talk to us about that today. Kevin Crowlicky is a native of Motor City itself, Detroit. He spent years covering the auto sector in the U.S. in Japan and is now based in Beijing as Reuters' Greater China Bureau Chief. Welcome, Kevin. Thank you for having me. Yeah. Talk us through, though, a little bit.

You know, you're so familiar with the car industry. It's kind of being your beat, right, for most of your career? Yeah, for me, as for the industry, it started in Detroit. In my family, like many families in Detroit, many people, most people, worked for the auto industry. And as I was moving into my college years, those are the years when that first wave of imports from Japan led to trade tensions, export restrictions from Japan, predictions that the U.S. industry was going to be hollowed out at a great cost to jobs and livelihoods. And a lot of that is replaying today. It does feel kind of old school, right, doesn't it, to be talking protectionism? Yeah, I mean, protectionism is a loaded word. That's not the term that Janet.

Yellen uses to describe what's happening. It is interesting in this to see Chinese officials from the People's Republic, a communist government, lecturing the economist Janet Yellen on comparative advantage and the meeting of free trade. But that's where we've come to in the argument. How did we get here? Part of what's happened is that the U.S. sees China as a threat. They see China has a threat in two ways. The first is what Janet Yellen and other U.S. officials have started to call China's an overcapacity problem. China has subsidized, they say, the production of goods like EVs, like solar panels, like batteries, and to the point where these exports are going to be so cheap that they wipe out overseas industries, they kill jobs, and they make the rest of the world

dependent on China. And then the other way that the U.S. sees China as a threat is the development of dual-use technology. China for its part says the U.S. is trying to suppress its rise, that the U.S. is hypocritical, and that, as Chinoa said in a commentary this week, if you don't kill us, you're only going to make us stronger. And in the meantime, the U.S. consumer loses out? In the meantime, yeah, the U.S. consumer will lose out. And what about for China? Well, the biggest risk now, I think if we take EVs, for example, is that other countries, starting with Europe, follow the U.S. lead. China EV makers, they need export markets to develop because it's true they have more capacity than the domestic market can handle.

So that's how it could go bad here. So you're saying both sides say the other is going to lose out. But we know the U.S. economy has avoided like a so-called hard landing. What about China? How is it doing? Right. Well, the economy here is on paper growing at just over 5%, which seems like a high number by the standards of the developed world. But it feels like a growth recession. And part of that is what's happening to income. Part of it is what's happened to this massive, and we talked about overcapacity, probably the biggest overcapacity in China's economy is in housing apartments that were financed, but haven't been completed, tens of millions of these. And there's a lot of personal wealth tied up in that. And that just leads to a real sense of caution about spending and investment. So China really needs those overseas consumers? It does. It's going to depend. There are questions about how much more stimulus China's government can provide. But yeah, the incremental sale of

overseas is really important in that context. So with domestic demands are weak, China then really needs external buyers for all this high-tech green economy stuff that it's producing. But the West could foil that with tariffs. Beijing is accusing the U.S. of protectionism. What's the U.S. saying? Yeah, the U.S. argument here essentially is that China has basically run policies, including subsidies at the local government level, that have collectively inflated a bubble in the EV manufacturing.

The policies, if you like, have succeeded too well. What does too well mean here? Over 100 brands, more production of EVs 6 million plus last year than the market can absorb, pushing down prices, and all of that, once these exports begin to move, threatens jobs overseas. That's the U.S. argument. And the Chinese argument is that's the nature of competition. Welcome to a capitalist economy, which is kind of a rich and ironic. come back. Talk to me about the U.S. consumer and all of this, Kevin. You mentioned before that they

could lose out. How so? It's interesting. So I said it felt like the 1980s all over again. But there's a big difference in the sense that right now we don't have Chinese EV exports in the U.S. market. They're growing in Southeast Asia, rapidly. They're starting to see them in Europe, in Latin America. But in part because of the politics, Chinese EV makers have opted not to export to the U.S. market. These tariffs make that now a near-term certainty. But this is very much a hypothetical rather than a real economic threat. And again, China's response is, well, if you put these tariffs on to the point that only rich people can afford EVs, that's the market for EVs you'll have in the United States. It's essentially you, the American government, are depriving American

consumers of choice. So what you're saying is Middle America is missing out on a price point? Part of the important realization here is Chinese EVs are really good. They are at price points that Western car companies can't possibly match $10,000 and below in some cases against, I think the average for an EV now in the U.S. is something like $55,000. So this is a fifth of the cost with great design, with integrated sort of online and phone connectivity. and decent battery range. So these are EVs that the US consumers never seen.

So every week on the show, we want to bring you a real world example of what we're talking about. The Beijing Auto Show provided the perfect venue for us to look at what US consumers

might be missing out on. Kevin, let's start with this audio clip you took for us. This is from an EV made by Zeker, a Chinese company that recently listed in the US. What's going on here? I mean, some of the tech features

on these new Chinese EVs seem a little. little gimmicky. Zeker has a sedan that allows you to, when you're parked at a red light, to play a song of your choice to the pedestrians walking past. For reasons, no one could explain the default is the wedding march. Well, that's unexpected. Well, if you're not a fan of the audio on the Zeker, you can also use a special display panel on the front of the car to flash a bouncing string of thumbs up emojis pedestrians too. How much does a Zika car cost? So Zeker is a premium brand, a premium EV brand.

I mean, it's just in terms of price competitiveness. Premium EV in China means cars somewhere maybe around or under $40,000. Those premium cars are still cheaper than the average EV by a long shot in the U.S. What about the auto show generally? A lot of dramatic unveilings? Yeah, it's amazing. The multitude of choices is the first thing that. you notice. And as someone who has only arrived in China in the last three months, but has been,

I've been writing about the auto industry for a long time, I feel like I've arrived in the future. And this was all on display at the Beijing Auto Show. At the very low end, you have cars like the BYD Seagull, which is one of the best-selling EVs now in China for $10,000. And it's not cheap and cheerful, as auto executives used to say of their more affordable gas-powered options. I mean, these cars at that price point have pretty incredible tech features, design sense, yeah, and just at a fraction of the cost of an EV in the developed markets. But you also saw the downside of the Chinese auto market at the show. Excess capacity in real life, Kevin. It was as if the organizers of the auto show, someone said, set out to advertise the worst aspects of car ownership in China,

because the traffic was just simply not moving in the last kilometers to the venue. Truck drivers were getting out of their cars and people were decamping, running kind of madly the last kilometers. Were people having smoke breaks on the side of the road? Was that what we're talking about? Yes. Wow. Drivers were smoking.

And in a panic myself, I, you know, got out, began to run. and then hitchhiked the last three kilometers in on the back of an electric scooter. Someone stopped and gave you a lift? Someone stopped and gave me a lift. And it was, yeah, I'm happy to say it was an electric scooter. You arrived there in green style. Is that what you mean? I did.

Without a helmet, I'm not proud. But I made it there. That's not Reuters policy. Reuters policy is to wear a helmet. So if China doesn't currently export EVs to the U.S., did these tariffs really matter? Ultimately, it matters. The U.S. is still the largest economy in the world. It's the second largest auto market after China's.

For now, China EV makers are chasing growth everywhere else and accepting the political reality for what it is. But, yeah, ultimately it has to matter. There is overcapacity. There are too many brands. You're already seeing that the top handful of brands account for the majority of sales. So there's a consolidation. There's a shakeout coming. Everyone understands just not yet. And right now, everyone is racing to try to capture as much growth as they can because scale most automakers here think is going to be the most important determinant of whether you have a seat at the table when this is all over. We already have some Chinese carmakers moving plants to Mexico. That gets them into the North American free trade area. So will U.S. protectionism even work?

That's true. D.YD, which is the 800-pound gorilla in the Chinese EV market, is just expanding in Mexico. You have Chinese suppliers in Mexico, some of them expecting to follow Tesla. Others looking to follow the Chinese EV brands as they begin to expand in North America. Not the U.S. yet, but they're close. No wonder Tesla's dropping its prices so much then, huh? This is the biggest source of competition on price for Tesla. And I think a lot of people believe the reason that Elon model is.

has pivoted so fully toward a focus on AI and software where there are higher margins. There's a lot of money going into green energy in the U.S. Can the U.S. play catch-up? I mean, you hark back to your days in Detroit when they were up against the might of Toyota and others. Can the U.S. do it? I think it's different this time because China owns the supply chain essentially now for EV batteries, as well as now a lot of the other components, including

the electronics that go into an EV. Toyota, Honda, Nissan, and when they were competitive threats back in the day, just really well-run companies with an emphasis on quality, a kind of innovation in production in the case of Toyota, focus on quality controls that were new and disruptive. A trade war between the West and China over green goods isn't great for the planet. Like, in theory, protectionism will delay the West's energy transit. if they have to pay more for clean technology? Yeah, that is China's argument.

Its biggest counter argument is that if you put tariffs on these goods, if you slow this down, then you're shooting yourself in the foot and making it harder to meet climate goals that are already seen as maybe out of reach. So this is China's rejoinder that a vote for the Chinese EV industry is a vote for the planet. What has the impact been or what could it be on, Chinese consumers from these trade tensions? Well, it's interesting. You know, in EVs, I think there's a there's a sense of developing or developed now national pride if in some cases maybe bordering on hubris. And this is a real change from just a few years ago. But if you talk to consumers, as we did at

the auto show, you find people who say, well, yeah, I had a Mercedes, but then the next car is going to be a Chinese brand because they're just better. And there's a pride in that. But it's a real reversal in this market. You mentioned nationalism. It does sort of feel like we're harking back to a bygone era in terms of the nationalism at play. Things can get emotional fast. Yeah. I mean, it's easy to see how debates over in trade policy and industrial policy could become very personal and sort of dangerously invective very quickly. And again, we've seen that before, right? I mean, When I was growing up in Detroit in the 1980s, Japanese cars were seen as a threat. Yeah.

Not a coincidence. A lot of people driving Japanese cars had their cars keyed or windshield smashed. Yeah. When people's livelihoods are threatened, these things can escalate very quickly. Obviously, not excusing any of that, but we've seen it before. Kevin, thank you so much for this discussion. It's been fascinating. We'll be getting you on the show again.

Thank you. Thank you for having me. Can I just say thank you for listening through the entire episode? This was our first show. Every week on Econ World, we're going to tackle one economic principle behind the news. We'll give you some historical context. We'll give you real-life examples. And we'll have an in-depth discussion with people in the know.

Let me know what you think of the show. Reach out on LinkedIn or Twitter. Leave us your thoughts in the comments section wherever you listen to the show. There's a newsletter to accompany this pod. You can subscribe to it on Reuters.com. Next week is going to be a biggie. We're going to look at debt. And for all you econ nerds out there, stay tuned.

We're going to have some very special guests. Till then, a huge thank you to Kevin Crowlicky, Sarah Wu, and everyone who covers economics at Reuters for all their help. Jonah Green is the producer on this week's show. Sound design was by Josh Summer. Lila de Kretzer is our executive producer. Our podcast team includes Tara Oaks, David Spencer and Gail Issa. I'm your host, Carmel Crimmons.

Remember for all your daily news, check out Reuters World News, our weekday podcast.