US tariffs and Chinese competition spell trouble for Ireland

Current global trade wars have their roots in a superpower competition born of China’s emergence as the world’s largest manufacturing and exporting nation and a formidable competitor for the Western world’s largest automobile and technology companies. Ireland, as a small open economy, benefitted from China’s rise but may be squeezed in the emerging Sino-American competition.

I cast my mind back to 2003 and a Xiali model car I frequently took a taxi ride in across Beijing was a source of amusement, a lightly upholstered contraption run on an outdated engine licensed from a Japanese rival carmaker. China’s car makers had become complacent, dominated by technologically superior western rivals like Volkswagen with whom they had set up joint ventures.

But 20 years later China has become the world’s leading exporter of cars, largely by acquiring and developing better technology to build better engines while skipping the combustible engine era to focus efforts and research on dominating the electric vehicle manufacturing business.

Car companies like BYD, Chery and Geely are today building and operating factories in Europe. All of this was telegrammed in five-year plans, the hiring of international talent and purchases of western technology. Western competitors, sated by access to China’s giant market, belatedly woke up to the Chinese challenge when Chinese electric vehicles started showing up in European markets at quality-to-price ratios better than any European firm was able to offer.

It’s a similar picture on Irish building sites and farmyards. Twenty years ago, heavy machinery-making firms like Yugong offered cheap, inferior imitations of Caterpillar trucks. Today, I watch Irish construction machinery dealers making gushing TikTok videos extolling the virtues (high quality, low price) of Chinese heavy machinery on their visits to trade fairs in Shanghai and Shenzhen. I know a farmer in Mayo who imports Chinese loaders to sell to Irish farmyards at a considerable markup.

And therein lies the problem for many Western economies for whom China has become a key supplier but no longer a contract manufacturer: rather, a competitor that they permitted to become the key supplier of most of its household white goods and its apparel but who now sells it cars and lorries.

China’s manufacturing renaissance, abetted by the country’s entry to the World Trade Organisation (WTO) in 2000, which allowed it access to Western markets on more favourable trading terms enjoyed by WTO members. That entry was facilitated by the Clinton administration which saw an opportunity to open China up to Western ideas on human rights.

Political liberalisation didn’t happen but WTO membership did open China to a wave of American sourcing companies, lawyers and accountants who created a vibrant expatriate social scene in Beijing in the run-up to Beijing hosting the Olympics in 2008. This was peak globalisation.

In so many industries, the Chinese could source for a fraction of the charge of a plant in the American mid-west, in large part because of low wages but also lower environmental standards as developed nations exported their dirty manufacturing businesses to the East.

As a result, Western consumers enjoyed two decades of deflation as Chinese factories produced consumer goods at low prices, in the process emptying out American and European lower-end manufacturing capacity.

In return, China invested its hard-earned dollars in American treasuries, in effect financing the American deficit-busting consumer spend that led to a housing bubble and a financial crash that shook the world and ushered in political consequences we’re still dealing with.

Resentment about Western industrial decline and austerity aided the rise of Trump and European populists but in other ways too China’s rise as the manufacturing superpower under the benign guise of globalisation created the space for the rise of resentment, Brexit and MAGA.

The first Trump administration, and the Biden presidency that followed it, saw China as an economic threat – the nationalistic Xi Jinping who took power in 2012 had after all stressed the need to make high-value goods and pursued a ‘Made In China’ agenda to reduce its reliance on imports while increasing its exports.

Seeing their dominance undermined by the assertiveness of Xi, America and the EU responded with tariffs and export controls on sales of American technology like microprocessor chips to Chinese clients. This was partly a response to China’s military modernisation but also an effort – too late, perhaps – to slow the rise of China’s industrial prowess.

Washington (and later, Brussels) had come to see in China a competitor that had absorbed little of Western democratic values but much in western technology, a technologically sophisticated dictatorship determined to export its political system and values to other parts of the world while remaking global bodies like the United Nations in its own image.

Today many of those hostelries in Beijing and Shanghai that catered to American executives and their families in 2008 have closed. The Chinese need for American and European imports has decreased while Western corporations have shifted some of their manufacturing to Vietnam and India.

China joining the WTO had, of course, been good for Western corporations who could sell goods in China. Some, like Colgate, McDonald’s and Nestle have major market share. But China’s relentless drive to self-sufficiency, reverse engineering and improving on Western technology to export frequently better products at a lower price - like those aforementioned farm loaders being sold in Mayo - has created a broader trade conflict that may run for decades and wreck the principles of globalisation on which Ireland has built its economic prosperity.

China’s growing industrial sophistication has been devastating for major EU manufacturing nations like Germany, France and Italy which have seen their exports to China fall before losing customers in other major markets to Chinese competitors.

Irish businesspeople have shown little European solidarity in their eagerness to import Chinese construction equipment sold for a fraction of the price of European brands. We may, however, find that Chinese competition is also coming for some of the things we make.

Ireland hasn’t called for higher tariffs on Chinese goods – party because as a member of the EU, it cedes that power to Brussels - but will be forced to apply tariffs being considered by the EU on Chinese imports.

It will do so reluctantly because Ireland is one of only two EU states with a trade surplus with China thanks to the fact that Chinese demand for software and pharmaceuticals has held solid.

Trump’s arrival has forced Brussels to jettison some of the hawkish talk about China heard during the Biden administration. Trump’s tariffing of EU goods makes an EU-American joint front, built under the Biden administration to counter China, less likely.

But it also increases the incentive for China to dump more of its US-bound exports in Europe. Trump has after all added 20% tariffs on Chinese goods in the past month. That’s atop the 25% introduced in his last term. A 45% increase in the price of any good renders most trade unviable.

This is a major problem for China given America is its biggest market in value terms. As the world’s top importer (and second biggest exporter, after China) in value terms, the US offers a market China can’t afford to ignore. Selling more stuff to its own population isn’t an option that China trusts as the Chinese remain a nation of savers out of necessity given that China has little of the social welfare entitlements of richer countries.

Complicating matters further, it’s not hard to see the consequences of China’s manufacturing dominance asserting itself in other challenges facing wealthy Western countries like Ireland – not least immigration.

Immigration from developing countries has soared because of high fertility rates (particularly in Africa) but also because the flood of low-cost Chinese manufactured goods has deprived poorer countries of their own manufacturing-led development.

Poor governance and regional political instability in these countries are, of course, also to blame but anyone who’s witnessed the eradication of light manufacturing in sub–Saharan Africa by cheap Chinese replacement imports will understand the exit of these countries’ youth for work in care homes in Rome, London or Mayo.

Faced with the might of Chinese capitalism, many of these developing countries have, like wealthy Western economies, started to introduce tariffs to protect what’s left of their industries to varying levels of effect.

A visit to an Irish farm by Xi Jinping (just before he became China’s president) over a decade ago was reported enthusiastically by a local agriculture press keen to sell dairy and meat products to China. Those sales haven’t really materialised (as in most things the Chinese developed their own supply chains in both commodities) but China’s purchases from Irish agricultural peers like New Zealand created space for Irish products elsewhere.

But other than some dairy products, as well as pharmaceuticals and computer chips (both of which it’s trying hard to replace with its own products which it will inevitably export), China hasn’t much use for anything else we produce.

The past two decades of having the best of a globalised world, making and shipping American pharmaceuticals while buying cheap Chinese machinery, has benefitted Ireland greatly. But faced with American tariffs and voracious Chinese competitors we may be entering a new, more challenging, era.