West plays 'whack-a-mole' as China dominates EV and battery sectors

Over the Past few years, the administration of U.S. President Joe Biden has unleashed restrictions on a wide variety of goods from China.

Washington’s supply chain review — which highlighted the national security significance of batteries, semiconductors, critical minerals and pharmaceuticals — laid the foundation for several industrial policies, targeted tariffs and other economic action against China’s deceptive trade practices. The European Union — joining the United States — slapped tariffs on Chinese electric vehicles earlier this year and is reportedly considering upping it to 37.6%.

Nonetheless on economic security, the West continues to play catch-up. While the U.S. was busy bringing together NATO and the Indo-Pacific to call for a coordinated approach in pressuring China over its support of Russia, Zeng Yuqun, founder and CEO of Chinese battery manufacturer CATL was traveling around Europe, holding talks with sovereign wealth funds, family offices and automakers.

And when it comes to China, it is glaringly apparent that industry and EU policymakers are not on the same page.

Germany is a prime example. Berlin has decided to abstain from voting in the upcoming vote on tariffs on Chinese goods. This comes at the backdrop of German industry advocating for increased economic linkages with China as a supposed de-risking measure. German automobile manufacturers lost out to Chinese competition recently, with Chinese EV’s ruling the roost for the first time in history. The trailing has incentivized German automakers to double down on their China push.

Japanese and Korean battery manufacturers can attest to the trajectory of foreign companies competing against China. With a history of whitelisting, Japanese and Korean battery manufacturers know firsthand how the Chinese Communist Party promotes Chinese manufacturers at the expense of foreign ones.

China is not all to blame, however. Western nations have been slower to transition from the internal combustion engine to EVs. America, the world’s largest market, was an EV skeptic and until recently had a large section of its population even denied the impacts of climate change on the environment. In the battery and EV market, one could characterize the last decade as the lost decade for the Western world.

Meanwhile, China doubled down on its industrial policies to develop its local champions across the automobile value-chain. Reaping the success of its industrial policies, Chinese automakers and battery manufacturers are entering foreign markets with a substantial lead. The foray into foreign markets is not simply to expand their market, but to serve Beijing’s larger economic goals. As trade data from 2022 shows, China today exports more to the Global South than to the Western world. It is no longer simply manufacturing goods designed in Silicon Valley to sell to Western consumers. It is increasingly building its own products and exporting its success story to emerging markets.

In the past six months, Chinese companies such as BYD, CATL and Gotion have announced plans to set up and expand their operations in Turkey, Thailand and Brazil. Notably, these investments are not for the respective domestic markets. They are investments designed to create export hubs, to foster greater market access for Chinese goods through tariff circumvention. Manufacturing within the customs union of the EU (e.g., Turkey) would imply tariff-free exports.

Thailand and few other southeast Asian nations were under scrutiny for shipping solar panels originating in China as manufactured in their states. Now, Chinese EV maker BYD is establishing manufacturing in Thailand, with Chinese automaker Chery having announced similar plans. Additionally, Chinese mining companies, having identified lithium deposits in Thailand — which happens to have a defense treaty with the U.S. — will thrive as a go-betweens for the U.S. and China, assisting the latter to circumvent tariffs. Similarly, when Mexico started to face scrutiny for enabling Chinese businesses to operate out of its shores to capitalize on the United States–Mexico–Canada Agreement, Beijing quickly found Brazil to manufacture its automobiles.

As the Ukraine-Russia conflict and the Global South’s response to sanctions on Russia show, nations in the Global South are not always leading with values, but economic interests. Increased economic linkages with China, particularly through investments that generate jobs, cement China’s place in the Global South.

This strong linkage will come in handy for China if the West chose to sanction or use its economic weapons against it in a conflict. Furthermore, Turkey and China’s investments in Hungary, which are transforming it into the battery capital of Europe, make coordinated collective action toward China largely difficult.

Washington is slowly waking up to Beijing’s deceptive trade practices and plugging loopholes in the Inflation Reduction Act (IRA). Even if the U.S. were to successfully plug these loopholes and transform its Commerce Department into a proactive agency capable of screening companies in the 20-odd economies the U.S. has free trade agreements with, there will remain three challenges.

First, China’s centralization of power and capital gives it autonomy to channel funds to various companies in need and direct investments in parts of the world it deems strategically important.

Second, through its sheer size and manufacturing capacity, Beijing had created gluts in several sectors in the last two decades. We are witnessing a similar one with EV’s, reflecting in the prices of key commodities. The volatility in prices make it difficult for smaller Western companies to compete with Chinese State-Owned Enterprises or state supported companies.

And third, China has always been one step ahead of U.S. economic statecraft. By the time Washington woke up to the stark reality of China skirting trade restrictions through manufacturing outlets in Mexico and Southeast Asia, it had already established bases in other nations. When Washington woke up to the challenge of securing supply chains, building out an EV battery manufacturing ecosystem through industrial policies such as the IRA, China was moving toward attaining self-reliance across the entire value chain. Yuqun of CATL believes that by 2042, China would not require any new minerals and it could rely just on the recycled ones. As a result, America is playing a game of whack-a-mole with China.

Over the last few weeks, as election campaigns were heating up, an old video from 1997 of U.S. President Joe Biden mocking Russia’s threat to seek support of Eastern partners such as China if NATO were to expand. Fast forward to 2024, Russia is selling West-sanctioned cheap energy to China that is subsequently enabling its rapid technological advancements and transition to EVs. Similarly, Elon Musk, touted as the pioneer in EVs, burst out laughing at the prospect of competition from Chinese EVs back in 2011. In 2024, Tesla is losing out to Chinese EVs such as BYD and Chery.

The U.S. continues to lead with ignorance, if not arrogance. This has in turn cost it dearly in critical sectors. Whether it is a Democrat or a Republican in the White House next year, the U.S. must adopt a proactive policy of creating multilateral supply chain initiatives, even if it lacks an appetite for multilateral trade initiatives.