In a bid to protect domestic car manufacturers, the EU is considering imposing extra tariffs on imported Chinese cars. Is this the right response? How about allowing some competition to encourage innovation?
The recent decade seems to be the least enjoyable time for European car producers. While the economic community is experiencing serious supply-side and cost-of-living crises, car production of old European brands has moved to a comparatively inferior position, especially in terms of Chinese companies. Not only does the latter have a price advantage of being 28% lower than European-made vehicles, but also has contributed more to innovations like electric vehicle (EV) development. A lot of politicians and economists are arguing that it is necessary to protect domestic car producers, to keep their competitiveness and employment of manufacturing workers. Nonetheless, protectionist policies such as a tariff on imported Chinese cars should never be considered as a panacea. Instead, a more practical solution is to treat foreign competitors as “catfishes” which encourages the “sardines” of domestic producers to run faster.
A Costly Agenda
Although domestic producers will benefit from the higher price resulting from the tariff, consumers will need to pay more compared to current costs. Because of the importance of transport vehicles to consumers and their position as a necessity, everyone, despite their financial background or lifestyles, would be negatively affected by the additional cost of buying a car. Although it seems that economic nationalism is encouraging to people who tend to be patriotic, its drawback is shared by the whole economy. According to economic theory, at least in the short run, the economic loss of the EU would be greater than its economic gain.
Furthermore, although employment is increased by a greater scale of domestic output, it has a regressively re-distributive effect on the economy. The newly-employed workers are largely those with better educational backgrounds and skills, so their income is usually greater than other employees. This leaves the poorest members and consumers in the economy in a worsening situation as the price has been driven up, and they are no longer able to buy a car. To sum up, the tariff transfers the wealth of the poor to the middle class and businesspeople which would make equality in the economy worse off.
Despite people’s utility being worsened, it would also lead to a greater market failure. Since most Chinese imported cars are electric, if a tariff is introduced that raises the price for EVs, people will start to purchase petrol cars as a substitute to replace its highly-priced competitor. Consequently, the carbon emissions from petrol cars could immediately result in environmental damage and enhanced global warming. Besides, considering the tariff on carbon resources, the price of petrol cars is increasing rapidly. This would force the EU to either bear the costs of inflation and the rising cost of living due to the rising prices of both types of cars or reduce carbon regulations and take the risk of greater external costs and market failure.
Lastly, it should be noticed that the European car market is an oligopoly market controlled by a few manufacturers who are earning much higher than normal profits. With protection that limits international competition, oligarchies are less likely to invest in new technology. Instead, they can rely on the protections which give the power of control back to their hands and there is less risk that they will lose profits due to little development.
And a Useless Agenda
Some people have argued that because the electric car market is an infant industry with high growth potential in the future, the EU should take any attempts to provide a good innovative environment for the entrepreneurs. While it has been proven in South Korea through Park Chung-hee’s Heavy-Chemical Industry (HCI) programme which gave Koreans an obvious advantage in the industry, it should be noted that previous successful cases generally rely on two conditions: low cost of labour and enterprises’ investments in innovation.
However, this is not typically suitable for the European Common Market. Firstly, as we have mentioned, it could result in firms’ reliance on government protections. This is found in the European agricultural market, where protections like tariffs to other economies have reduced the productivity of farmers. Because they are the only choice of European consumers, there is little motivation to invest in new technology and management systems of farms. Unfortunately, it seems to be true for car producers as well. European car manufacturers have a relatively low investment rate in technological advancement. There is no reason to believe that they will return to “good developers” just because the government has cared for them as newly-born babies while they are old hands.
Moreover, the growth potential of European car producers should also be questioned. Due to the strong trade union power in Europe and the high cost of labour, it should be questioned whether the companies would still have the money for innovation after receiving the protections. If they are forced to pay much higher to their workers, which enhances its disadvantage compared to Chinese producers, the current situation will hardly be altered. On the other hand, if it chooses cheap labour and de-industrialise its domestic industries, it would be unrestrained gambling for the EU to do so as neither the consumers nor workers will benefit from it. Hence, even if it can be more efficient in the future, can Europeans be beneficiaries of this de facto non-European companies’ growth?
On the contrary, what free trade and international competition can contribute to growth is that it forces European producers to invest in innovations to cope with changes in the world market. If these companies have seen an obvious loss in profits due to the development of Chinese EVs, unless they are Stoics, they will immediately promote their technologies to keep their positions as world-leading companies. Furthermore, this can also encourage international cooperation between Chinese and European firms. If the former can benefit from the experiences of the latter, the Catfish Effect on European car producers would be successful because they are indeed encouraged.
Conclusion
Protectionism has a long history since the discovery of economics. However, its agendas are usually controlled by large firms that aim to benefit from the lack of international competition. Europe should be enthusiastic about competition: it still has great growth potential, and the key issue is to find an effective strategy for growth. In a world with exaggerated “Communist China has beaten capitalism in a market economy,” Europe should be open to new challenges and take advantage of this global ordeal. It has to grow, in the way of encouragement instead of protection.
About the Author
Zhenglin (Alex) Li is an independent researcher based in China. His research area focuses on the financial market, pension reforms, the Chinese economy, and international citizenship. He was one of the delegates of China in the United Nations Youth Training Program in 2023.
