Western Protectionism Needs an End Date

The European Union and United States have joined in levying tariffs on Chinese electric vehicles, with the EU blaming Chinese subsidies, while the United States points at overcapacity. China does have a big overcapacity problem in its manufacturing sector, but electric vehicles are not the best example of this.

The European Union and United States have joined in levying tariffs on Chinese electric vehicles, with the EU blaming Chinese subsidies, while the United States points at overcapacity. China does have a big overcapacity problem in its manufacturing sector, but electric vehicles are not the best example of this.

The challenge Chinese EV car companies present to Western legacy manufacturers is not because they are low-value or sold below market prices. The challenge is that Chinese EVs are better. Washington and Brussels are adopting the same protectionist strategies that Latin American states once did—and if they don’t have an exit strategy, they risk trapping themselves in an economic dead end.

China’s overcapacity of vehicles is mainly due to internal combustion engine (ICE) cars, which have decreased in popularity in favor of EVs. These ICE cars now are offloaded to the rest of the world—75 percent of China’s auto exports are ICE vehicles. Why, then, are Chinese EVs seen as such a significant threat in the United States and Europe, despite currently accounting for less than 2 percent of EVs sold in the United States? It’s not just because there are too many of them. It’s because they are better than domestic competitors.

In a post-earnings call in January, Tesla CEO Elon Musk said Chinese EV manufacturers such as BYD stand to demolish their rivals on a global level if no trade barriers are erected. BYD, the current global market leader for electric vehicles, is the result of a decadeslong push by the Chinese government to boost innovation in its automotive industry.

But this initiative is not artificially propping up a few companies—quite the opposite: It has incubated so many start-up EV companies that the survivors who succeed in the Chinese market provide incredibly strong products shaped by a Darwinian level of market competition. One need only look at the reviews garnered by the only Chinese-branded EV currently sold in the United States, which, according to a reviewer, “[f]or $52,000, the P2 is pretty delicious, no matter where it’s made.”

Just compare the number of essential EV players in China to that of the United States. Whereas only a handful of B-level companies meet Tesla’s dominance in the United States, China has powerhouses in BYD, Geely, XPeng, Nio, Chery, and others.

Musk is correct: China’s finest will demolish global competitors. We’ve already witnessed it. Consider the speed at which TikTok overtook Western audiences and disrupted existing giants like Meta and YouTube, or how companies like Shein and Temu threaten eBay and Amazon. Even Xiaomi, a consumer electronics manufacturer that successfully competes with Apple in the handheld phone market, recently announced an electric vehicle model. Compared to Apple, which scrapped its EV project after 10 years of development, Xiaomi took its car from concept to production in only three. While we dismiss China as producing cheap, second-rate products, Chinese firms focus on user interface, algorithms, and supply chains.

It’s not just Western auto manufacturers that China is threatening. Four of the 10 most downloaded apps in the United States are Chinese (Temu, TikTok, CapCut, and Shein). As the Chinese market becomes more competitive and complicated, Chinese players will expand abroad. Ninety percent of Chinese companies surveyed have plans to go global in the next three years. As Shein, TikTok, Temu, and Tencent did, many of these companies will capture market share quickly and quietly when they globalize.

China has already developed a significant lead in several next-generation industries. Chinese batteries are half as expensive and more efficient as their international competitors. China possesses an insurmountable lead on lidar technology, giving the country an advantage in the production of autonomous vehicles.

China has also developed a significant lead in commercial drones, e-payments, and e-VTOL aircraft. . These advantages are not coincidences scattered across specific industries or a result of excess capacity—China has become an innovation giant across numerous sectors.

Tariffs will be necessary to stop the flow of overcapacity goods in search of foreign markets as well as to give American and European industries time to catch up to the innovative and affordable products that China is offering the world. However, the West should look to Latin America in the mid-20th century as a cautionary tale. In an effort to industrialize Latin American economies, the region saw a period of significant protectionism from the 1940s onward to create its own manufacturing industries instead of relying on foreign imports.

Latin America grew and industrialized, but without a clear exit plan from protectionism, domestic industries became complacent, unexposed to the market competition that the rest of the world provided. When protectionist policies ended, these domestic economies were unprepared and unevolved, and they floundered.

The West can avoid a similar result today by assuming it only has a certain time window to catch up before the market protection ends. This should be a time to learn to outrun the competition by investing in R&D, hiring the best talent (and lobbying their governments to help them ease the process of hiring foreign talent), and working to shorten the time it takes for a project to go from concept to reality.

The challenge will be to distinguish among industries threatened by Chinese overcapacity and those in need of protection, sectors that pose real national security threats, and industries that have been caught flat-footed by new Chinese competition and need time to catch up to them. But it would be a mistake to throw them all in the same bag. Calibration is needed.

For this reason, trade barriers against Chinese goods need an expiration date. A good rule of thumb is simply judging whether the Chinese option is technologically superior or just cheaper. If the former, the tariff should be phased out eventually. The latter can be maintained longer-term. The goal of these tariffs should be to allow domestic industry to catch up to Chinese innovation, not isolate it forever. Whether they make cars, consumer electronics, or batteries, Western companies will need to stand up to the global free market eventually.