Move beyond the China shock

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Move beyond the China shock

Published: 22 Sep. 2024, 19:59 Updated: 22 Sep. 2024, 22:05

Choi Byung-il
The author is an emeritus professor of economics at Ewha Womans’ University.

The Nov. 5 presidential election in the United States is just 43 days away. This spring, I received many requests for a lecture on U.S. trade policy under Trump 2.0 from our government and academia. The tension in the hall was palpable each time. I was instantly reminded of the massive repercussions of the reckless trade policy — totally dismissive of existing norms and agreements — during the first term of the egocentric U.S. president. If Donald Trump — who proudly branded himself as a “Tariff Man” — returns to the White House, he will thrust the entire world into confusion and chaos yet again.

The Republican presidential candidate forewarned of a universal 10 percent tariff on all imports. He demands all foreign companies pay a uniform “admission fee” if they really want to enter the U.S. market. Such unilateralism squarely defies the U.S.-led General Agreement on Tariffs and Trade aimed at lowering tariffs under the multilateral system over decades since World War II. Trump claims the basic tariff will protect U.S. manufacturing and workers, but critics say it will only help consumer prices soar to exacerbate ordinary citizens’ livelihoods.

The ongoing presidential race is neck and neck since the surprising nomination last month of Vice President Kamala Harris as Democratic candidate for president shortly after Joe Biden withdrew his bid for re-election. But Harris, if elected, is expected to succeed Biden’s policy of uniting with allies to effectively contain China’s rise in technology and rebuilding global supply chains, as evidenced in the platforms adopted in the Democratic National Convention. If Harris wins the election, climate change will likely emerge as a top agenda in the trade policy of her administration, given the Democratic Party’s pivotal values like environment and labor, and the aggressive response to climate change in the state of California, Harris’s political base. As Biden had a plan to replace more than half of all U.S. cars sold in 2030 with electric vehicles (EVs), Harris would materialize the design and implement it. The drastic difference between Trump and Harris over trade policy poses the toughest-ever challenges for Korean enterprises and decision-makers to overcome the limits of a slowing economy and move beyond.

However, the sharp gap in both candidates’ trade policies noticeably narrow when it comes to their China policies. Despite the extremely polarized U.S. politics, there is a bipartisan consensus on perceiving China as the United States’ biggest rival in the system competition. U.S. citizens’ anti-China sentiment is rock-solid. As international politics mirrors domestic politics, the U.S. government and Congress cannot but turn to a hardline stance toward China. Trump, if re-elected, will deprive China of the nondiscriminatory treatment it has been enjoying as a member of the World Trade Organization. He made public a plan to decouple from China by blocking its export of major products to the United States by exponentially raising tariffs on imports during his term. Trump believes America alone can keep China in check as he did in 2016. Is his belief really credible?

China in 2024 is different from China in 2016. Eight years ago, time seemed to be on China’s side, as hinted at by a heated prediction race among international organizations, research agencies, consulting firms and financial companies over when the Chinese economy would surpass the United States’. Though the year varied — 2024 or 2025 or 2030 — the prophecy that China will soon replace the United States as G1 was deemed irreversible. Was their prediction correct? In 2016, China’s GDP accounted for 60 percent of the United States’ and rose to 75.2 percent in 2021. But that’s it. After entering the low-growth phase in 2022, China’s GDP fell to 65 percent of the United States’ in 2023.

What’s really happening now? When China’s economic power would exceed America’s was the question I rasied to grab an audience’s attention in my early lectures around the world. In 2015 — just a year before Trump’s election victory — the audiences were busy predicting the time for China’s rise to No. 1. But after the U.S. government shifted its China policy from engagement to deterrence since the launch of Trump’s administration in 2016, my audiences were increasingly reluctant to speak about the year when China will outpace the U.S. As Trump’s term neared an end, more joined the silence. Now, they think the moment will never come. Their reasoning was clear: Under the rule-based economic competition, China was able to achieve growth largely thanks to the United States’ embrace of China — as implied by America’s generous opening of its domestic market, capital, technology and education to the country — but after the superpower changed the rules of the game, China cannot continue a marvelous growth as in the past.

Despite the evidence of the Chinese economy and population having peaked out, the West faces a new China shock in 2024. The risk comes from the onslaught of Chinese EVs on the Western market. Even with the world’s largest population and manufacturing base, China couldn’t become a leader in the car industry. But the country has emerged as the behemoth in the transition to EVs to combat climate change — largely thanks to “Made in China 2025,” a state-led industrial policy to make China dominant in global high-tech manufacturing. Backed by hefty subsidies and market protection by the government, China already outpaced Korea and Japan — the early leaders in secondary batteries — to become a frontrunner in the category.

Surprisingly, China’s EV production capacity nearly doubles its sales volume. That means China is ready to sell its EVs to Western consumers at even cheaper prices if it only wants to. The European Union (EU) sought to revitalize its sluggish economy and regain its global economic leadership by building an eco-friendly automotive industry, creating jobs and addressing environmental threats all at the same time through a swift conversion to EVs. But the new China shock has put the brakes on Europe’s dream. The EU resorted to levying high tariffs on Chinese EVs, but it knows well it’s just a quick fix. German car giant Volkswagen’s ongoing anguish over whether to shut down its domestic EV factories may be just the beginning.

In response to Biden’s — and Trump’s — persistent checks and blocks on China’s technological elevation, China is determined to stand on its own feet. In 2016, China — the world’s factory — needed the world to sell its cheaply manufactured products and the world also needed China. But in 2024, China became a major competitor with free democracies on the frontline of cutting-edge technologies. In 2016, China and the rest of the world had a win-win relationship, but in 2024, it turned into a win-or-lose relationship.

Is Korea prepared for the tough challenges with less than two months left before the U.S. election? First of all, the multilateral trade system which helped Korea come this far has collapsed. The possibility of the system being restored in the near future is extremely slim. Eight years have passed since the United States — the designer of the multipartite structure — started to question the effectiveness and legitimacy of the scheme, and the situation won’t change after 2024. Still, Korea cheers for the multilateral trade system without trying to find any realistic alternatives.

Second, the United States — the orchestrator of an open global economy — increasingly isolates itself from the rest of the world. U.S. decision-makers shifted their policy focus to drawing investments from foreign countries. Are our worries about exporting jobs to America really overblown? Korean companies moved more of their production facilities for chips, batteries, cars and chemicals to the United States than ever before. Are our government and legislature really having heated negotiations with their U.S. counterparts? How much effort is the government making to create a symbiotic ecosystem for domestic industries?

Third, China is no longer a trade partner that cooperates with Korea for their complementary economic relationship based on the division of labor. Even though the Chinese economy peaked out and there’s a slim chance of China surpassing America, China still boasts its technological and military prowess. The threat is more palpable in the era of economic security. What trade strategies has Korea devised to cope with the “China threat” beyond the tripartite cooperation among Korea, the United States and Japan? Our government must present a wise answer to the conundrum before it’s too late.
Translation by the Korea JoongAng Daily staff.