Something that seems inevitable, regardless of who wins the November 5 U.S. election, is the intensification of the trade war between the United States and China. China’s accusations of illegal aid to businesses and non-compliance with World Trade Organization (WTO) rules are a constant. Let us recall the context of this growing trade war:
- In 2018, Trump imposed tariffs on 7-25% on Chinese imports worth $300 billion.
- After these tariffs, a trade agreement was concluded between the two powers by which China agreed to increase its purchases of certain American products. 200 billion dollars between 2020 and 2021.
- China broke this agreement without even approaching the committed import figures.
- The Biden administration has maintained all tariffs imposed by the Trump administration and has continued to selectively increase them.. Recently, tariffs on Chinese products were approved: 100% on electric vehicles, needles and syringes, 50% on semiconductors and solar cells, or 25% on critical minerals.
- China responds by imposing limitations on the export of certain products, notably certain metals and rare earth. The latest measure concerns export controls on antimony, a metal used in the production of armor-piercing munitions, night vision goggles and precision optics. Exports of germanium and gallium were previously limited. The West’s dependence on rare earth and certain essential metals from China is a reality.
The tone used in the campaign by the two candidates for the presidency of the United States with regard to China varies depending on the intensity of the new measures to be adopted concerning trade with China: Trump advocates revoking China’s most favored nation statuswhich grants the benefits of free trade and aims to gradually eliminate imports of essential goods; Kamala Harris also talks about selective tariffs and not allowing unfair trade from China.
For decades, China’s supply of cheap raw materials was considered guaranteed. While China invests heavily in mining, refining and exploration, Western governments are only putting obstacles in the way of these types of activities on their territory.. The result of these policies is that Chinese companies currently control 90% of the processing capacity for rare earths and more than half of the processing capacity for minerals like lithium.cobalt and nickel, essential for electric vehicle batteries and the energy transition.
Furthermore, China’s state aid to a number of sectors for over a decade has led to huge production overcapacities that facilitate continued price declines in international markets and the destruction of competition. foreign, not being able to compete on price. of Chinese products. The strategy is to achieve dominance in international markets by subsidizing certain industries which result in overproduction and flood the markets with unbeatably priced products, thereby wiping out foreign competition.
The sectors affected by this Chinese strategy range from steel, to solar panels, to less advanced electronic chips (legacy chips), to electric vehicles.
One of the sectors in which China intends to hold a dominant position is in the manufacturing of the least advanced electronic chips, used in everything from cars to supersonic planes. China already has the largest capacity in the world to produce these microchips. Its production increased by 40% in the first quarter of this year and it is expected to reach a global market share of 33% in 2027.
The United States believes that this Chinese domination of the microchip market poses a national security risk and would create critical vulnerabilities in industrial production chains, including the defense industry. Although steps have been taken through the CHIPS Act to prevent China from obtaining the tools needed to produce the most advanced chips, the problem with the most common microchips has not been resolved.
Regardless of the new US administration, this will be one of many battles in the growing trade war between China and the United States.. Inevitably, the trade war will lead to lower global growth and higher inflation, limiting interest rate cuts.
