On December 7, the European Union and China are having their first in-person summit in four years, with the presidents of the European Commission and European Council, Ursula von der Leyen and Charles Michel respectively, flying to China for the event. Playing the role of trapped-in-the-middle in the US-China trade war, EU rhetoric has these gallant diplomats riding off to Beijing to restructure the bilateral trade relationship. However, their statements have made it clear that they don’t care about European prosperity at all and that Europe’s biggest threat is far from China’s “unfair trade practices,” but the protectionism pushed by EU officials themselves.
Protectionism and Mercantilism from Brussels
Von der Leyen and Michel are going to China with a heap of demands utterly at odds with good economic policy, not to mention the free-trade spirit and philosophy of the European Union. Here are some of the demands:
· Ending Chinese “Overcapacity”
Aggregate domestic demand has decreased in China in the last few years, but Chinese factories haven’t decreased production accordingly, instead exporting to Europe at prices that EU firms can’t compete with. If China does not stop overproducing, the EU will be forced to institute tariffs to preserve “a level playing field.”
This point is horrific for two reasons. Not only do European officials want to deprive their citizenry of more affordable products in order to support non-competitive firms, but apparently, they’re willing to take advantage of China’s command economy to control global production. The EU presumes to have a “market economy,” but evidently that only applies within European borders. Getting a foreign government to control the production of goods based on bureaucratic whims rather than market demand is no problem.
· Reducing the Trade Deficit
EU diplomats are going to go to Beijing and demand that Xi Jinping himself decrease the European trade deficit with China, specifically by increasing the purchase of European exports. Here we see that despite several centuries of evidence against it, EU officials are still pushing mercantilism.
· Raising Electric Vehicle Prices
In an utterly baffling move, von der Leyen and Michel plan to propose “price undertaking“ to Xi Jinping and Li Qiang. In other words, they’ll ask that Chinese firms raise the prices of electric vehicles exported to Europe to bring them in line with domestic prices. This is in the same summit during which the very same diplomats will be pressuring China for more participation in “multilateral efforts against climate change.”
The top three nations for EV purchase subsidies are all in the EU: France with 5,000€, Germany with 4,500€ and the Netherlands with 2,950€. [5] In other words, the EU massively distorts the prices for EVs under market value yet will now simultaneously distort it in the other direction by statutorily increasing EV imports by 20 percent.
And again, this is European indirect price control. EU politicians mostly avoid controlling prices within the EU, but they apparently have no problem getting a communist dictatorship to do it for them by setting prices on exports.
Motivation for These Demands
Of course, you can guess the official reason for this protectionism: jobs. The diplomats in question have been pretty candid, too. They need to save jobs in the face of Chinese competition in the EU market ahead of the June 2024 European Parliament election.
Economists know this reasoning rings hollow. There isn’t a finite number of jobs. If a Chinese firm outcompetes a European EV manufacturer, a handful of jobs are lost. For example, let’s say that lower prices on Chinese EVs managed to drive Volkswagen, the EU’s largest manufacturer of EVs, completely out of business, laying off its roughly 500,000 European workers. That would still be less than 0.2 percent of the entire EU working population.
Meanwhile, Chinese firms, state-run or not, cannot sell EVs to Europe for free. They will trade for something, and new industries will form providing new jobs.
The numbers tell the whole story. According to economist Thomas Sowell, all the EU’s protectionism saves the bloc around 200,000 jobs at a cost of $43 billion per year, or some $250,000 per job. [6] Considering the average EU job barely pays a 10th of that, the consequences of protectionism are quite palpable.
It’s clear that von der Leyen and Michel aren’t trying to save jobs, they’re trying to save companies. In other words, they’re trying to prop up wealthy businessmen who have failed on the market.
What About Market Fairness?
Europeans are generally well enough educated to know that free trade benefits them and the jobs argument is bogus. Therefore, modern politicians like von der Leyen and Michel must tack on the myth that trade must be “fair.” Presumably, Chinese firms do not provide goods at lower prices because they have any kind of comparative or absolute advantage but rather because the Chinese government conducts “unfair trade practices,” such as:
- Subsidizing Chinese firms;
- Failing to protect European intellectual property;
- Purposefully weakening the Yuan to promote exports;
- Providing barriers to foreign investment, leading to a trade surplus.
The Chinese government does do all of these things, but they are only “unfair” to the Chinese people—and a handful of European business owners. In some cases, a Chinese firm may outcompete a domestic European firm not due to a real advantage, and that is unfortunate for the owners. However, they still represent a very small constituency compared to the hundreds of millions of Europeans who benefit from lower prices paid for by Chinese citizens whose taxes go to subsidization and who cannot use their weak currency to buy superior imports.
In the end, this justification falls as flat as “jobs.” In reality, EU diplomats are transparently working at the behest of European corporations, not European consumers.
Results of These Initiatives
What will happen if von der Leyen and Michel get their demands? In short, Europe will become slightly more impoverished. Prices will rise and prices will be distorted, leading to a misallocation of resources. The real purchasing power of every European will drop.
If that sounds severe, it only goes to show that it isn’t China’s so-called unfair trade practices that are harming Europeans. It’s our government.
