China Files WTO Complaint Over US EV Incentives

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It was inevitable, really. From the moment the Inflation Reduction Act was signed, it was only a matter of time before China disputed the rather generous rebates awarded to US-made electric cars and production credits for making EV batteries in the US with materials and components sourced from countries that have friendly trade relations with the US. The wonder is that it has taken this long.

This week, the Chinese empire struck back when it initiated dispute settlement proceedings against the United States at the World Trade Organization to safeguard its interests in the electric vehicle industry, the Chinese mission said on March 26, 2024. The WTO has confirmed that a dispute case was filed by China against the United States, according to a report by CNBC.

China said it was contesting “discriminatory subsidies” under the U.S. Inflation Reduction Act that it said resulted in the exclusion of goods from China and other WTO countries. The IRA provides billions of dollars in tax credits to help consumers buy electric vehicles and companies produce renewable energy as part of President Biden’s initiative to aim to decarbonize large parts of the US economy.

“Under the disguise of responding to climate change, reducing carbon emission and protecting environment, (these subsidies) are in fact contingent upon the purchase and use of goods from the United States, or imported from certain particular regions,” the Chinese mission said. It said it was launching the proceedings “to safeguard the legitimate interests of Chinese electric vehicle industry and to maintain a fair level playing field of competition for the global market.”

U.S. Trade Representative Katherine Tai said Washington was reviewing China’s request for WTO consultations “regarding parts of the Inflation Reduction Act of 2022 and its implementing measures.” In a statement, Tai said the IRA was helping to contribute to a “clean energy future that we are collectively seeking with our allies and partners.” She accused China of using what she described as “unfair, non-market policies” to the advantage of Chinese manufacturers.

In Beijing, a spokesperson for China’s Ministry of Commerce said it urged Washington to “promptly correct discriminatory industrial policies, and maintain the stability of the global industrial and supply chains for new energy vehicles.”

Is China A Threat Or A Victim?

The action taken by China must not have been a complete surprise to US authorities because within hours, Treasury Secretary Janet Yellen was telling Fortune that China’s ramped-up production in solar energy, electric vehicles, and lithium-ion batteries amounts to creating unfair competition that “distorts global prices” and “hurts American firms and workers, as well as firms and workers around the world.”

Yellen, who is planning her second trip to China as Treasury Secretary, said in remarks prepared for delivery in Georgia on March 27, 2024, that she will convey her belief to Chinese officials that Beijing’s increased production of green energy also poses risks “to productivity and growth in the Chinese economy.” She is scheduled to speak at Suniva, a solar cell manufacturing facility in Norcross, Georgia. The factory closed in 2017 primarily due to cheap imports flooding the market, according to Treasury. It is reopening, in part, because of incentives provided by the Inflation Reduction Act, which provides tax incentives for green energy manufacturing.

The firm’s history is something of a warning on the impact of over-saturation of markets by Chinese products and an indication of the state of U.S.-China economic relations. They are strained because of investment prohibitions and espionage concerns, among other issues, Fortune suggests. China is the dominant player in batteries for electric vehicles and has a rapidly expanding auto industry that could challenge the world’s established carmakers as it goes global. The International Energy Agency has noted that in 2023, China accounted for almost 60% of global electric car sales.

The European Union is also concerned about the potential threat from Chinese automakers to its own auto industry. It launched its own investigation into Chinese subsides for electric vehicles last year. “In the past, in industries like steel and aluminum, Chinese government support led to substantial over-investment and excess capacity that Chinese firms looked to export abroad at depressed prices,” Yellen said. “This maintained production and employment in China but forced industry in the rest of the world to contract. These are concerns that I increasingly hear from government counterparts in industrialized countries and emerging markets, as well as from the business community globally,” she said.

The tone of Yellen’s speech stands in contrast to Chinese leader Xi Jinping, who met with American business leaders in Beijing Wednesday and called for closer trade ties with the U.S. amid a steady improvement in relations. Chinese and American trade relations have sunk to the lowest level in years, following the botched attempt by the prior US president to show how tough he was by initiating a trade war with China. “Trade wars are easy to win,” he bragged to his adoring sycophants supporters, then immediately proved that quite the opposite was true.

Xi emphasized Wednesday the mutually beneficial economic ties between the world’s two largest economies, despite heavy U.S. tariffs on Chinese imports and Washington’s accusations of undue Communist Party influence, unfair trade barriers, and theft of intellectual property.

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The Takeaway

Richard Nixon in his wildest dreams never imagined when he went to China in 1972 that the sleeping Red Giant would ever become an economic powerhouse and challenger to the US. He thought he was opening new markets for US companies, little realizing what the outcome of his actions would be.

Ever since the end of World War II, America has been the dominant economic power in the world, and it is finding that sharing power with another country is not much to its liking. China has indeed provided massive subsidies to its manufacturing sector, especially in the areas of renewable energy, batteries, and electric cars and for a number of years the US was perfectly OK with that. Who was going to buy $2 a watt solar panels or $80,000 EVs?

But the wheel has turned. While America slept and made fun of solar power and electric cars, China saw an opportunity to become a dominant player in both industries and went for it — hard. Now, in a reprise of a song made famous by Sting, the servant has become the master.

The Grand Denouement

What will be the outcome of the trade case filed by China? WTO rulings on trade disputes are supposed to take six months after an adjudication panel is set up but often take longer, Fortune says. If the WTO finds in favor of China, Washington could always appeal that decision.

Now here is where it gets interesting. If there is an appeal, it will fall into a legal void that has been in place since December, 2019, when the WTO’s top appeals bench ceased to function due to U.S. opposition to judge appointments. The United States is calling for reforms to the Appellate Body which it accuses of over-reach, and negotiations are under way, but face many obstacles. So the likely outcome of the WTO trade case is a big fat nothing.

Surely China, which has centuries of experience in how to win political disputes, knows full well what the likely result will be for its case before the WTO. If that is the case, thoughtful observers may conclude that China has deliberately chosen a course of action that contains an obvious off-ramp that avoids further conflict and allows everyone to save face — a concept western cultures understand poorly but which is a powerful cultural component in China and other Asian nations. “Let us resolve this,” China seems to be saying, but is anyone listening?

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