In his recent meetings with France’s President Emmanuel Macron and EU Council President Ursula von der Leyen, Xi Jinping mocked the concept of “dual-use” equipment such as semi-conductors, saying that by European definitions rice would be dual-use because soldiers have been known to eat it before battle. (Dual-use is commonly applied to products or technologies that have military as well as non-military uses. The proximate cause for the discussion was Chinese exports to Russia, which help Russia sustain its war in Ukraine in the face of Western sanctions.) Xi also rejected the concept of Chinese industrial “over-capacity” in reaction to charges, emphasized in the meeting by von der Leyen, that state subsidies have enabled Chinese steel and car manufacturers to dominate European markets with underpriced goods.
Of particular concern to von der Leyen’s home state of Germany is China’s dominance of electric-vehicle production. Macron urged Germany’s Chancellor Olaf Scholz to attend the talks with Xi, but Macron is less keen than Scholz on protecting Europe’s EV manufacturers from Chinese competition. This difference was a principal reason why Europe’s largest economy was absent from talks that pivoted on Europe-China economic relations. From an investor perspective, Europe’s current geo-economics offer little more than chronic unpredictability. Xi Jinping’s strategy is to divide the European powers from each other and from the US, a strategy that should be harder to do than it is.
The disturbing reality is that Xi is not wrong. The concept of dual-use is infinitely expandable. If its deployment were simply an artifact of political opportunism — for example, a means to foster non-Chinese semiconductor production — the problem presented would not be so difficult. But most advanced technologies, and the innovation systems that underlie them, really are dual-use, and in the end so is rice.
What Xi is really pointing to is the impossibility of neutrality. It was impolite of him to do so and probably bad politics, which could explain why the CCP’s Internet-scrubbing mechanisms were tasked with removing references to dual-use at the time of the Paris meetings. But for Xi it must be hard to resist pointing out to Europeans how dependent they are on Chinese tech inputs, not just for their own industries but for there to be much chance for European companies to compete with American ones. European states cannot be neutral profiteers trading with both sides in the US-China conflict. At the same time, Biden’s industrial policies (particularly for electric-vehicle production), US dominance of the West’s Ukraine policy, and the prospect of a second Trump administration all combine to gravely weaken trans-Atlantic solidarity when it is most needed. This is a key CCP strategic goal.
“Over-production” is also incoherent. The European argument is that Chinese production is state-subsidized and in excess of domestic Chinese demand for electric vehicles. The second charge is the weakest. Like Germany, China produces cars in excess of domestic demand because it wants to sell EVs on the world market. That’s what exporting is. It makes no sense to insist that Germany be able to continue manufacturing Mercedes or Volkswagens in excess of German consumer demand but China should not be able to do the same.
The state-subsidy charge is stronger but still not massively convincing. German subsidies to German consumers (4500 euros, sometimes more, per purchase) incentivized the buying of 2.1 million EVs in Germany from 2016 to the end of last year. Part of the goal of this policy was, through subsidized pricing, to artificially boost German consumer demand for electric vehicles and thereby subsidize German car manufacturers’ transition to EV production. When the German government rather abruptly cancelled its EV subsidy to address a budget shortfall, German manufacturers like Mercedes and Volkswagen undertook to pay it themselves for existing orders.
That policy is not intended to last, however. At some near date, Germany and other European states with auto industries will have to choose between protecting their own car industries until they are able to compete with Chinese competitors (a very distant prospect), leaving their markets open to Chinese EV imports (already accounting for 37% of European EV imports in 2023), or somehow managing the China trade at the EU supra-national level. The last option is the one the EU is aiming at, but it will meet strong resistance from individual European states who do not want to lose their auto industries to European competitors (mainly Germany) and from European consumers, who will be stuck with higher prices. Those high prices will in turn delay Europe’s transition to greener transport. This is the fate that US protection of EV manufacturing (and much else) is intended to avoid for Americans — but at the cost of hobbling European EV exports into the US market, further impairing the geo-economics of trans-Atlantic solidarity.
Efforts to reorient manufacturing to address climate change keep running into the wall of geopolitical competition. Meanwhile, the Chinese government has economic and environmental challenges of its own and will continue to try to punch its way out of them by subsidizing domestic production and controlling domestic consumption to favor Chinese goods. Each side in this drama will correctly accuse the others of “over-capacity” and unfair state subsidization.
China has the advantage of an unblushing commitment to state capitalism and an immense captive domestic market. It also has an ideological advantage of sorts in that it frames its own economic growth in a long narrative — “changes not seen in a century”, in Xi’s phrase — of anti-imperialism. Ultimately, the Chinese contention is that Western-led modernization was itself “unfair trade” on a very grand scale, achieved at gunpoint and cementing first-mover advantages that Chinese state policy is dedicated to undoing. Of course, Chinese growth is fueled much more by a Chinese nationalist will to power than by any notional anti-colonialism. It is a Sinicized version of the German imperial push for a “place in the sun” alongside the other imperial economies of the 1890s, including Japan. The increasing brutality of the CCP regime both domestically and in its foreign policy is an index of where its commitments lie. It came to praise globalization but in all likelihood will end by burying it.
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