And the West isn’t ready for it.

On a recent Monday, when a generically named Chinese ship called the Explorer No. 1 docked in the German North Sea port of Bremerhaven, it may have inaugurated a new era in the global economy.

What was special about the vessel was not its 653-foot length, nor its relatively green liquid natural gas propulsion, nor even its fast, roll-on, roll-off capacity for the loading and unloading of goods. What caused this event to send tremors beyond Germany through most of Europe and to the distant United States was the nature of its cargo.

The ship had been specially commissioned by BYD—a company that many people outside of China still haven’t heard of but soon will—and it carried roughly 5,000 shiny new electric vehicles (EVs) bearing the auto manufacturer’s insignia into Western markets.

Despite a flourish of attention during the Trump administration, it has been a while since international trade was a front and center agenda issue in international relations. But the challenge that BYD embodies may soon bring trade ragingly and lastingly back to the foreground. By no means is BYD the whole story, but the company—which recently became the world’s leading maker of EVs, surpassing Tesla—is at the center of a thorny and potentially existential new challenge that rising sectors of China’s industry pose to their rich world competitors. And for its part, BYD—which has adopted the slogan “Build Your Dreams” in western markets—is not shy about its ambitions.

BYD’s export push has forced Europe to quickly work its way through the shock that its car makers have experienced recently as they have watched BYD and a plethora of other Chinese auto manufacturers ramp up design and production of the products of the future. This has helped the Europeans move past denial and begin grappling with a fundamentally altered landscape. That does not mean they have found a solution for Chinese competition in this sector. Simply put, no one has.

In terms of immediate tactics, the answer for now in Europe seems to be the pursuit of radical cost savings in the making of automobiles. Unlike in the United States, small cars dominate the European market. China’s new offerings are attractive in design and, according to many first impressions, strikingly well made.

More to the point, Chinese-made EVs are breathtakingly cheap, with some projected to be priced as low as 15,000 pounds (approximately $19,000) in Britain. This has sent European carmakers scrambling to form partnerships with each other, and sometimes in collaboration with Chinese brands, to crack the code for rock-bottom pricing. The French maker Citroën now offers a model called the e-C3, which sells for as low as 23,300 euros (around $25,000), and Peugeot and Fiat, which are owned by a conglomerate called Stellantis, hope to soon be able to sell EVs for less than 20,000 euros (roughly $22,000). In China, 3-door mini-EVs from brands such as Wuling can be had for as little as 32,800 renminbi (about $4,500); BYD has just reduced the price of its cheapest EV, the 5-door Seagull Hatchback, to 69,800 renminbi (approximately $9,700).

In an interview with the Financial Times, Denis Le Vot, head of Renault Group’s Dacia brand, gave a flavor for what this price push means. “We have nothing superfluous in [lower-cost car models],” he said. “We don’t have 22 screens, we don’t have electric seats, and [this approach] resonates more and more, because some people are saying: Don’t spend your money on useless things. We don’t put chrome in the car. Why? Because it is shiny and useless. We just take it totally out.”

What may also be useless is that at the low end, trying to beat China on price may simply be a mug’s game. And this is what the new era inaugurated by the arrival of Explorer No. 1 promises to be all about: China hitherto has been mostly known to Western consumers as the producer of cheap goods that fill Walmarts. Now it is making a push in the West, where purchasing power is strong, for higher value and higher value-added goods—including cars, chips, and tomorrow airplanes.

Even higher up the food chain, German giants of the auto industry, such as BMW and Audi, are not taking a relaxed view of this. Yes, they hope to hold on to the high end of the market, but they see the risk here as twofold. China may quickly capture the lower end of the market or wring all the profits out of it for European manufacturers. In the meantime, BYD will be building the brand awareness it presently lacks, and as it does so, it will inexorably seek to move upmarket, just as Toyota and Nissan did in the United States in an earlier era.

HOW THIS CAME ABOUT with cars and certain other advanced goods, and the impact on rich Western economies, are both of immense consequence.

In short, the Chinese state has provided massive support to companies in industrial sectors, such as the electric vehicle segment, that it has deemed strategic. This support comes in many forms, from subsidized loans to research support, land breaks, and tax incentives. And this has brought new manufacturers flooding eagerly into the automobile and other sectors, seeking to grasp a historic opportunity for industrial success at greatly reduced risk. This is what has driven the price of EVs in China down to levels unimaginable, say, in the U.S. market. Eventually, many of these novice firms will fail or be absorbed by others, but for now there is no end in sight for the pricing race to the bottom.

Where this becomes especially difficult is where the economics of this meet the politics. This can be seen best in two of the largest countries concerned. Under President Xi Jinping, China has faced an accumulation of serious economic problems, from a looming demographic crisis of potentially crushing proportions to a poorly managed real estate bubble and steadily declining economic growth.

This has created what appears to be an irresistible temptation on Xi’s part to try to export his way out of the country’s difficulties, and high value-added goods, such as EVs and microchips, are the key. The fact that there is not enough demand in the rest of the world to allow China to pull this off seems to have had no deterring effect.

This means that for the foreseeable future, the Chinese state is likely to continue to offer strong support to its favored sectors and turn a deaf ear to complaints about dumping or other unfair trade practices. To paraphrase Thucydides, those weaker than China will have to suffer whatever they must.

The equally difficult politics of the moment show up just as readily in the United States, where there appears to be much more denial about how rapidly the terrain of international trade is now shifting. In the United States, automobile manufacturers have recently been cutting back on production of EVs or deemphasizing them in their product lineups. In a seeming repeat of the industry’s history in the wake of the oil shocks of the 1970s, manufacturers in the United States, unlike Europe, have only made a halfhearted push toward developing smaller and cheaper vehicles.

To be sure, some of this is down to consumer preferences, with Americans still enamored of trucks, SUVs, and other large vehicles. The global market is moving fast in the other direction, though, and by the time Detroit’s automakers come to terms with this it may already be too late.

Here is exactly where the U.S. politics of this come in. Thus far, there has been excessive bipartisan belief that protectionist tactics advanced during the Trump administration and augmented and refined by President Joe Biden can handle this challenge virtually on their own, but this is an illusion.

Through the Environmental Protection Agency and regulations and energy-related measures included in the Inflation Reduction Act, the Biden administration has both flirted with the industrial policy strategies of countries such as China and provided protection for U.S. automakers.

It accomplishes the latter by providing tax breaks to consumers who purchase domestically made EVs, placing foreign-made vehicles at a market disadvantage. This does not appear to be enough to see off Chinese car companies, so Washington has begun to employ other justifications for engaging in more protectionism. This includes the novel charge that Chinese EVs pose a national security threat because the vehicles rely heavily on data networks to operate.

Biden’s real aim was laid bare by his comments, though, when this new claim was rolled out. “China is determined to dominate the future of the auto market, including by using unfair practices,” he said. “China’s policies could flood our market with its vehicles, posing risks to our national security. I’m not going to let that happen on my watch.” To put it bluntly, Biden is arguing that the future market for cars for U.S. automakers is a national security issue. What no one in the Biden team has explained, perhaps because it is unknown, is how protectionism will ensure innovation across the price range of cars and other complex industrial goods.

Just as Xi’s political fortunes are tied to trying to export China’s way out of its economic doldrums, Biden’s fate, as well as those of future U.S. presidents, is becoming increasingly attached to the fortunes of an old-line American industry. Unfortunately, that industry has already been bailed out by taxpayers once recently and has shown no inclination to innovate its way toward a competitively viable tomorrow.

What China and the United States share is that both of their problems are deeply structural. This can be seen in a host of areas, from cars to chips to airplanes and more. Leaning heavily on subsidies, China has established its prowess as a manufacturing superpower but has shown far too little aptitude for the rebalancing toward domestic consumption that even its own economists say is needed.

The United States, by contrast, has steadily decayed as an industrial power, with its capacity for manufacturing in more and more key sectors dependent on barriers of one kind or another or on outright financial support from the state.

By endlessly seeking market share, China is bound to cheat itself, and by desperately trying to hold on in industries it once proudly led, the United States will do the same.

Written by: @ForeignPolicy

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