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China Shock II Is Coming, the EU Will Be Hit Hard, Then the US

Germany is feeling the pinch of China shock. But the US is on deck too. A global trade war looms.

China Shock

Eurointelligence discusses China shock in its article Technology Is Why We Are Losing.

We are not sure that the effect of high tariffs on Chinese electric cars will work quite as intended. We are also skeptical of hydraulic theories of global trade flows – of Chinese goods suddenly starting to swamp European markets.

The much bigger problem at least for German industry has nothing to do with trade policy, but with China crowding in on previously monopolistic and oligopolistic markets dominated by German firms.

Handelsblatt alerts to research just published by the economics team of Allianz that in our view comes much closer to explaining the current dynamics. Previously, the partnership between Germany and China was complementary. The Germans built the factories and the Chinese made the consumer products. Or the Germans specialized in fuel-driven cars, and the Chinese in electric cars. China is now challenging Germany in areas Germany dominated previously. These are the largest parts of the German industrial economy: machines, chemical and electrical engineering. The study says that in many segments of the market, the Chinese are more successful than the Germans. Ludovic Subran, the Allianz chief economist, predicts that the China boom will be followed by a China shock. 

We see this similarly. In our own research on the shifting nature of German competitiveness, we find that the most important issue is not trade, but technology. Digital technologies are encroaching on classic engineering. Apple’s latest commercial of a large steel press crushing a whole bunch of analogue devices caused a lot of criticism. Apple apologized, but the commercial is a good visualization of what is currently happening to parts of the German economy. Apple was forced to apologize, but the commercial, which goes under the title Crush!, is still on Apple’s Youtube site. No trade policy is going to help here. The only effect on car tariffs is to move car production to Hungary or Mexico.

The Germans are now starting to talk the talk they previously associated with the losers of global competition. The head of mechanical engineering association is suddenly using geopolitics as a justification of subsidies. 

What’s happened is that Germany made itself foolishly reliant on manufacturing exports, and that China is now playing the same game, only better. The German economic strategy was unsustainable on so many levels. 

A good example of what has been happening at a micro level is the story that Mercedes has given up on a multi-billion investment project for a new manufacturing platform for the electric versions of its larger limousines. The goal had originally been that Mercedes would start shifting all of its production to the new platform from 2028. But since demand for luxury electric cars has collapsed, this investment is not going to pay off. So Mercedes is trying to bolster its future profits not through investments but savings and efficiency gains. This is the classic play book of industrial decline.

The issue is not only that Germany specialized on the wrong technologies, but that German companies have no incentives to move out of them. The consequence of this is that a high-tech industrial sector can only happen through new companies, not old ones. Yet European and especially German industrial policy is focused on the protection of existing commerce.

It is also interesting and telling that there is not a whiff of this in the European election campaign. We do not know of a single political party that has a strategy to address this issue.

Crushed by China

I have no idea why Apple felt the need to apologize over that video but it is irrelevant to the discussion, other than the name.

German exporters are getting crushed by China. The EU as a whole cannot compete. The US is responding with massive tariffs.

Eurointelligence says No trade policy is going to help here. The only effect on car tariffs is to move car production to Hungary or Mexico.

That’s happening now.

Made in Mexico

On May 14, I noted BYD Unveils the “Shark” a Plug-in Hybrid Pickup Truck Built in Mexico

The Chinese automaker BYD (Build Your Dreams) announces a 700-mile range PHEV that will be built in Mexico, this year.

Also see Biden Wants EVs so Badly That He Will Quadruple Tariffs on Them

Astute readers will immediately notice the title of this post makes no sense. It’s not supposed to. But it is exactly what President Biden is doing.

The EU is too shellshocked and disorganized to do anything. The US is fighting with tariffs and sanctions.

But US sanctions on China and Russia have backfired massively. That actually a good thing because it would otherwise add to inflation.

The US is also a global leader in AI, and technology in general. Germany and the EU don’t lead on anything.

Regardless, a global trade war of mammoth proportions is coming no matter who wins the election. More accurately, Biden filed the opening salvo already.

Green Trade War Is Underway

For discussion, please see Joe Biden vs Joe Biden on Tariffs, a Green Trade War Is Underway

China will retaliate against US tariffs. One way might be to stop exports of rare earth minerals used in cell phones, EV, computers, wind turbines, and military guidance systems.

Critical Materials Risk Assessment by the US Department of Energy

Please consider a Critical Materials Risk Assessment by the US Department of Energy

Our own Department of Energy has placed some of the rare earth minerals we need for weapons systems, windmills, batteries, and aircraft on a critical materials list.

Nearly all of them are mined or refined in China. Yet Biden just blocked production in the US.

The world is on a huge collision course with China.

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