By Michael Lelyveld
A trade conflict with the United States may be looming around the corner as China pursues its goals for developing electric cars.
China’s government has bet heavily on manufacturing “new energy vehicles” (NEVs) for both the environmental benefits and the technological advancement expected to come with development.
The country is already the world’s leading auto market, with sales of 23.9 million cars, sports utility and multi- purpose vehicles in 2016, according to the China Passenger Car Association and Bloomberg News.
Sales of NEVs, including plug-in hybrids, pure battery electric and fuel-cell electric models, soared to 507,000 units last year, the China Association of Automobile Manufacturers (CAAM) said.
While accounting for only about 2 percent of the total, sales of NEVs jumped 53 percent in 2016.
Through September of this year, China sales of 20.23 million vehicles are up 4.5 percent from a year earlier, while NEV sales have climbed 37.7 percent, CAAM said.
The growth spurt has been a product of demand shaped by government policies, including subsidies for both buyers and manufacturers, local licensing breaks for non-polluting vehicles in major cities and rules that mandate NEV market share.
Most recently, the government shook up the market on Sept. 28 as the Ministry of Industry and Information Technology (MIIT) announced a new policy that requires car companies to make 10 percent of their sales in the NEV category in 2019, rising to 12 percent in 2020.
Under a cap-and-trade provision, automakers that fall short of the targets will have to buy credits from competitors that exceed them or pay fines, state media reported.
The new rules were announced shortly after MIIT Vice- Minister Xin Guobin disclosed on Sept. 10 that the government is considering a timetable for phasing out production of fossil fueled cars.
“Those measures will certainly bring profound changes for our car industry’s development,” Xin told the official Xinhua news agency.
The series of moves have spurred foreign car companies to make their own plans for speeding development of NEVs.
Within days, General Motors chief executive Mary Barra said the U.S.-based automaker plans to offer 10 new NEV models for sale in China by 2020 and 20 models by 2023. Other foreign automakers are following suit.
With the shift toward zero-emission transport, China would join Britain and France, which have pledged to ban new internal combustion vehicles by 2040.
But China’s plans pose special challenges for foreign automakers and risks of trade conflict, due in part to its history of demanding technology transfer and erecting barriers to competition from abroad.
China’s passenger car production has rocketed from 604,000 in 2000 to 24.4 million last year, according to the International Organization of Motor Vehicle Manufacturers.
Experts say the spectacular growth would not have been possible without the transfer of technology under rules that have required foreign automakers to establish joint ventures with Chinese partners as a condition of market access since the 1980s.
Risk of conflict
In an analysis for the Seattle-based National Bureau of Asian Research (NBR), China analyst Marika Heller of the Crumpton Group consulting firm argued that many of the same conditions are at work in the push for NEV development, raising the risk of a trade conflict with the United States.
“In the past few months, the Trump administration has grown wary of the Chinese government-led effort to make China a leader in electric cars,” Heller wrote.
“Yet, if the administration targets China’s electric vehicle policies, Beijing is likely to take reciprocal actions to protect what it deems a strategically important industry,” she said.
The groundwork for a confrontation has already been laid on both sides, Heller argued.
On the U.S. side, President Donald J. Trump directed the U.S. trade representative in August to determine whether to investigate China’s trade practices that “may be harming American intellectual property rights (IPR)” under Section 301 of the Trade Act of 1974.
On the Chinese side, a series of plans make it likely that harm to American IPR will be found.
The government’s “Made in China 2025” initiative to support home-grown technology has specifically targeted indigenous NEV manufacturing for dominance, directing “locally branded NEVs to capture 70 percent of the Chinese market by 2020,” the Economist Intelligence Unit said.
Under a law introduced in January, joint ventures must show that they have “mastered” all elements of NEV technology before they can produce in China. Both U.S. and European chambers of commerce have voiced concerns that the requirement will force foreign partners to transfer all of their technologies, Heller said.
In March, MIIT Minister Miao Wei reassured investors that it was “not mandatory for foreign-funded enterprises to transfer technology to China,” the Financial Times reported. But foreign business interests were not convinced.
Subject to tariffs
Under a draft proposal shown to industry executives last month, foreign automakers would be allowed to produce electric cars in free-trade zones without Chinese partners. But the vehicles would be subject to import tariffs if sold in China, Bloomberg News and The Wall Street Journal said.
On Oct. 22, the Journal reported that U.S. electric car maker Tesla has reached an agreement to build a wholly-owned factory in Shanghai’s free-trade zone. But the paper said it was unlikely that the cars produced there would be exempted from China’s 25-percent import tariff.
Heller cited concerns that China will raise market barriers to foreign-made NEVs once it builds up its own industry and gets the technology that it wants.
Washington would respond with its own barriers to Chinese auto imports. And then, “China would likely respond with direct and indirect retaliatory measures involving countervailing duties against auto and auto parts,” and so on, escalating into a full-blown trade crisis.
The risk appears to depend on a series of tit-for-tat reactions that have not happened yet.
Heller did not respond to a request for comment. But Gary Hufbauer, a trade expert and senior fellow at the Peterson Institute for International Economics in Washington, said the risk of a trade conflict with China over NEVs is real.
In an interview, Hufbauer said U.S. automakers have been tolerating China’s demands for technology transfer for decades.
“For U.S. automakers, it’s been the price of admission to the Chinese market,” he said. “China has had this practice and companies have gone along with it.”
No other country has been able to use the attraction of its market to gain so much technology, Hufbauer said.
High cost of transfers
The pressures over NEV production are likely to be seen as a continuation of past problems, despite the high costs of forced technology transfers.
In a commentary this month for East Asia Forum, Hufbauer and Peterson research analyst Zhiyao Lu cited NBR estimates that the loss of trade secrets has cost America’s economy between U.S. $180 billion and U.S. $540 billion (1.2 trillion to 3.6 trillion yuan) annually.
But there may be few good options for dealing with the NEV issue and forced technology transfers, raising the risk of conflict.
The United States could bring a case before the World Trade Organization, but the outcome would be uncertain.
“The WTO was never set up to deal with this type of problem. It’s really outside the framework of the WTO,” Hufbauer said.
With the ponderous pace of the WTO process, any decision would be likely to take two to three years.
A WTO case is also unlikely to be a strong one without industry support.
“I think it’s going to be very difficult to find companies that complain … because that would put a big cloud over their future participation in what promises to be the biggest auto market in the next decade or two decades, or maybe even longer,” Hufbauer said.
The path forward
The U.S. government could unilaterally impose restrictions on technology transfer, but the result could put the interests of automakers at risk.
“They’d be unhappy, but it’s a potential tool that could be used,” said Hufbauer. Other possible measures including quotas and duties could invite retaliation, bringing the countries closer to a trade war.
“The path forward is not at all clear,” he said.
In their posted commentary, Hufbauer and Lu suggested the alternative of accelerating talks on a bilateral investment treaty (BIT), with the possibility of negotiating IPR protection terms similar to those in U.S. free trade agreements with Singapore and South Korea.
But the pace of negotiations is likely to be much slower than China’s headlong rush into NEV development with its consequences for U.S. automakers and bilateral trade.