China’s industrial strengths must also benefit its trading partners

The European Commission is pressing China for progress by next month to address the widening EU-China trade imbalance, and raising the possibility of new protectionist trade policy. The deadline raises a question: how should China and its trading partners address perceived economic imbalances while sharing the benefits of Chinese industrial competitiveness?China’s merchandise trade surplus approached US$1.2 trillion last year even as other exporting economies press for controls. “overcapacity” is accepted as the blanket explanation for China’s industrial success, with government support leading to a production glut.But this framing obscures more than it clarifies. China’s success is multifaceted, given the vast scale of its ecosystem, intense domestic competition and dense supplier networks. An effective response must distinguish between genuine imbalances and the productive advantages that offer opportunities for cooperation.China’s car industry showcases the strength of its competitive edge. The International Energy Agency found that while making an electric car costs 30 per cent less in China than in advanced economies, only about one-third of that difference is due to batteries. Furthermore, the gap for conventional vehicles is similar.China’s advantage is embedded in its manufacturing system rather than being the product of government subsidies.Research by Rhodium Group makes the point clearly. It estimates that Chinese carmaker BYD enjoys a cost advantage of about US$4,700 per vehicle over Tesla’s Chinese operations. Direct grants account for only around US$292; the bulk of the advantage is due to vertical integration and lower research, administrative and supplier costs.