An influx of Chinese cars
Is China about to unleash another wave of deindustrialisation on the rich world? About 1 million American manufacturing workers lost their jobs to Chinese competition in 1997-2011, as the country integrated into the global trading system and began shipping cheap goods overseas. This “China shock” has since been blamed for everything from rising deaths among working-class Americans to the election of Donald Trump. Now China’s carmakers are enjoying an astonishing rise. That stokes fears of another ruinous shock. In fact, the successes of Chinese cars should be celebrated, not feared.
Just five years ago China shipped only a quarter as many cars as Japan, then the world’s biggest exporter. This week the Chinese industry claimed to have exported over 5 million cars in 2024, exceeding the Japanese total. China’s biggest carmaker, BYD, sold 0.5 million electric vehicles (EVs) in the fourth quarter, leaving the Americans in the dust. Chinese EVs are so snazzy, whizzy and – most important – cheap that the constraint on their export today is the scarcity of vessels for shipping them. As the world decarbonises, demand will rise further. By 2030 China could double its share of the global market, to a third, ending the dominance of the West’s national champions, especially in Europe.
This time it will be even easier for politicians to pin the blame for any Western job losses on Chinese foul play. A frosty geopolitical climate will feed the sentiment that subsidised production unfairly puts Western workers on the scrapheap. And there have certainly been subsidies. Since the launch of its “Made in China” agenda in 2014, China has brazenly disregarded global trading rules, showering handouts on its carmakers. It is hard to be precise about the value of the underpriced loans, equity injections, purchase subsidies and government contracts Chinese firms enjoy. But by one estimate, total public spending on the industry was in the region of a third of EV sales at the end of the 2010s. These subsidies come on top of the ransacking of technology from joint ventures with Western carmakers and Western and South Korean battery-makers.
The temptation will therefore be for rich-world policymakers to shield their carmakers. Yet locking out Chinese cars would be a mistake. The market for cars is going to be shaken, regardless of trade with China. In 2022, 16-18% of new cars sold around the world were electric; in 2035 the EU will ban the sale of new cars with internal-combustion engines. Though firms are retaining their workers as they switch to making EVs, the process is less labour-intensive. As a historical parallel, the first China shock was responsible for less than a fifth of total manufacturing job losses occurring at the time, many of which were attributable to welcome technological advances. Similarly, there is a danger of confusing disruption caused by the shift to EVs with that caused by Chinese production of them.
Next consider the gains from letting trade flow. Vehicles are among people’s biggest purchases, accounting for about 7% of American consumption. Cheaper cars mean more money to spend on other things, at a time when real wages have been squeezed by inflation. And Chinese cars are not only cheap; they are better-quality, particularly with respect to the smart features in EVs that are made possible by Internet connectivity. Nor does the existence of a carmaking industry determine a country’s economic growth. Denmark has among the world’s highest living standards without a carmaker to speak of. Even as cars roll off Chinese assembly lines, the economy is struggling – in part because it has been so distorted by state control.
What about the risks? The threat to industry from cheap imports is usually overblown. The lesson from the rise of Japanese and South Korean carmakers in the 1980s is that competition spurs local firms to shift up a gear, while the entrants eventually move production closer to consumers. Already, BYD is opening a factory in Hungary and many Chinese carmakers are scouting for sites in North America. Meanwhile the likes of Ford and Volkswagen are racing to catch Chinese firms. Last year Toyota said a breakthrough in its “solid state” technology would let it slash the weight and cost of its batteries.
Policymakers should therefore curb their protectionist instincts and worry only in the unlikely event that Western carmakers implode altogether. A hefty market share for Chinese carmakers that invigorates wider competition, however, is not to be feared. If China wants to spend taxpayers’ money subsidising global consumers and speeding up the energy transition, the best response is to embrace it with open arms.