OUTLOOK 2024: Trade Conflicts and Price War
2024 will be a year of crucial elections and looming trade conflicts as Chinese companies are set to flood the world with green technology, and the race for critical minerals will intensify.
In Chinese culture, 2024 is considered the year of the Dragon, symbolizing luck, growth, progress, and success. However, China faces challenges both domestically and internationally as the new year dawns.
Despite nearly three years of pandemic and self-imposed isolation, the world’s second-largest economy has not rebounded as swiftly as anticipated. Most economists predict China’s economy will grow by less than 5 percent next year. While impressive compared to Europe, this growth may not be sufficient to address the pressing issue of job creation in China, especially with historically high youth unemployment rates.
The economy is navigating a challenging structural shift following the burst of the property bubble. Previously, the property sector contributed nearly a third of China’s GDP. Now, Chinese banks are redirecting significant loans into the manufacturing sector, bolstering the 'new three' economic drivers: electric cars, batteries, and renewable energy—particularly solar panels and wind turbines.
Overcapacity export
China presently holds the majority share of the world's manufacturing capacity for green technologies, such as producing over 75 percent of global solar panels. Despite sluggish domestic consumption and price wars, new factories continue to emerge. This surplus capacity is poised to be exported at remarkably low prices, envisioning a deluge of inexpensive Chinese products flooding the market.
This surge poses a significant challenge for both European and U.S. companies and governments. Competing with Chinese manufacturers, supported by their government, becomes nearly impossible. The dilemma is evident: while affordable Chinese-made electric vehicles, solar panels, and wind turbines are vital for the green transition, the intense competition threatens to eliminate entire industries in Europe and the U.S.
A decade ago, the German solar industry faced a similar scenario when flooded by cheap products from Chinese producers. This pattern could repeat across multiple sectors like heat pumps, electric cars, batteries, and electrolyzers, raising concerns among EU leaders. The predicament lies in the fact that imposing trade restrictions on Chinese goods might impede the green transition, making it more costly and slower.
Trade conflicts
The surplus capacity exports are poised to intensify the strain in trading relationships between the US, EU, and China, as both the US and EU endeavor to establish independent green supply chains, reducing their reliance on China. With the ongoing trade conflict between the US and China, there's a tangible risk that the EU might take the initial step by imposing tariffs, potentially triggering a similar retaliatory response.
In October, the European Commission initiated an anti-subsidy investigation into imports of Chinese electric cars. If the Commission decides to levy additional tariffs on Chinese-made electric vehicles (EVs), this move could impact companies like Volkswagen and Tesla. Both have Chinese factories that received subsidies from the Chinese government and export to the EU.
Anticipating such actions, China is likely to retaliate. Recently, China responded to the widened U.S. export control by restricting the export of specific graphite products. Being the world's top graphite producer and exporter, China refines over 90 percent of global graphite, crucial for anodes in EV batteries.
Intense race for critical minerals
The Chinese government has been strategically securing China’s critical mineral needs for decades. Since the 1980s, Chinese companies have expanded their involvement in rare earth metals, vital components in high-tech products like weapons, computers, smartphones, electric cars, and wind turbines.
Presently, China holds a commanding position, accounting for approximately 60 percent of rare earths mining, 91 percent of refining, and 94 percent of magnet production, as reported by the Center for European Policy Studies. The EU heavily relies on China, importing 98 percent of its rare earth metals, a situation viewed as a significant vulnerability in Brussels.
China's dominance extends to investments in lithium, cobalt, and nickel, all critical elements in battery production. While many countries recognize the importance of these minerals, Chinese companies have been the most proactive thus far.
Yet, the landscape is swiftly evolving. There's an escalating race worldwide for critical minerals as car manufacturers strive to secure these essential resources to meet the surging demand for electric vehicles.
Space exploration boom
While Europe and the U.S. are beginning to engage in the pursuit of critical minerals on Earth, China has already outlined an official plan to mine the moon and develop space-based solar power installations. Though these plans are still years from realization, a burgeoning 'new space' industry is taking shape in China, marked by private companies striving to reduce satellite costs and advance space travel.
Satellites play a pivotal role in the forthcoming generation of internet technology (6G), and as carbon-neutral smart cities and autonomous transportation develop, the demand for satellite-connected sensors and devices will soar. Over the past five years, the number of satellite constellations has doubled and is projected to multiply further by 2024, raising concerns about potential collisions if international regulations are not promptly established.
Space expert Paul Wohrer from the French Institute of International Relations suggests that 2024 could be a decisive year for space exploration. The EU is contemplating the introduction of space legislation and has proposed initiatives concerning space traffic management and satellite cybersecurity.
Another driver behind the EU's proposal is the growing apprehension that China might become the first nation to establish a crewed station on the moon, marking a significant milestone in space infrastructure. Chinese scientists assert that within five years, China will be capable of producing construction materials from lunar soil.
Geopolitics and elections
Western leaders have long talked about a new multi-polar world order rising in the horizon. Now it’s here, and the world today consists of multiple alliances and groupings. According to Australian Institute of International Affairs these groupings are “ill-defined, fragile, and likely to shift”.
The results of next year’s elections in India, Russia, United States, and especially in Taiwan will naturally affect how China’s foreign policy will play out. The Chinese Communist Party sees Taiwan as a part of China that needs to be reunified with the mainland as soon as possible and fears that the island could declare its independence under the ruling DPP, with support from the US and other countries.
If that happens, China will not hesitate to invade with its military. Chinese officials have called the election a “choice between peace and war”, a slogan used by the KMT party which has better relations with China. Fears are growing that China’s supreme leader Xi Jinping could try to take Taiwan by force, but it’s more likely, that China will stick to its long-term strategy of squeezing Taiwan economically and try to influence the population to unite with the motherland through propaganda and disinformation campaigns.
Seen from Beijing, it doesn’t make a big difference who is in The White House, because both Trump and Biden has followed the same line trying to limit China’s development by imposing trade restrictions. However, it could have implications for the situation in the Taiwan Strait, if Donald Trump wins, as he is unlikely to invest in a war in Asia.
Global south vs. global north
The war in Ukraine has separated the world in a group of countries in “the West” (Europe, U.S., Australia, New Zealand, Japan, South Korea) who imposed sanctions on Russia and the rest of the world, representing 85 percent of the world’s population who didn’t impose sanctions on Russia. The last group includes India which claims to be the largest democracy in the world.
This doesn’t mean that all the countries in “the rest of the world” agree with Russia and approve the invasion of Ukraine, but they insist that globalization is still a good idea, and they don’t believe in sanctions. While U.S. and partly the EU is promoting the friend-shoring agenda – moving supply chains to countries that do not pose a geopolitical threat – some global south countries like India and Vietnam are benefitting from investments redirected from China.
I had the privilege to meet one of the leading geopolitical thinkers in the world, Kishore Mahbubani, in Singapore earlier this year, and he is a great inspiration to me. One of his points is that Western leaders need to try to understand 'the rest of the world' when trying to solve major problems.
The consequence could be that we will see a new price structure in the world, where the West/global north will have one price level, based on longer and more expensive supply chains outside China – and the rest of the world/global south, which will focus on producing the goods where its cheapest and most efficient. In many cases that country will still be China, meaning that we could end up with “global north prices” and “China prices”.
For example a solar module made in China is 50 percent cheaper than that produced in Europe and 65 percent cheaper then the US, according to a report from Wood Mackenzie.
Global expansion of Chinese platforms
Many traditional retailers are not even aware of Temu yet. However, the new Chinese e-commerce platform tops the list of the most downloaded free iPhone apps in the US in 2023, just published by Apple. It has the potential to disrupt almost every household related industry with its huge variety of extremely cheap products, shipped directly from Chinese suppliers.
Temu now has more than 100 million users in the US, and it happened in less than a year. The company recently entered Mexico and the European market and was downloaded 250 million times since it was launched in September 2022.
It is a sister company of the Chinese e-commerce platform Pinduoduo which has grown rapidly since it was founded in 2015 and has recently overtaken Alibaba as the most valuable e-commerce company in China.
Just a few years ago another Chinese company named Shein (formerly known as She Inside) made headlines when it became the most downloaded shopping app in the US. It has grown rapidly and now has over 70 million active costumers in 150 countries.
With a turnover of 24 billion USD in the first three quarters of 2023, it is poised to surpass both H&M and Zara. Shein is expected to IPO in the US in 2024 and is called the Tik Tok of shopping because of its advanced recommendation algorithm and real time data analytics.
I expect more Chinese companies to develop international versions of their platforms to try to expand globally in the coming years. China has 1,2 billion internet users but it is a red ocean, and competition is fierce. Also, the local economy is still recovering from the pandemic, and the potential to grow is considered better outside China.
Apart from geopolitical tensions, the timing is good as many consumers around the world are struggling with inflation and are more sensitive to the price. Consumers don’t seem to worry much about cyber security or labor conditions behind the cheap products.
Carbon peak
2023 was a record year for clean energy investments in China, and that is one of the reasons that China’s carbon emissions could peak this year before falling into structural decline from 2024. The Chinese government already reached targets for solar and wind installation in September, and the market share of electric vehicles is ahead of the governments 20 percent target for 2025.
In recent years, China has been investing heavily in new coal power plants, but this is mainly to secure a backup for China’s energy needs in times of climate disasters and political uncertainty.
In 2020 China set up a dual carbon goal to peak emissions in 2030 and become carbon neutral in 2060. If China’s emissions already peaked, it means China is six years ahead of time, which is good news for the planet.