September 14, 2023 - 4:30pm

This week Ursula von der Leyen announced that the European Commission, of which she is President, would be launching an anti-subsidies probe into the market for Chinese electric vehicles (EVs). This announcement comes off the back of data showing that Chinese EVs are starting to dominate the European market, with reports as early as last autumn showing that these cars were outcompeting domestically produced equivalents.

Von der Leyen said that the probe would investigate whether these EV companies were benefiting from state subsidies and, if they were, that the Commission would consider imposing tariffs on them. 

China has responded very negatively, with one widely-read opinion piece in the state-affiliated Global Times accusing the EU of “biased protectionism” and claiming that the Chinese EV industry is no longer subsidised. Another piece in the Chinese outlet said that “Europe is afraid […] of competition from China, so they want to seek trade protectionism as a protective umbrella.”

In fact, Europe’s move toward protectionism should not come as a surprise to close observers of recent developments. When the Nord Stream pipeline was bombed last year it was immediately clear that the continent would no longer be able to compete with countries that still had access to cheap energy. 

Unless the EU figured out a new source of cheap energy or found a way to get cheap Russian gas back online, the only logical move that the continent could make would be protectionist. This logic will eventually also hit Britain, which has the same energy troubles as broader Europe.

Since the pipeline was bombed, European industry has already started to feel the pinch. Recent data shows that energy-intensive German industrial output has fallen nearly 20% since the start of the war — a larger drop than was seen during the 2020 lockdowns. 

When recession eventually comes to Europe, these declines will be further exacerbated. Every metric shows that manufacturing in Europe and Britain is already in a recession, even as the rest of the economy manages to keep its head just above water.

What does this desperate retreat into protectionism mean? Certainly, the EU should be able to keep foreign products out of the bloc if it imposes sufficient tariffs. But this will raise prices and lead to a further decline in living standards. 

Tariffs will not make European products any cheaper on foreign markets, however. What will likely happen is that, shorn of external competition and labouring under high energy costs, European industry will become increasingly uncompetitive in much the same way as British industry did in the 1970s.

Meanwhile, Chinese products will gain increasing global market share. Volkswagens and Audis will disappear from streets everywhere from Riyadh to Jakarta, replaced by Chinese brands like Geely and Dongfeng. We are already seeing the process happen in Russia, where these shifts are being rapidly sped up by the sanctions, themselves a sort of geopolitically motivated protectionism.

Our leaders’ poor management of the new multipolar world will have real, awful effects that could end up impoverishing us. The West seems to think that the old rules still hold, and that it can prevent its own decline by simply asserting itself more loudly and more aggressively. But all this does is blind it to emerging realities, preventing rational planning and management, and burning through its remaining diplomatic capital at a scary rate. 

Europe and Britain will be the first to feel the pain but, as with the cycle of economic destruction unleashed by the Smoot-Hawley tariffs in the early-1930s, America too will eventually be in line for some serious blowback. 

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics