The protected Chinese home market has important consequences beyond revenues foregone.
It is also an opportunity for Chinese firms to leverage the vast size of China’s market.
To build scale, amass profit, and improve productivity, technical capabilities, and product design and quality.
This is all with limited or no pressure from foreign competition.
China’s Threats to European Economy
This then enables some of these firms to enter foreign markets on a strong financial footing.
And to sell tried-and-tested, more tailored products at highly competitive or below-market prices.
And it facilitates further international expansion and pursuit of the global market share at the expense of European firms.
Cultivating a large, protected home market as a beachhead for international expansion is hardly a new idea – it was the development model of many industrialized economies in the nineteenth and twentieth centuries, from Germany to Japan.
Many of these practices were eventually rolled back due to external pressure.
And because of their mixed track record of producing truly competitive national champions in the long term.
For Western countries and businesses, waiting for China to ‘normalize’ its behavior and open up its economy is a risky choice.
Firstly, the size of China’s market – the largest globally for a wide range of goods and services – means that such practices have the potential to do significant permanent damage to European firms.
Over a decade ago, Chinese solar panel manufacturers decimated the German photovoltaic industry by offering their products at meager prices.
Most of that price advantage derived not from state support but from significant economies of scale that these manufacturers secured as part of a large, protected home market.
China’s scale is not a problem in itself. But, combined with restrictions on foreign participation, it can do lasting damage to foreign firms and markets.
Secondly, while many of China’s local industries are open to foreign competition.
Not all sectors display higher efficiency as they grow in size or scale.
Market protections in China tend to be stronger and more prevalent in strategic high-tech industries.
Many of whose efficiency does increase with scale.
Large Chinese Market Effect
The large and protected Chinese home market could have particularly severe consequences for a string of key sectors to Europe’s future.
From green technologies to connectivity equipment to digital industries.
In any case, China’s latest policy announcements, including its recently published 14th Five Year Plan.
It makes it clear that Beijing intends to continue protecting and promoting local firms in strategic sectors.
Curbing hopes for short- or even medium-term normalization.
Thus, it is time for the European Union to integrate an understanding of China’s ‘protected home market advantage.’
The advantages are derived from the combination of a large and restricted home market.
All into how it defends and promotes European industrial competitiveness and economic prosperity.
Despite the implications of this advantage, it is not yet fully embedded into the European Commission’s work on how Chinese market distortions affect the European market.
It does not formally fall within the scope of last year’s Commission white paper on foreign subsidies.
For example, even though the distortions arising from this advantage have much the same effects.
The CAI is not resolved, which secures formal openings in some sectors but leaves many either closed or partially closed and includes myriad exceptions.
In any case, the agreement’s effectiveness depends on whether China is ultimately willing to implement its commitments to a level playing field.
And, of course, given recent EU-China tensions, the agreement may not even be ratified.