Politicians campaigning for elections often treat protectionism as a quick fix solution, but in the long run, it can do more harm than good. The European Union seems to be following this approach with its largest trading partner, China. Brussels has launched investigations into Chinese subsidies for electric vehicles and wind-power equipment, and there is a possibility of further investigations into Chinese solar panels. While these measures may seem appealing to politicians seeking votes, they come with costs. They risk overshadowing more beneficial trade and climate policies where the EU could help reduce Chinese emissions while supporting its own industries.
The EU’s carbon border adjustment mechanism (CBAM) is a key part of its efforts in recent years. It is essentially a version of Europe’s carbon-pricing system imposed at the border to create a level playing field with foreign manufacturers. The CBAM aims to bridge the price gap between European mills and their Chinese competitors in terms of carbon costs. This mechanism operates within the rules of the World Trade Organization and helps encourage other regions to adopt similar carbon pricing, leading to cleaner industries worldwide. Chinese sectors affected by the CBAM may even join China’s own carbon market in the future.
For this virtuous cycle to work, it is crucial that trade partners see Europe as a fair and honest broker. China has two types of companies competing for capital: clean energy and technology sectors that promote pollution reduction and sustainable economic growth, and state-owned behemoths in construction and basic materials that contribute significantly to emissions. The CBAM can strengthen the position of more innovative companies by providing them with a vibrant export market. However, if Europe is seen as excessively protectionist and hostile, the state-owned giants will gain the upper hand.
Australia has experienced a similar situation with China as its major trading partner. Deteriorating relations under the former government led to trade embargoes and tensions, but a less confrontational approach from the current government has seen positive changes. This serves as a lesson that bashing foreign countries for political gain only leads to retaliation and no progress. Reducing climate policies to a battleground in a trade war empowers polluting industries instead of supporting clean-energy pioneers.
If Brussels wants to assist the portion of China’s economy moving towards net-zero emissions, it must demonstrate itself as a trusted partner by focusing on consistent policies that reward green businesses instead of launching questionable investigations.
