Could electric vehicles be adding to trade tensions?

With signs of hidden protectionism under the veil of going green, what’s going on in the EV market?   

And there have been increasing signs of hidden protectionism under the veil of going green – with the electric vehicle market a case in point. Here we look at what’s going on in the EV market and consider the outlook for global growth. 

Signs that trade is fragmenting

Geopolitical tensions have started to weigh on global trade. The trends towards reshoring (the practice of transferring a business operation that was moved overseas back to the country where it was originally located) and nearshoring (moving supply chains or business operations closer) have resulted in increased use of measures that act to restrict trade. So too has, according to the World Trade Organization’s (WTO) latest annual report, the shift towards more local and bloc-based trade. This is leading to a fragmentation of global trade.

The number of concerns about trade raised at WTO committees has risen steadily in recent years, as we can see in the chart below.

What’s more, the number of interventions restricting goods trade had jumped from 2,398 in 2009 to nearly 36,000 by 2023, with the highest number of new restrictive measures taking effect in the past three years: 2020 (+3,812), 2021 (+3,569) and 2022 (+3,307).  

The shift to more sustainable energy has brought about new sources of trade distortion, with what’s happening in the auto sector is a good example. The threat of climate change and the need to cut carbon emissions have led to a major shift away from vehicles based on traditional combustion engines to electric vehicles (EVs). In the process, EVs have become a major focus of global trade tensions. 

Chinese EVs account for an increasing share of EVs sold in the EU. In response, the EU has launched an investigation into whether to impose tariffs on cheap Chinese EV imports, which it says are benefitting from subsidies from the Chinese government. While it’s still early days, the battle for supremacy in the EV market could spark a trade war. However, both sides have reasons to tread cautiously – the EU risks subjecting its auto manufacturers to potential retaliation by China, while the EU is still the main source of demand for Chinese car companies.

Meanwhile, the potential for post-Brexit EV tariffs has become a bone of contention between the UK and the EU. Under the post-Brexit Trade and Cooperation Agreement, EVs traded between the UK and EU that are less than 45% made in the UK or EU will attract a 10% tariff from 2024 onwards. Major European car manufacturers have called on the EU to delay the introduction of this tariff.

Signs of a slowdown in global trade in Q3

All this comes at a bad time for the global economy as key forward-looking indicators, including export sentiment, shipping and early-reporting countries’ national export data, suggest that global trade growth is still sluggish:

PMI manufacturing export orders figures – which are leading indicators of trade volumes – rose in Europe in September, but they remained well below the no-growth level of 50. They rose by slightly more in the US and UK, but even in these countries they are still consistent with a further moderation in trade growth, as we can see in the chart below.

PMI new manufacturing export orders

Freight movements and shipping costs

Global freight movements were low at the start of H2 against a backdrop of high interest rates and increasing inventories. After falling in July, monthly flows of container volumes at major ports around the world painted a mixed picture in August: volumes were down 9.4% year-on-year in Hong Kong (a key North Asian port), while they were up 2.8% year-on-year in Los Angeles (the busiest container port in North America) and 2% year-on-year in Singapore (the world’s second-largest port). Freight movements might increase in the coming months as businesses frontload their inventories ahead of the winter festive season.

Early reporting national data

The latest Asian export data show weak trade growth in value terms across the board. This is consistent with a slowdown in trade growth in Q3 as demand deteriorates. Data for South Korea – a key export hub in Asia and often a leading indicator of global demand – show there has been a further significant decline in exports: average daily shipments were down 7.9% year-on-year in the first 20 days of September. Export data for several other Asian exporting nations were also weak in August: exports were lower in Taiwan (down 7.7% year-on-year), Singapore (-12.5%), Vietnam (-5.6%), China (-8.9%) and Japan (-1.5%).

Global trade started on a weak note in Q3, with world trade volumes down 0.6% month-on-month in July after falling by the same amount in June. Most notable was the slump in Chinese trade, with Chinese imports down by 5.2% and exports down by 2.9% over the month. However, trade in most developed markets (except the euro area) rose. Another positive development was that suppliers’ delivery times stabilised in key developed markets in September. 

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