Theme of the Day: How China’s record trade surplus helped spark Trump’s tariff war

China’s domination of global trade has led to a schism between the world’s two largest economies, reports the FT. China is comfortably the world’s trading superpower. Its trade surplus — the difference between imports and exports — rose to almost $1tn last year. Beijing’s exporting machine is one of the main reasons President Trump has launched the opening shots in his new global trade war. But it is not just the US that is alarmed. Emerging economies and established rivals are also concerned about their industries being crushed by cheaper Chinese goods - a situation that could be exacerbated if products once destined for the US end up in their markets instead. China’s trade surplus affects the whole world.

The US president hopes that his tariff regime will erode China’s surplus and enable American manufacturers to compete again. But Beijing’s trade juggernaut is built on deep competitive advantages built up over decades that will not be easily dislodged. China makes almost a third of all manufactured goods — more than the US, Japan, Germany and South Korea combined.

The battery sector is a clear example of China’s prowess in capturing industries and squeezing efficiencies until foreign rivals can no longer keep up. This is usually achieved by combining comprehensive government support with the entrepreneurialism of Chinese businesspeople like Wang Jiang. Wang, a former factory worker who now runs a recruitment business, moved to the dusty industrial hub of Sanhe in southern Guangdong province two years ago, drawn by its efforts to build a complete supply chain for battery production, or in Chinese factory parlance, “the whole dragon”. This region of southern China is a hotbed for battery production. It is home to a research centre for the world’s third biggest lithium producer, Ganfeng Lithium, as well as a production base for Contemporary Amperex Technology (CATL), the world’s largest battery maker, and EV producer BYD. The area’s booming lithium-ion battery industry encapsulates the benefits manufacturing industries in China enjoy when building “the whole dragon”.

Raw materials critical to battery production are found in only a few locations, with Australia, Chile, Indonesia, and the Democratic Republic of Congo (DRC) among the top producers — and China has a presence in all of them. Many of the world’s cobalt, nickel and lithium mines are part or majority owned by Chinese companies, including state-owned enterprises. Chinese groups have significant stakes in cobalt mines in the DRC, a country home to ~70% of global production. Weda Bay in Indonesia is among the largest nickel deposits in the world and one of multiple mines in the country with links to Beijing. Companies from China also have investments in lithium projects in Argentina, Australia, Canada and Zimbabwe.

Even where mine ownership remains in local hands, Chinese entities have secured long-term agreements for the supply of raw materials, such as lithium from Chile and Argentina. Beijing’s supremacy is even starker further down the supply chain. China dominates mineral processing and the production of parts. China is home to the vast majority of refineries and factories that produce anodes and cathodes, key components which are then assembled into battery cells. China produces three in every four lithium-ion batteries sold globally, according to the IEA.