The US-China trade war might make Europe a cheap products dump.
The US-China trade war poses a significant risk of transforming Europe into a dumping ground for inexpensive goods. China’s expanding trade surplus with the European Union is raising new alarms that the 27-nation bloc may be at risk of becoming a repository for inexpensive goods amid the turbulent tariff dispute between Washington and Beijing. As European officials enhance their scrutiny to prevent an influx of Chinese goods encountering increased obstacles to enter the US market, data already reveal that China’s surplus with the EU hit a historic $90 billion in the initial four months of this year.
Currently, the majority of the rerouting of Chinese goods is occurring via Latin America and Southeast Asia. However, the volume of Chinese exports currently reaching Europe since the onset of the pandemic raises concerns that this influx could intensify as the United States implements its increased import tariffs. “European and non-US markets are going to see an increase of Chinese shipments,” stated Maxime Darmet, a senior economist at Allianz Trade. “China will want to maintain a substantial presence in global markets, thus it will seek to expand its share in alternative markets.”
China’s Vice Premier He Lifeng is set to meet with French officials in Paris on Thursday, highlighting the delicate nature of Europe and China’s relationship. This meeting follows his recent temporary agreement with US counterparts in Geneva aimed at reducing tariffs. Markets responded positively to the 90-day truce; however, analysts indicate that significant barriers remain between the world’s two largest economies. Despite the recent reductions in tariffs by both China and the US this week, Washington’s tariffs on the majority of Chinese goods remain 30 percentage points elevated compared to their levels in January.
The changing dynamics of global trade are challenging Europe’s approach of proceeding cautiously in the rapidly changing competition to establish new regulations that contradict a fundamental principle of the EU’s foundation — economic openness. In response to President Donald Trump’s aggressive policies, China implemented tit-for-tat levies that quickly reached prohibitive levels. Conversely, the EU opted to prepare targeted measures, which would only be activated should negotiations with Washington prove unsuccessful.
Currency fluctuations are exacerbating the difficulties faced by Europe. In the previous month, the yuan experienced a decline, reaching its lowest point in over ten years relative to the euro, thereby rendering Chinese exports less expensive and more appealing to European purchasers. More fundamentally, there are also concerns that the swelling trade imbalance with China may reflect a stark loss of competitiveness in Europe, as Chinese companies rapidly ascend value chains and challenge market leaders both domestically and internationally.
“In an era of protectionism, you cannot have open trade — it’s just impossible, because it just destroys your industry,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA. “We have to have barriers for products — it doesn’t have to be necessarily electric vehicles, but anything in which the EU thinks it wants to compete and it has a nascent industry” needs protection, she said. Paris and Beijing find themselves in disagreement regarding the EU’s tariffs on Chinese electric vehicles, alongside Beijing’s imposition of levies on spirits, which are resulting in significant financial losses for French cognac producers.
According to data released Friday in Beijing, Chinese exports to the EU this year rank as the second-highest on record, only exceeded by the surge in goods driven by the pandemic in 2022. Maros Sefcovic, the EU trade chief, last week stated, “we are monitoring possible risks of trade diversion,” adding that the initial results are anticipated in mid-May. The subject is anticipated to arise during the gathering of EU trade ministers on Thursday in Brussels.
Meanwhile, Chinese purchases have consistently declined as domestic demand weakens and local companies enhance their competitiveness, effectively displacing European suppliers from the market. The EU expressed apprehension regarding the swift rise in imports from China, particularly as the prices of these goods were declining owing to domestic deflation. Even prior to Trump’s return to the White House in January, the trading relationship between Europe and China was experiencing a significant transformation. The swift transformation in German-Chinese trade relations is evident, shifting from a deficit exceeding $18 billion for China in 2020 to a surplus of $12 billion in the previous year.
If the trend observed in the first four months persists throughout the remainder of the year, the surplus with Germany may surpass $25 billion. The automotive sector has emerged as a significant catalyst for transformation, characterized by a swift increase in Chinese exports of both electric and traditional vehicles, juxtaposed with a rapid decline in Europe’s exports and sales within China. Despite the stagnation in EV exports following the tariffs imposed by Brussels last year, Chinese automakers are experiencing unprecedented sales in the region by ramping up the delivery of hybrids and combustion engine vehicles.
Allianz’s Darmet indicates that the situation will compel European policymakers to adopt more proactive strategies aimed at bolstering domestic industry, including the implementation of tariff and non-tariff barriers. “We initially thought that would be a stand-off between China and the US, but actually this is going to have implications for the rest of the world and Europe in particular because it will force major countries to be increasingly protectionist,” he said.
