Europe wants to get tough on China. The risks could be enormous
With tensions rising, next week’s talks will test whether the EU can curb Chinese imports without harming its own economy
When trade commissioner Maroš Šefčovič visits Beijing next week, it will be for one of the most highly charged trade negotiations ever conducted between the European Union and China. In advance of the talks, each side has issued threats that have the potential to cause serious harm to both economies, although Europe’s is more vulnerable.
Šefčovič’s meetings with China’s commerce minister Wang Wentao next Thursday and Friday are meant to assess how much progress China and the EU have made in rebalancing their trade relationship since they met in Brussels last June. Since then, the trade gap in goods has widened, with the EU importing €1 billion more in Chinese goods every day than it exports to China.
In her State of the Union speech to the European Parliament last month, Ursula von der Leyen said the trade deficit with China had reached a tipping point. And she compared the current situation to the so-called China shock after Beijing joined the World Trade Organisation in 2001 and a surge of low-cost Chinese manufactured goods made many European producers of labour-intensive products like textiles, clothing, toys and furniture uncompetitive.
“Some say the second China shock is looming. But it’s already here. It shows in our communities and in factories across our Union. It leads to deindustrialisation in the industrial heartlands of Europe. This is unsustainable,” she said.
“And this is why we are engaged in a dialogue with China to rebalance our trade. But this dialogue must now lead to results. China’s weaker domestic demand means it also needs our European market. So, it is in both our interests to work together to find solutions.”
Von der Leyen said the EU would use all the tools at its disposal to rebalance the trade relationship and the Commission is expected to propose adding additional weapons to its armoury at this month’s European Council meeting. They include a diversification instrument that would oblige companies in some sectors to have at least three suppliers in several countries and a solidarity fund to support firms hit by retaliatory measures from countries such as China in the event of a trade war.
Noah Barkin, a China expert at the Rhodium Group consultancy firm, reported last Monday Germany and France were finalising a joint proposal that would give the EU new powers to shut China out of the European market within 24 hours. The mechanism could be based on the US government’s Section 301 powers which allow for the immediate imposition of unlimited tariffs in response to foreign practices that discriminate against American companies or breach US rights under international trade agreements.
China’s commerce ministry described the reported Franco-German proposal as a protectionist and unilateralist measure that is inconsistent with the EU’s proclaimed commitment to multilateralism.
“The move will not help solve problems, but will instead backfire on the EU itself and disrupt China-EU trade as well as the stability of global industrial and supply chains. The EU itself has also been a victim of such tools. One should not impose on others what one does not desire for oneself,” a spokesperson said.
“As an important member of the WTO, the EU has consistently portrayed itself as a defender of multilateralism. If it fails to lead by example and instead takes the lead in violating WTO rules, it will seriously undermine the rules-based multilateral trading system.”
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The EU is China’s second biggest export market after southeast Asia, accounting for about 15 per cent of goods exports every year. And the European market has become more important for Chinese manufacturers of everything from electric vehicles to batteries and semiconductors since the US market has become more difficult to access and as domestic demand in China remains sluggish.
But the EU is caught in a bind because while it would like to limit imports of Chinese finished goods, its industries depend on China for many of the inputs its own industries need. These include everything from components to critical minerals, rare earths and permanent magnets, without which much of Europe’s advanced manufacturing would grind to a halt.
Beijing complains the EU is blaming China for its own failure to integrate European capital markets, the red tape it imposes on businesses and the high cost of energy. And it warns that any move by the EU to adopt its own version of Section 301 powers will be met by retaliatory measures that will hit politically sensitive European sectors.
For China, the best outcome from next week’s talks would be some modest compromises that will slow down, de-escalate and extend the trade negotiations. But Beijing will be reluctant to make significant concessions to the EU, in case they are seized upon by its other trading partners around the world, many of whom have the same worries about the impact of Chinese exports on their own industries.
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