Could trade relations between China and the European Union profit from the tensions between China and the US? This article tries to answer this question by exploring the impact of the transatlantic and transpacific trade tensions on China-EU trade relations.
The China-US phase one deal certainly did not appease the bilateral tensions for long. Right from the start, trade relations between the two countries have been facing challenging times. And the coronavirus pandemic seems to have increased tensions in every aspect.
EU exports to China
- Impact of the Phase One Deal on the EU’s industry
With the Phase One Deal, China has committed to purchasing an additional $110 billion of US manufactured products. Despite being behind schedule, its effects should begin hitting the European manufacturing sectors, especially in France and Germany. According to a report by the US Chamber of Commerce, this agreement is expected to cut Chinese demand for EU goods by up to 11 billion USD in 2020.
Undoubtedly, the escalated China-US trade tensions raise concerns over the fate of the Phase One Deal, which could have a knock-on effect on EU exports to China. Nonetheless, political signals and some economic indicators such as continued soybean purchasing, suggest that continuity in the implementation of the trade deal is more likely than a total break.
This does not prevent Europe from playing its cards. Chinese demand for European food sector products remains resilient to the external changes despite the Chinese commitment to purchase American goods. Spain, the biggest supplier of pork to China, increased its exports to China 2.3 times in April, at the peak of the Spanish Covid-19 outbreak. Overall, the EU was China’s largest pork supplier during the first five months of 2020 and is likely to continue to be so for the rest of 2020.
- Impact of the Transatlantic tensions
Will transatlantic tensions also trigger some trade diversion of European products to the Chinese market? The 15% to 25% tariff imposed by the US on 7.5 billion USD of EU food and aero industry products since October 2019, seem now to have become the new normal in the EU-US trade.
The EU might then be tempted to turn to the Chinese market. However, what the EU lost in the US due to trade tensions may not necessarily be compensated for in China’s market. For example, due to the additional tariff, French wine lost 16.4% in export value to the US in the last quarter of 2019 (-11% in volume). In the same period, French wine exports to China also dropped by 12% both in value and volume. Although France remains the largest wine exporter to the Chinese market, the country is facing growing competition from Chile and Australia, though the recent tensions between China and Australia could wreak havoc on Australian wine exports to the Chinese market.
Japan appears as a more likely alternative in the Asian market. In 2019, along with the EU-Japan FTA entering into force, Japan’s import of French wine[1] increased by 9.7%.
Similarly, the recent US investigation into digital taxes in the EU could spill over and generate additional tariffs on imported European goods. If this is the case, a certain potential trade diversion needs to be kept in mind. Earlier this year, the US had threatened to charge a 100% tariff on French food and fashion items over the digital tax, even if eventually both sides reached a consensus. An optimistic view is that it may be that the US investigation serves more as a bargaining tool for America in the future negotiation of the US-EU trade agreement, rather than to transform the present situation by the creation of additional tariffs.
EU imports from China
Over the past five months, Chinese exports to the US were eroded by 11.4% due to the dual effect of trade tensions and the pandemic [2]. The consequences of the trade war can be observed in the decreasing share of US imports from China. For containerized shipping volumes (kg) [3], the US imports from China accounted for 44% of all US imports from Asia in the first four months of 2020, whereas the figure was 57% for the same period in 2018, a pre-trade-war period. If we consider the main gateway ports, we notice that for the first four months of 2020 the container shipping volumes of US imports from China via Long Beach and Los Angeles fell by 39% and 29% respectively, whereas the volumes from Vietnam increased by 152% and 30%, in comparison to the first four months of 2018.
Under these circumstances, will the tensions lead to trade diversion of Chinese exports from the US market to the European market, particularly along with the gradual ease of lockdown measures in Europe? Not necessarily.
Indeed, the trade data in May from China Customs suggest a slight recovery of China’s exports to the EU, with a -0.6% contraction in comparison to the -4.5% drop in April. However, the difference primarily came from the surge in EU imports of Chinese Personal Protection Equipment under the pandemic conditions. In contrast, the major reduction of Chinese goods entering the US market came from machinery and consumer products such as footwear, furniture and toys. These products happen to be the ones for which EU retail demand plummeted the most during the pandemic. The further drop in shipping capacity of 15% on the Asia to Europe route in the third quarter, with a total capacity of around 4 million TEUs withdrawn, signals a continued pessimistic vision of European market demand from Asia.
Furthermore, even if EU demand for these products resumed, Chinese products seeking to divert to the EU market will be forced to face growing competition from Vietnamese goods in the European market. Vietnam is also a major supplier of some goods, such as small machinery products, footwear and apparel. This scenario could become more salient, particularly thanks to the EU-Vietnam agreement which is likely to enter into force in August, as 99% of the tariffs will be eliminated gradually over seven years[4].
Policy impact in the second half of 2020
The analysis above suggests that current tensions would not necessarily lead to closer trade relations between the EU and China. However, it will bring some changes to bilateral trade.
The China-U.S tensions and the pandemic have pushed the EU to reflect on its strategic autonomy. The EU’s quest for digital sovereignty seems also to be one of its answers to the China-US tensions, which are by nature a competition of technology standards. "We are not China, we are not the United States — we are European countries with our own values and our own economic interests that we want to defend", said Bruno Le Maire, France’s Minister for Economy and Finance, during the launch of Europe’s GAIA-X cloud project. This policy trend could lead to a shrinkage in EU demand for critical goods from the Chinese market, either by diversification of suppliers or reshoring in the long run.
After all, the EU's connections with China and the US go way beyond pure economic interests, with deeply embedded political context. Merkel’s recent statement during Germany’s presidency of the EU council reflects the EU's general approach in seeking to balance between China and the US. Expanding the trade-volume with China is not the only issue that concerns the EU in its economic relations with China.
The second half of 2020 will be critical for China-EU-US trilateral relations. For the transatlantic relations, if Joe Biden wins the election in November, a reparation of EU-US relations can be envisaged. Ameliorated transatlantic relations also serve the intention of creating a united front line to challenge China. The potential impact on EU-China trade in this eventuality needs to be carefully studied. For the China-EU relations, the EU-China Summit held by videoconference on June 22nd again raised hopes that the 7-year-long negotiation on the China-EU Comprehensive Investment Agreement will be concluded this year. In any case, it will be an excellent opportunity for the EU to insert more influence and shape their bilateral relations with either China or the US.
[1] The growth rate is calculated based on the data provided by Eurostat, French wine here refers to the wine belonging to the category of HS code 2204.21.
[2] This is based on data published by China Customs.
[3] The data in this paragraph, if not specified, is generated and calculated based on the trade data provided by US Census bureau.
[4] The tariff on footwear, of which Vietnam is a major supplier to the European market, will be eliminated after 7 years.
