The global trade war is far from over, and a new front has emerged, one that doesn't involve Donald Trump. Europe, a key player in this ongoing conflict, finds itself in a delicate situation, facing a deluge of cheap imports from China, a consequence of the trade wars Trump initiated. This influx has sparked a series of strategic moves by the European Union (EU) to protect its industries and sovereignty.
The EU's response is multifaceted. Firstly, they are considering legislation that would force companies in sensitive sectors to diversify their supply chains, reducing reliance on single suppliers, especially those in China. This includes the requirement for at least three different sources of 'critical supplies' to safeguard against disruptions and government policies like China's export controls on rare earths and semiconductors.
Secondly, the EU aims to boost its domestic technology supply chains, reducing dependence on the US and Asia, particularly China, for critical technologies like artificial intelligence, data centers, semiconductors, and cloud computing. This could involve mandating that EU governments store their data on regionally owned cloud platforms, a move that could create friction with the US, given the dominance of US companies in Europe's cloud sector.
The EU's efforts to protect its industries are not limited to manufacturing. They are also addressing the trade imbalance with China, which had a record €360 billion goods surplus with the EU last year and a further €98 billion surplus in the first quarter of this year. The EU views these imports as an existential threat to its industries, and the situation is exacerbated by China's tightening restrictions on imports into its own economy.
The OECD's recent report on trade subsidies highlights the scale of the issue. It found that industrial subsidies in China have reached their highest levels since the 2008 financial crisis, with Chinese companies averaging three to eight times more government support than firms in the OECD. This support has contributed to significant market share gains, with almost 60% of the gains in the case of Chinese businesses attributed to subsidies.
The trade war, reignited by Trump, has had a profound impact on China's export volumes and trade surpluses, which have swelled to over $1 trillion annually. President Xi Jinping has doubled down on China's mercantilist economic strategy as the country's domestic economy and demand for goods weaken, with the property sector implosion casting a long shadow over the economy.
As Trump's tariffs reduced direct exports to the US, Europe became a primary target for Chinese exports and investment. Chinese EV companies have circumvented attempts to curb exports of electric vehicles, selling cheap hybrid cars, building plants in Europe, and acquiring European car brands. Similar strategies have been employed in Europe's green technology sector, highlighting the challenges in stemming the flow of Chinese imports.
The EU's efforts to protect its industries and sovereignty are not without challenges. Germany, with its export-oriented economy and significant trade with China, is hesitant to upset the Chinese, potentially threatening its exports and supply chains. However, the EU remains convinced that its current trade and investment settings with China are unsustainable and must be addressed to prevent further deterioration.
In conclusion, Europe's response to the influx of cheap Chinese imports is a complex and multifaceted strategy aimed at protecting its industries and sovereignty. While it may create friction with the US and China, the EU's actions are driven by the need to safeguard its economic interests and ensure a sustainable trade relationship with China. The outcome of these efforts remains to be seen, but the EU's determination to address the trade imbalance is clear.
