The European economy and China: the beginning of a trade war?

The stricter approach of the European Union towards China is shaped by French concerns that Beijing’s trade practices are starting to pose a critical threat to key industries. Paris has played a significant role in this policy shift, believing that current inaction would put the bloc’s economy on the path to long-term damage.

One must remember the solar industry debacle a decade ago when cheap imports from China killed European production. The electric car market and the European automotive industry face a similar issue today. The EU has a binary choice: either assert its power or submit to China.

The intention is not to turn the $900 billion annual trade relationship into a confrontation. The failure of the American model in its relationship with China does not argue for an open conflict with the world’s second-largest economic power.
French President Emmanuel Macron wants his European partners to see Europe as a balancing force between the two global economic superpowers. This would enable Paris and other capitals to maintain privileged relations with potential allies like India.

However, the EU’s stricter stance has also caused some nervousness, particularly in Berlin. The risk of this being perceived as the beginning of a trade war could prove costly for Germany. If European measures on Chinese electric vehicles were to materialize, there would then be a risk of retaliation, which German cars could be particularly exposed to.

The Chinese Vice Premier expressed “his deep concern and dissatisfaction” to the EU’s Chief Trade Negotiator, Valdis Dombrovskis, regarding the bloc’s anti-subsidy investigation into Chinese electric vehicles. The EU has initiated an inquiry into Chinese subsidies to its electric car industry. This could lead to customs tariffs and raises the prospect of a radical shift in European policy-making that sets aside the principles of free trade and market openness, which are considered the best means to protect the continent’s economic interests.

Any provocation towards China is a significant gamble for a bloc already struggling to overcome an energy crisis and the worst inflation crisis in the history of the Eurozone. On top of that, Chinese tariffs would be difficult to predict. They could potentially involve several of the continent’s largest companies, including French luxury groups for which the most significant Asian economy constitutes a key market.

Furthermore, a confrontation with China would be asymmetrical. According to calculations by Allianz Trade, if the EU imposed a one percentage point increase in tariffs, the total losses for China, taking price sensitivities into account, would amount to approximately $8.4 billion, or 0.2% of Chinese exports, compared to 1.5% of EU imports.
The dependence on Chinese products could also turn into an asymmetric inflationary shock, as Europe may have to accept higher prices for essential materials. At the same time, China could become more self-sufficient or turn to other markets to replace European products.

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