Opinion

Lose-lose scenario for Europe from ongoing China-US negotiations

Without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.

By: Date: January 9, 2019 Topic: Global Economics & Governance

This opinion piece was originally published in The Corner.

While there is no clear winner from the US-China trade tensions, the way in which the negotiations between the US and China are shaping up does not bode well for the European Union (EU). If China were finally to massively increase its imports from the US to buy back its future, it needs to substitute imports from other parts of the world, leaving missed opportunities borne by US allies, especially the European Union. Further, should China offer the concession that the US has requested in terms of banning import tariffs for some previously targeted sectors, this can only be another bad news for those sectors in Europe, except for the parts of the value chain that are produced in the US and exported to China. As such, we should expect a trade diversion away from Europe and in favour of the US.

Within this context, European exporters would find it hard to benefit from filling the gap left by either the American or Chinese exporters. As most of the benefits of a US-led trade war for Europe would have come from the Chinese market and not so much the US one due to the sectoral similarities of US and EU exports into China, the key European beneficiaries that were supposed to replace US exports: car manufacturers and aircraft producers (by substituting US exports into China in the event of higher tariffs) shift to be the losers in a quick deal between China and the US is reached.

Further, even if China were finally to accept a huge import bill from the US, it would not be free: the key objective for China to accept such bill would have to be consistent with its ultimate goal, namely, moving up the technology ladder. However, it remains clear that China’s moving up the technological ladder could still be put at risk by renewed pressure from the US. In the long run, thus, China will become increasingly aware of its economic relations with the US and more eager to become less reliant on US technology. Against this backdrop, we should not be surprised to see a new wave of government-supported mergers and acquisitions (M&A) by Chinese companies, especially on the high-tech end such as in the semiconductor sector. The easiest target continues to be Europe given the increasingly wary attitude of the US on M&A by China.

In addition, we should not forget about the second part of the US reason to start a trade war with China: better market access, which is currently restricted by the large role of the State and a heavy-handed industrial policy. If China were to follow the US towards additional reform versus a market economy and opening up to foreign competition, it would of course also be very good news for Europe as a net exporter of goods and foreign direct investment. Unfortunately, President Xi’s speech at the 40th anniversary of China’s reform and opening up on Dec. 18th seems to indicate that China is not keen on following the US mandate. In fact, President Xi made it very clear that the policies of China would not be influenced by the West. The lack of any formal announcement of opening up could also imply that China has realised that there is limited scope for concessions in expanding its market access even under pressure from the US and the rest of the world. This should come with the realisation that the role of the State in the production of goods and services is still very large and that there seems to be little intention to reduce it. In other words, it will be unlikely for Europe to benefit from better market access.

In a nutshell, a hastily agreed trade deal between China and the US may be good to ease the negative sentiment in global financial markets. The non-market way of reaching the deal, however, will probably bring a large cost for Europe since it will probably divert European exports to China towards US ones. The underlying of China’s strategy to accept to the bill also expose Europe as the targets for M&A on high-tech end. Worse yet, without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article Download PDF More on this topic

External Publication

Europe – the global centre for excellent research

This report, requested by the European Parliament's Committee on Industry, Research and Energy, analyses the EU’s potential to be a global centre of excellence for research as a driver of its future growth in a complex global S&T landscape, and how EU public resources can contribute to this.

By: Michael Baltensperger and Reinhilde Veugelers Topic: Innovation & Competition Policy Date: May 22, 2019
Read article More on this topic

Blog Post

India in 2024: Narendra Modi once more, but to what end?

Even with the recent economic slowdown, India still boasts Asia’s fastest growing economy in 2018. But beneath the veneer of impressive GDP expansion, uneasiness about India’s economic model clearly tempers enthusiasm.

By: Alicia García-Herrero and Trinh Nguyen Topic: Global Economics & Governance Date: May 17, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Opinion

Trade war: Is the U.S. panicking due to China's big hedge?

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 9, 2019
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More on this topic More by this author

Blog Post

Does attaching environmental issues to trade agreements boost support for trade liberalisation?

This blog post shows that the omission of environmental issues in the new EU-US trade negotiations may make it challenging to pass the trade agreement in the European Parliament. In particular, the inclusion of environmental issues is pivotal to keep the second largest, centre-left S&D group in the pro-trade coalition.

By: Boram Lee Topic: Global Economics & Governance Date: April 24, 2019
Read article More on this topic More by this author

Opinion

What else China can do to support growth in the short term

Recent data shows the downward spiral in the Chinese economy has somewhat eased on a cyclical basis, but it is still too early to cheer for a full stabilization.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 23, 2019
Load more posts