SOURCE :- THE AGE NEWS
Next week, two high-level meetings in Europe could add another dimension to the global trade wars.
On Monday, when G-7 leaders hold their annual summit in Évian in France, a key and potentially inflammatory item on the agenda will deal with global trade imbalances.
Immediately after that two-day meeting, European Union leaders will hold their own summit in Brussels, weighing up measures to diversify supply chains in sensitive sectors of their economies – which will have particular relevance to the bloc’s relationship with China.
Europe finds itself vulnerable to a swelling tide of cheap imports that China is directing towards the EU, as a result of the trade wars Donald Trump has instigated against the rest of the world and the impact of the tariff wall he has built around America.
Among other measures, the EU is looking at legislation to force companies in sensitive sectors to reduce their over-reliance on single suppliers, notably those in Chinese.
It is considering directing companies to have at least three different sources of “critical supplies”, to shield them from supply chain disruptions and government policies such as the export controls China has erected around rare earths and semiconductors.
Had Trump co-opted Europe into a joint trade war with China, America and the EU – combined by far the largest markets for China’s exports – would have been in a far stronger position to force China to change its ways.
Other potential steps include broadening export and import quotas and tariffs for imports from China to protect Europe’s automotive, chemical, metal and green technology industries, and accelerating processes to prevent dumping and unfair subsidies.
Current EU anti-dumping and anti-subsidy investigations (about 75 per cent of them involving imports from China) can take a year or more to be completed.
The EU wants to raise manufacturing’s share of the bloc’s GDP from 14.3 per cent last year to 20 per cent over the next decade, which inevitably must involve protecting its domestic industries from cheap imports.
Europe wants to protect more than just manufacturing.
The EU also recently unveiled a long-term plan to boost its domestic technology supply chains and reduce its reliance on the US and Asia, particularly China, for artificial intelligence, data centres, semiconductors and cloud computing.
To encourage the construction of data centres within Europe, EU governments could be required to store their data on regionally owned cloud platforms.
Europe’s cloud sector is dominated by US companies – Amazon, Microsoft and Alphabet’s Google – so a move to promote and protect European sovereignty over critical technologies could create another point of friction in the uneasy trade relationship with America. Only recently did the EU formally agree to implement the terms of the trade framework Trump imposed on it last year.
But the larger, or at least more pressing issue, and the one that could cause a new flare-up in global trade tensions, is Europe’s trade relationship with China.
Last year, China had a record €360 billion ($589 billion) goods surplus with the EU, and racked up another €98 billion surplus in the first quarter of this year.
The Europeans view Chinese imports as an existential threat to significant industries, even as China’s tighter restrictions on imports to its own economy exacerbate the trade imbalance.
Europeans have been rushing around signing trade deals with Canada, India, Mexico, a grouping of South American countries and Australia (and are seeking deals in South-East Asia), but those deals will have modest impacts relative to deals with China.
Fuelling the EU scramble to respond to the perceived assault on its industrial base is a report on trade subsidies earlier this month from the OECD. It found that industrial subsidies have now reached their highest levels since the 2008 financial crisis – and that industrial companies in China have averaged, on a conservative estimate, three to eight times more government support than firms in the OECD.
Renewable energy equipment, semiconductors, aluminium, steel and shipbuilding were the five largest recipients of subsidies. Enterprises with more than 25 per cent state ownership gained significantly more subsidies than private competitors.
About 22 per cent of the global market share gains of companies that grew between 2005 and 2023 could be explained by the subsidies they received, the OECD found. In the case of Chinese businesses, subsidies could account for almost 60 per cent of the gains.
The report covered the period to 2024. Since Trump reignited the trade war with China that he started in his first term (and widened it to the rest of the world), China’s export volumes have accelerated, and its trade surpluses have swollen to more than $US1 trillion ($1.4 trillion) a year. At the start of the 2020s, its trade surplus was about half that.
President Xi Jinping has doubled down on China’s mercantilist economic strategy as his country’s domestic economy and domestic demand for goods have weakened, with the now five-years-long pall cast by the implosion of its property sector weighing heavily on the economy.
As Trump’s tariff wall reduced direct exports to the US (there appears to be significant trans-shipping of goods or components emanating from China), Europe has been increasingly targeted for Chinese exports and investment.
Attempts to curb China’s exports of electric vehicles have been circumvented by Chinese EV companies, who have ramped up their sales of cheap hybrid cars, built their own plants in Europe and, in a few instances, acquired European car brands. Similar destruction has occurred in Europe’s green technology sector.
Any serious attempt to stem the flow of Chinese imports is going to trigger a Chinese response. China has already warned the EU that discrimination against its exporters would lead to countermeasures by China to safeguard its own interests.
China has created a raft of new export controls and other measures enabling retaliation against foreign companies, individuals and governments should they try to restrict its trade.
Its most powerful sanction, as the US discovered when it threatened punitive tariffs on China last year, is its stranglehold on the entire supply chain for rare earths and other critical minerals that are essential to most advanced manufactures and technology stacks.
It’s also aware that Europe isn’t united when it comes to the trade issue. Germany, with an export-oriented economy and far more two-way trade with China than the other major European economies, doesn’t want to upset the Chinese and see its exports – and supply chains – threatened.
The EU, however, is convinced that its current trade and investment settings and relationship with China are unsustainable, and will only worsen if it doesn’t address the Chinese import flood.
Had Trump co-opted Europe into a joint trade war with China, rather than targeted it in his trade wars on everyone, America and the EU – combined by far the largest markets for China’s exports – would have been in a far stronger position to force China to change its ways.
He didn’t, and so the EU, already under pressure from his tariffs, will have to confront China on its own.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
