Europe is grappling with a renewed “China shock,” a situation that may result in the erosion of local manufacturing and significant job losses, as expressed by trade analysts and industry representatives. The crux of the issue lies not in finished goods like electric vehicles but in the massive influx of Chinese components, which is deepening Europe’s dependency on China. The European Union is now considering measures to mitigate this dependency, such as mandating companies to source critical components from at least three different suppliers. This issue prompts urgent discussions among European commissioners, who are set to meet on May 29 to address the situation.
The economic dynamics are heavily influenced by state subsidies in China, which make their products cheaper, and significant changes in the exchange rate. A German economist highlighted that the yuan might be undervalued by as much as 40% against the euro, forcing procurement decisions that favor Chinese imports. This challenge is underscored by the fact that, despite EU tariffs on Chinese electric vehicles, the exchange rate adjustments have neutralized their intended impact. The trade imbalance has resulted in China becoming Germany’s top trading partner, with a significant surplus that doubled within a year.
The effects of this dependency are stark in the labor market, with Germany reportedly losing approximately 22,000 jobs in the machinery industry last year alone. This situation is seen as an existential concern, with some experts warning of potential security implications if reliance on China continues at the current pace. The EU has proposed legislative measures to protect its industries, including the Industrial Accelerator Act and updates to the Cyber Security Act, but these will take years to implement, leaving EU industries vulnerable in the interim.
Data from the China trade watch site, Soapbox, highlights the extent of Europe’s reliance on Chinese imports, with alarming percentages of some components like amino acids and polyhydric alcohols originating from China. This dependency risks making EU production economically unviable, posing a long-term threat to European industries. Andrew Small from the European Council on Foreign Relations points out that the tools the EU has used to date are inadequate given the scale of Chinese imports, stressing the need for more immediate and effective responses.
As Europe seeks solutions, the geopolitical dynamics with China play a crucial role. While the EU’s measures need careful calibration to prevent further tensions, China appears to have the upper hand, capable of complicating the EU’s efforts to regulate imports. The challenge for Europe is to balance political efforts with effective economic strategies to safeguard its industrial base without provoking adverse reactions from Beijing.