The specter of a new China shock looms large over Europe, threatening to disrupt its industrial landscape and spark a wave of job losses. This crisis echoes the events of 25 years ago when China's entry into the global trade arena as a WTO member led to the displacement of local industries and the loss of millions of jobs in the US. Today, Europe finds itself in a similar predicament, with a plunging exchange rate and support for Chinese "zombie firms" exacerbating the issue.
One of the key concerns is the increasing reliance on Chinese imports, particularly components, which are becoming deeply embedded in the EU's industrial bloodstream. This dependence is not limited to finished goods like electric vehicles but extends to a wide range of components, raising questions about Europe's ability to maintain its industrial independence.
Jens Eskelund, a seasoned observer of China, highlights the problem: "It is the sheer volume of components being imported from China. If anything, Europe is getting more dependent on China." This growing reliance is a cause for concern, as it threatens to cannibalize local industries and lead to de facto colonization by Beijing.
The EU is now facing a critical juncture, with commissioners set to meet on May 29th to discuss urgent measures. One proposal is to force European companies to source critical components from at least three different suppliers, a move aimed at reducing dependence on any single source.
Oliver Richtberg, head of foreign trade at VDMA, commends Brussels for its engagement but expresses concern about the impact of state subsidies and exchange rate fluctuations. He argues that the undervalued yuan leaves European procurement bosses with little choice, leading to rational decisions to source cheaper components from China.
The consequences of this reliance are already evident. The machinery industry in Germany, for instance, lost 22,000 jobs in the last year alone. And it's not just machinery; the trade in amino acids and polyhydric alcohols, used in various industries, is heavily dominated by Chinese imports, with the EU importing a significant portion of these ingredients from China.
As China's surplus with the EU balloons, some argue that the impact of EU tariffs on Chinese electric vehicles has been negated by the exchange rate. Andrew Small, a former China adviser in the European Commission, emphasizes that the tools used so far by the EU are not sufficient to address the scale of imports.
The situation is particularly acute in Germany, where China has overtaken the US as the top trading partner. The surplus with Germany has doubled, and an estimated 250,000 industrial jobs have been lost since 2019, with the sharpest decline in car manufacturing.
Eskelund warns that the growing reliance on China is an existential worry, potentially leading to deindustrialization and, ultimately, a security issue for Germany. Small adds that China's impact on European industry is still not adequately addressed in the debate.
The EU has proposed two legislative measures to safeguard industry: the Industrial Accelerator Act and an update to the Cyber Security Act. However, these measures will not be in force until 2027, leaving Brussels under pressure to provide immediate support to EU industry.
Small highlights the challenge: "The question is where are the member states on all of this." While tariffs are seen as a non-starter, the EU must carefully navigate its response to avoid a hostile reaction from China, which is perceived to be in the driving seat.
In conclusion, Europe's growing dependence on Chinese imports, particularly components, poses a significant threat to its industrial base and job security. The EU's response will be critical in determining the future of European industry, and the challenge is to find a balance between safeguarding local industries and avoiding a hostile reaction from China.
