The European Union is facing a new China shock, a looming crisis that threatens to disrupt local industries, displace jobs, and potentially lead to a de facto colonization of the EU's manufacturing sector by Beijing. This crisis is fueled by the EU's growing reliance on Chinese imports, particularly in the form of components, which are increasingly embedded in European products. The situation is reminiscent of the 1990s China shock in the US, where China's entry into the global trade stage led to a surge in imports, displacing local industries and causing significant job losses.
Jens Eskelund, president of the European Chamber of Commerce in Beijing, highlights the issue of component imports, stating that Europe's dependency on China is increasing. As these Chinese components become more integrated into EU products, the bloc is faced with difficult choices. The Financial Times reports that the EU is considering forcing European companies to source critical components from multiple suppliers, a move that could have significant implications for the industry.
The primary concerns revolve around the exchange rate and state subsidies. Jürgen Matthes, a German economist, suggests that the yuan might be 40% undervalued against the euro, making Chinese products cheaper and more competitive. Oliver Richtberg, from VDMA, emphasizes the unfair advantage Chinese firms have due to these subsidies and the exchange rate, leading to a loss of market share and industry pressure in Europe.
The data on amino acids and polyhydric alcohols is particularly alarming. The EU imports a significant portion of these ingredients and chemicals from China, with the latter accounting for almost 96% of EU imports by volume. This reliance on Chinese inputs poses a risk of making EU production uneconomic, potentially leading to a dependency on China, the very source that initially displaced European industries.
The impact of the 2024 EU tariffs on Chinese electric vehicles has been overshadowed by the exchange rate, according to Andrew Small, director of the Asia program at the European Council on Foreign Relations. China's surplus with the EU is growing, and it has become Germany's top trading partner, surpassing the US. This shift has led to a loss of approximately 250,000 industrial jobs in Germany since 2019, with the car manufacturing sector being the hardest hit.
Eskelund expresses existential concerns about the growing dependency on China, noting that 26% of EU members are increasing their presence in China. He warns of deindustrialization and the potential for the issue to escalate beyond economics to security concerns. Small agrees that China's influence in the debate about European industry is underweight, and the EU's legislative proposals, such as the Industrial Accelerator Act and the updated Cyber Security Act, may not provide immediate solutions.
The EU's response to this crisis is under scrutiny, with Small questioning the member states' involvement and the effectiveness of tariffs. The bloc must carefully navigate the situation, considering the potential backlash from China, which could disrupt the flow of exports. The China shock highlights the complex challenges the EU faces in maintaining its industrial sovereignty and economic stability in the face of global trade dynamics.
