A decade ago, Xi Jinping received a warm welcome in Duisburg, Germany’s Ruhr valley, where he commended the region as a focal point for Chinese investment. He celebrated the arrival of a train from Chongqing to Europe’s industrial heartland and enjoyed performances of traditional mining songs.
However, a recent Chinese arrival in Germany, the BYD Explorer No. 1, encountered a less enthusiastic reception. In February, this vessel unloaded around 3,000 electric cars produced by BYD, a Chinese electric-vehicle (EV) company. This event, coupled with China’s burgeoning car production driven by substantial investments, has raised concerns about the future prospects of Germany’s esteemed automobile manufacturers.
China’s accelerated production of cars, supported by significant cash injections and loans to its high-tech industries, aims to rejuvenate its sluggish economy. With its manufacturing trade surplus nearing a record high relative to global GDP, European leaders are apprehensive about a potential influx of competitively priced Chinese goods.
Responding to this, on March 5th, the European Commission took steps towards imposing tariffs, citing evidence of unfair subsidies to Chinese EV manufacturers. Ursula von der Leyen, the president of the commission, cautioned China against compromising environmental standards in pursuit of technological advancement. The UK has initiated an investigation into Chinese excavators, while France’s President Emmanuel Macron is expected to convey strong trade-related messages during his upcoming meeting with Xi Jinping in May.
Countries worldwide, from Brazil to India, are taking measures to restrict Chinese exports. However, Europe, with its trade-centric growth model, faces unique challenges due to its openness to international trade and investment. The EU, being a rules-based entity, hesitates to resort to overt trade barriers, as does Britain, historically a proponent of free trade.
The latest shock from China arrives amidst Europe grappling with an energy crisis triggered by Russia’s invasion of Ukraine, which coincided with efforts to expedite the green transition. Soaring gas prices, reaching over €300 per megawatt hour in 2022 from the usual €20, led to a surge in electricity prices, dampening the post-COVID economic recovery and exacerbating inflation. The European Central Bank (ECB) responded by raising rates to 4%, further straining an already fragile economy.
Following fiscal stimulus during the pandemic and the energy crisis, Europe is now retreating towards austerity. Germany, constrained by tight deficit limits, has implemented cuts this year, with more austerity anticipated in 2025. France recently disclosed a higher-than-expected deficit for 2023, prompting spending reductions to realign fiscal policy.
Europe’s GDP growth has been sluggish since 2019, contrasting with the robust expansion experienced by the US. Productivity in Europe stagnates while uncertainty looms regarding future growth prospects. Additionally, the looming possibility of a Trump presidency in the US threatens European exporters with potential tariffs, jeopardizing access to a vital market.
As Europe contends with shocks from Russia, China, and potentially the US, it faces a substantial economic restructuring period. Trade wars and protectionist measures may elevate costs and limit options, albeit with some sectors and regions potentially benefiting from new opportunities. However, the overarching impact is likely to result in job losses and diminished productivity, necessitating adaptive strategies across industries and geographies.
