What will a US-China trade war mean for Europe?

What will a US-China trade war mean for Europe?

On the campaign trail, Trump – businessman and reality TV star – presented himself as a force for change who would bring manufacturing jobs back to the US by all means necessary. A year and a half into his term, this mission is still a priority, but has been confronted by the reality of governing: getting Congress approval can be difficult and lengthy.

President Trump’s first year has been centered around his ability to deliver on bold promises. Though some have been be broken, others have been kept, and right now his agenda to change trade policy is in full effect.

Trump

How it all started

One of the key examples used in President Trump’s campaign rhetoric was America’s growing trade deficit, which he cited as the main reason for the decline of America’s manufacturing sector and promised to eliminate. When the US trade deficit with China climbed to $375 billion in 2017, it was the highest level on record and likely triggered the Trump administration’s latest actions.

The US-China trade dispute started on March 23, when Washington imposed a 25% tariff on steel imports and 10% on aluminum. China, with a record of slapping tariffs on nations for political purposes, announced plans to hit back by imposing tariffs on up to 25% on US agricultural goods. This response sparked a retaliation by the Trump administration, whose next move was to place tariffs on $60 billion worth of Chinese imports to penalise China for allegedly stealing American companies' intellectual property. Since then, further tariffs have been considered and the consensus is that this conflict could escalate into a full-scale trade war.

These retaliatory tariffs are being questioned by critics who see them doing harm to both economies, hurting companies, workers and consumers. But while the issue is mostly portrayed as a bilateral one, the implications are far more wide-reaching. This is a trade war that could destabilise the global economy – one that has only just about recovered after more than a decade of uncertainty.

Countries caught in the crossfire

The European Union’s largest trading partners are the US and China. The bloc is therefore dependent on good trade relations with both countries and could see severe implications if they were to weaken.  Despite the fact that the EU has its own trade conflicts with China, most notably concerning accusations of steel dumping, the bloc is bound by its collective approach and not willing to choose a side in the US-China dispute – even though some of its member states could be in danger.

Several modern industrial productions take place within complex international networks that rely on cheap trade. If a trade war were to break out, manufacturing based economies who rely on industrial production, including Germany and France, might receive the hardest hit. A recent article in the Financial Times suggests that German manufacturers worry that they could suffer considerable collateral damage, as some German components are used in Chinese products sold to the US, and could face a lower demand as a consequence of increased tariffs. This potential outcome is a real concern for many export-driven manufacturers in Europe who are integrated into the world economy, dependent on international value chains and reliant on trade being as free as possible.

America China flag

For services-led economies like the UK, the impacts won’t be as significant. Despite being a key player in the international economy, it exports comparatively fewer goods than manufacturing-led economies to China. However, UK manufacturers could still be affected by a second wave of implications from any resulting trade war. If Chinese exports to the US are reduced, China is likely to turn to European markets to make up any shortfall. While European consumers might benefit from lower prices, UK manufacturers will face harsher competition from Chinese manufacturers in key European markets.

Larger international companies with connections in both China and the US, including European car producers in Germany, Spain and France, would arguably face the largest threats. But in terms of risks, smaller manufacturers in Europe dependent on American products, who in turn are sourcing material from China, could also face devastating business impacts if tariff costs were to increase.

Impacted industries

Country and company size are not the only important factors in this trade war. Some industries are more exposed than others: agriculture, advanced manufacturing, heavy manufacturing and technology are key examples, although at first glance they may not appear to be negatively impacted.

The US agriculture industry is so far facing the largest threat by China, with tariffs worth an estimated $3 billion on US pork, wine and fruit products. While this will leave many US manufacturers in distress, this could be good news for alternative producers in Europe. In terms of pork, Germany, Spain, Denmark and Russia would likely benefit from a price increase on American meat. Local wine producers in France, Spain and Italy will probably also see a surge in Chinese exports.

The aerospace industry is also attentively watching the situation play out. China is a rapidly expanding and highly prized market.

China will overtake the US as the world largest aviation market by 2022 – two years earlier than previously thought.

Research by the International Air Transport Association (IATA)

Before this trade dispute in September last year, Boeing forecast that Chinese airlines would spend nearly 1.1 trillion USD to buy 7,240 new aircraft by 2037. Although China is making steady progress developing its first generation of domestically produced passenger aircraft, this demand will by far outstrip supply and will necessitate large purchases of aircraft from foreign makers. Companies in the sector, most of all Europe’s multinational Airbus, could capitalize on this opportunity if airlines like China Southern and Air China opt for European-made aircraft over tariffed Boeing planes. This will, of course, have knock-on effects for the vast supply chains that support the development and manufacture of aircraft.

 

Boeing.jpg

Much of the focus has been on Trump’s tariffs on heavy industrial goods, but they also target a range of high tech industries, particularly in areas in which China plans to become a world leader over the next decade. Major American technology companies, most notably Apple, who have moved their production to China, may also face challenging times in a retaliatory tariff environment. Higher costs on Chinese-manufactured components, combined with restrictions on products sold in the key Chinese market, create troubling conditions and could see increased costs passed on the consumer in order to sustain the high profitability that shareholders demand. This is another situation that European manufacturers could capitalise on, although it seems likely that South Korean giant Samsung is best placed to benefit.

That said, while some countries and industries could avoid being a direct victim, few will be immune if the retaliatory measures between China and the US escalate. 

Don’t be fooled by the short term

President Trump is not the first one to criticise existing trade policies; in fact, it’s an established approach among US presidential candidates. The difference this time is that Trump looks like he is willing to deliver on this rhetoric. What he may or may not have foreseen is China’s retaliatory response, which indicates that it is prepared to deviate from previous strategies and to fight back overtly in the public domain.

At the moment, there are no clear winners or losers if this trade war becomes a reality. What is certain is that while there may be short term benefits for European manufacturers, increased tariffs and retaliatory measures between the United States and China will eventually affect manufacturers all throughout Europe. If this happens, we will face disruption across the global value chains, harming both manufacturers and countries who were not directly involved in the trade war.

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