ChinaMarket Insights

European Opportunities Amidst the China-US Trade War

By 11 November, 2018June 30th, 2023No Comments

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Trade wars are not only affecting the warring parties, but also cause collateral damage to third country businesses due to globally integrated supply chains.

A growing number of European corporations have now published profit warnings claiming that the US-China trade war have a detrimental impact on their cost structure and export opportunities. Adding to the damage, US import taxes have also been imposed on Mexico, Canada and the EU, causing all of these parties to retaliate.

Despite the obvious downsides, trade wars can also create opportunities for companies and business sectors in third countries. As the US agricultural sector is impacted by Chinese retaliating measures, for example, European agriculture and food manufacturers have a chance to step in and take over the export share to China that was previously sourced from the US. From a larger perspective, the ongoing trade war also offers European exporters a long term opportunity. Under increasing pressure, China is set to be more open to deeper and more favourable trade agreements with alternative trade partners such as the European Union. According to a recent study by ING on the impacts of the US-China trade war, European companies could benefit primarily in the product categories of road vehicles (including cars), machinery, optics, chemical products, wood pulp, aluminium, hides and skins, iron and steel, and rubber.

On the other hand, many Chinese products shipped to the US contain significant input of European intermediary products. A decrease in Chinese exports to the US, indirectly hits these European sub-suppliers. The size of this European input in bilateral Chinese-American trade is estimated to be $10bn, and although the figure is not high, the negative impacts down the value chain can be significant. Adding to this, the barriers imposed on Chinese companies in the US may lead to an oversupply of Chinese goods on other markets, such as Europe. This leads to decreasing prices, which can hit some European sectors with increased competition, but it will also decrease the sourcing cost for many European companies that rely on imports from China.

A simulation conducted by the Guangdong University of Foreign Studies and the Chinese Academy of Social Sciences, measured the potential implications of a trade war between the United States and China. By using a multi-country general equilibrium model, the simulations produced numerical values that represent the effects of a US-China trade war. Overall, the results indicate that China “will be significantly hurt by tariff trade war in all indicators, including welfare, gross domestic product (GDP), manufacturing employment and trade.” However, the study also pointed out that although there will be a significant impacts on China, the costs should be maintainable and will not severely damage the Chinese economy. As regards the United States, the simulation produced results that “the US will gain on welfare, GDP and non-manufacturing production, but hurt employment and trade”.

In summary, the trade war is definitely having negative impacts on both China and on third countries, but it is also opening up excellent opportunities for Europe to strengthen its trade position with China. The world´s second largest economy is taking steps to counteract the trade war by further opening up its markets, easing ownership structure requirements, alleviating investor protection and lowering import duties for EU companies. Many European sectors and companies are now well positioned to benefit from this development.

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