EU-China trade relationship caught in ‘slow train crash’: business group

BEIJING — Trade tensions between Europe and Beijing are likely to escalate due to China’s growing ability to produce cheaper products in strategic industries, said Jens Eskelund, president of the European Union Chamber of Commerce in China.

“What we see now is a slow-motion train crash unfolding,” he told reporters at a briefing last week.

“Europe cannot simply accept that strategically viable industries that make up the European industrial base are being priced out of the market,” Eskelund said. “That’s when trade becomes a security issue, and I think that may not be fully understood in China yet.”

Chinese authorities are promoting high-tech manufacturing as a way to increase technological self-sufficiency and wean the economy away from dependence on real estate for growth. Investment and government financial support for manufacturing increased, while support for real estate decreased.

Beijing’s emphasis on manufacturing has raised concerns about excess capacity: China’s ability to produce far more goods than the country or others can absorb could lead to price wars.

Eskelund said the chamber is seeing “excess capacity across the board,” whether it’s chemicals, metals or electric vehicles. “I’ve met very few companies that haven’t experienced this,” he said.

“We haven’t seen all this capacity come online yet,” he said. “This is something that will come to market in the next few years.”

“There needs to be an honest conversation between Europe and China about what this will mean,” Eskelund said, noting that both sides need to find a way to ensure that most trade flows are not disrupted.

“I find it difficult to imagine that Europe will simply sit back and quietly watch the accelerated deindustrialization of Europe due to the externalization of weak domestic demand in China,” he said.

Manufacturing accounts for almost a fifth of employment in the EU, making this category the largest. The sector also makes the largest contribution to what the bloc calls “the added value of the business economy”, with a share of almost a quarter.

The EU was China’s largest regional trading partner until Southeast Asia recently overtook it. The US is China’s largest trading partner individually.

Eskelund was speaking at a media briefing on the chamber’s report, co-written by consultancy China Macro Group and published on Wednesday, on the growing political risks for European businesses in China.

Despite the EU’s current focused policy stance, broader US actions and Beijing’s response have made it more difficult for European businesses to operate in China, the report says.

The US is citing national security for export restrictions on Chinese companies’ access to advanced semiconductor technologies. Recent legislative efforts have targeted popular social media app TikTok due to risks associated with its Chinese ownership.

In China, Beijing’s latest five-year planning document has significantly increased the number of security references compared to previous documents, Markus Herrmann Chen, co-founder and managing director of China Macro Group, said at a media briefing.

He noted that all major Chinese ministries, with the exception of Veterans Affairs, have adopted the concept of “development and security coordination.”

While not a direct focus of US-China tensions, there are already signs of an impact on European businesses.

The report quotes one unnamed advanced manufacturing industry executive as saying his company’s market share in China has collapsed to zero, down from 35%, in 10 years.

“China is keeping us in a geopolitical trap. We remain dependent on supplies from China but cannot sell our products in the market,” the unnamed executive said in the report. “We are investing in other places to diversify, but in practice it will take a long time – perhaps more than 10 years.”

“The key problem is that the pricing mechanisms in Europe are so oppressive that if we were to abandon our Chinese partners today, we would not be able to sell at European auctions as we would not be able to compete with the prices of the Chinese players.” “, the manager is quoted as saying.

Businesses in Europe and many countries are only buying more from Chinese companies.

China is increasingly shipping more goods to Europe via container ships than vice versa, Eskelund said, noting a significant increase compared with pre-pandemic times.

“China’s exports have reached their highest share of global exports in history,” he said. “What worries me is that China’s imports are lagging behind.”