Bruegel: Lose-lose scenario for Europe from ongoing China-US negotiations

A hastily agreed trade deal between China and the US may ease negative sentiment in global financial markets. But it could cost Europe dearly, writes Alicia Garcia-Herrero for Bruegel

Opinions
21 January 2019
270318-china-trade-boat-in-usa
Shutterstock

While there is no clear winner from the US-China trade tensions, the way in which the negotiations between the US and China are shaping up does not bode well for the European Union (EU). If China were finally to massively increase its imports from the US to buy back its future, it needs to substitute imports from other parts of the world, leaving missed opportunities borne by US allies, especially the European Union. Further, should China offer the concession that the US has requested in terms of banning import tariffs for some previously targeted sectors, this can only be more bad news for those sectors in Europe, except for the parts of the value chain that are produced in the US and exported to China. As such, we should expect a trade diversion away from Europe and in favour of the US.

Within this context, European exporters would find it hard to benefit from filling the gap left by either the American or Chinese exporters. As most of the benefits of a US-led trade war for Europe would have come from the Chinese market and not so much the US one due to the sectoral similarities of US and EU exports into China, the key European beneficiaries that were supposed to replace US exports: car manufacturers and aircraft producers (by substituting US exports into China in the event of higher tariffs) shift to be the losers in a quick deal between China and the US is reached.

Further, even if China were finally to accept a huge import bill from the US, it would not be free: the key objective for China to accept such bill would have to be consistent with its ultimate goal, namely, moving up the technology ladder. However, it remains clear that China’s moving up the technological ladder could still be put at risk by renewed pressure from the US. In the long run, thus, China will become increasingly aware of its economic relations with the US and more eager to become less reliant on US technology. Against this backdrop, we should not be surprised to see a new wave of government-supported mergers and acquisitions (M&A) by Chinese companies, especially on the high-tech end such as in the semiconductor sector. The easiest target continues to be Europe given the increasingly wary attitude of the US on M&A by China.

You can read the full report here, by Alicia Garcia-Herrero

This article first appeared on Bruegel on 9 January, 2019


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).