Ursula von der Leyen, President of the European Commission, is visiting China for talks on Russia sanctions and the imbalance in EU-Chinese trade. The AFP reports:
On the economy, von der Leyen stressed that Europe was not trying to “de-couple” itself from the Chinese powerhouse, but to “de-risk” ties that had become too one-sided. “We have seen a growing trade imbalance. The trade imbalance has doubled in the last two years up to almost 400 billion euros by now,” she said.
According to Politico, the EU leadership is worried about the combination of a trade deficit and the recent slowdown in the Chinese economy. The latter, they fear, may lead Chinese manufacturers to try to offload products to a larger degree on export markets:
[The] EU faces deeper, structural problems due to Chinese overcapacity and subsidies. That concern, EU officials fear, is compounded by the recent sluggishness of the Chinese economy, which could dampen local consumption and drive Chinese products outward.
The tensions over trade between the EU and China have been rising over time. Von der Leyen’s visit is the last in a series of meetings between EU officials and their Chinese counterparts.
One of the concerns behind the EU’s efforts to reduce the trade deficit with China is the economic security of the union. On September 14th, The Guardian reported on the EU Parliament’s vote “to diversify its supplies of critical raw materials” and reduce dependency on China for those products. The goal set by the parliament is that by 2030 the EU should not import “more than 65% of any strategic raw material” from a single country.
Trade between China and the EU has been affected by the recent gradual depreciation of the Chinese currency. Per data from xe.com, the yuan renminbi depreciated by 19.6% vs. the euro in one year: in July 2022 one euro cost 6.74 yuan; in July 2023 the exchange rate was 8.06 yuan per euro.
When the Chinese currency weakens vs. the euro, Chinese exporters can lower their prices without losing any profits on their exports to the euro zone. By contrast, the weaker yuan makes it less profitable for euro-zone exporters to sell to China.
Since this summer, the Chinese currency has strengthened somewhat vs. the euro. However, at its exchange rate of 7.69 yuan per euro on December 6th, it was still 14% weaker than in the summer of 2022.
While trade with China has national security implications due to the EU’s current dependency on Beijing for green-transition-related minerals, China is not as dominant in terms of EU foreign trade overall. Among non-EU countries, China is the dominant seller of manufactured goods, but not of goods and services in total.
A review of Eurostat trade data shows that, in 2022, 69% of the manufactured goods imported to the European Union were produced in China. However, the Chinese share of total goods imports, which includes other merchandise than manufactured goods, is considerably lower. China accounted for less than 21% of total goods imports to the EU from the rest of the world.
The trade deficit with China, as reported by the AFP, pertains to trade in goods only. In total in 2022, the EU’s trade balance was notably stronger. The EU exported goods and services for €3.85 trillion in 2022, while importing €3.97 trillion worth of goods and services. The trade resulting deficit of €120 billion suggests that the €400 billion trade deficit with China is countered by a surplus in EU foreign trade in general.
In addition to trade, transactions between two countries also include financial flows. The sum total of trade and financial transactions, known as the current account of the balance of payments, has been modestly positive for the EU over the past 12 months. With a small trade deficit, this suggests that there is more financial capital flowing into the EU from the rest of the world than is going in the opposite direction.
Eurostat does not report financial transactions between China and the EU separately. However, judging from the recent trend in the yuan vs. the euro, and the strong Chinese trade surplus, it is reasonable to conclude that over the past two years, China has exported major amounts of financial capital to the European Union. The trade surplus puts an upward, or appreciation, pressure on the yuan; the fact that it still depreciated suggests a significant inflow of Chinese financial capital into the EU.
The nature of these flows, or what investments in European assets they have targeted, have not been discussed in the context of the EU’s trade policy vs. China.
