EU-China trade relations in a “slow-moving train accident”: a business group

BEIJING – Trade tensions between Europe and Beijing are likely to escalate due to China's growing ability to manufacture at lower cost in strategic industries, according to Jens Eskilund, head of the European Union Chamber of Commerce in China.

“What we are seeing now is a slow train accident,” he told reporters at a press conference last week.

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

Chinese authorities have encouraged advanced manufacturing as a way to promote technological self-sufficiency and move the economy away from its dependence on real estate for growth. Investment and government financial support for manufacturing have increased, while financial support for real estate has decreased.

Beijing's focus on manufacturing has raised concerns about excess capacity – China's ability to produce far more goods than the country or other countries can absorb could then lead to price wars.

Eskelund said the chamber is seeing “excess capacity in all areas,” whether in chemicals, metals or electric cars. “I've met very few companies that don't have this problem,” he said.

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

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

“It is difficult for me to imagine that Europe will sit idly by and quietly witness the accelerating deindustrialization in Europe, due to the outsourcing of declining domestic demand in China,” he said.

Manufacturing accounts for nearly a fifth of EU employment – ​​making it the largest category. The sector is also the largest contributor to what the union calls “value added to the business economy,” with a share of nearly a quarter.

The European Union was China's largest regional trading partner until it was recently surpassed by Southeast Asia. The United States is China's largest trading partner on a one-country basis.

Eskelund was speaking at a news conference on the chamber's report, which he co-wrote with consultancy China Macro Group and released on Wednesday, on the growing political risks facing European companies in China.

Despite the EU's currently targeted political stance, broader US actions and Beijing's response have made operations in China more difficult for European companies, the report said.

The United States has cited national security for export restrictions on Chinese companies' ability to access advanced semiconductor technology. Recent legislative efforts have targeted the popular social media app TikTok for risks stemming from its Chinese ownership.

In China, mention of security has increased significantly in Beijing's latest five-year planning document compared to previous documents, Markus Hermann Chen, co-founder and managing director of China Macro Group, said at the press conference.

He noted that every major Chinese ministry, with the exception of Veterans Affairs, has adopted the concept of “development and security coordination.”

Although not directly in the crosshairs of US-China tensions, there are already signs of the impact on European companies.

The report quoted an unnamed member of Advanced Manufacturing as saying that their company's market share in China had collapsed to nothing, down from 35%, over 10 years.

“China has trapped us into a geopolitical trap,” the executive, who was not named in the report, said. “We still depend on sources from China but we cannot sell in the market.” “We are investing elsewhere to diversify, but in practice it will take a long time – perhaps more than 10 years.”

“The main challenge is that pricing mechanisms in Europe are so depressed that if we dropped our Chinese partners today, we would not be able to sell at European auctions, due to our inability to compete with the prices of Chinese players,” the executive was quoted as saying.

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

China is increasingly sending more goods to Europe via container ships than vice versa, Eskelund said, noting a significant increase since before the pandemic.

He added, “China's exports achieved the highest share of global exports ever.” “My concern is that China's import performance is as poor as it is now.”