Tuesday, September 17, 2019

EU Trade Deficit With China Destined To Grow

Europe Runs A Solid Trade Deficit With China
While we read a great deal about the huge trade deficit America runs with China it is important to understand we are not the only one. Other countries also have this problem. Europe as a whole runs a solid trade deficit with China. In some ways, this is balanced by the EU having a surplus with America. Still, in many ways, a growing trade deficit with China bodes poorly for the EU as they look down the road.

Reuters reports the European Union’s trade surplus in goods with the United States and its deficit with China both increased in the first seven months of 2019. Eurostat, the EU statistics office, reported the European Union’s surplus with the United States grew to 100.8 billion dollars in Jan-July 2019 from 88.6 billion in the same period of 2018. During that time the EU’s trade deficit with China expanded to 120.9 billion dollars from 109.2. This comes at a time that trade figures are adding extra strain to global tensions.

The Items These Countries Trade (click to enlarge)
This brings up the importance of what countries buy and sell to each other. If a county's exports are not centered around products where they have a core advantage over time they can see them erode. I contend part of the problem the EU has going forward is that much of the EU is simply uncompetitive. This means unless it takes strong action to halt the importation of cheap Chinese consumer goods it will be flooded with them in coming years. Since Europe does not sell China much in the way of "raw goods" it has little to balance this trade.

Simply put, the EU and the companies that call it home lag in both innovation and technology. The most innovative companies based on the number of patents they received in 2017 were IBM, Samsung Electronics, Canon, Intel, LG, Qualcomm, Google, and Microsoft, in that order. Note how European companies are absent from this list. Adding to their lack of industrial leadership is the matter of over-regulation that stifles EU companies from moving forward. When it comes to low-cost production they are also beaten by China and other Asian countries. This has caused Brussels to join Washington in complaining that China wants free trade but does not play fair.

The auto industry is just one example of the EU losing its ability to compete. A recent article titled, "European Carmakers Face Perfect Storm" delves into how European carmakers are facing what could turn out to be a major crisis. It is being created by EU regulators which are driving automakers to cut emissions at great cost. The EU has been enforcing emission caps on cars but beginning next year they will be reduced further to 95 grams of CO per km. This means a slew of electric vehicles will be rolled out but there are no guarantees that people will want to buy those cars. These cars will be much more expensive to build, estimates are each one will cost over $10,000 more to produce, so just because many people claim they are a greener alternative does not guarantee a market for them.

Click Here To View C919 Article
In future years the EU is expected to continue slipping further behind in many areas. Politico reports that Washington is preparing to announce tariffs on billions of goods from the European Union.  This follows a decision by the WTO which has just ruled in favor of the US in a case against Airbus. This ends a multi-year transatlantic dispute between the world's two largest aircraft manufacturers over whether Airbus had benefited from illegal state subsidies. Unfortunately, for both America and the EU the Chinese state-owned aviation manufacturer Commercial Aircraft Corp of China (COMAC), has been busy developing the C919, which is seen as China's answer to the Boeing 737 and Airbus 320.

The C-919 hits right at the core market of both companies. COMAC is yet to release the price tag of the jet, but a report by China National Radio predicted that it would likely to be sold for around $43 million. This is much cheaper than a Boeing 737 or an Airbus 320 which each cost around $80 million $100 million respectively. It does not take a rocket scientist to calculate how rapidly China can ramp up production. This is just the sort of thing that dooms the EU into an unwinnable position. The EU will be hard hit if America is successful in trimming its existing deficit with the region while its deficit with China widens.

Footnote; This article is in some ways a follow up to a previous post titled; "China Is cutting A Path through The Turbulence." The article delves into how China's One Belt One Road agenda includes developing much stronger trade ties with Europe. The link to that article is below.

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