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Europe takes cover from US-China tariffs

10/06/2019

Trade war set to hit European growth but also presents an opportunity for the EU to strike new preferential trade deals with China

The escalating US-China tariff trade war will have a range of negative impacts on business, economic growth and logistics demand across Europe, but also opens up new opportunities, according to a range of new reports and fresh analysis.

Earlier this week, the World Bank warned the health of the global economy was imperilled by the ongoing trade conflict between its two largest economies and, as a result, downgraded its forecast for global economic growth this year by 0.3 percentage points to 2.6%.

Equally important for the freight sector, the World Bank downgraded its forecast for 2019 growth in global trade volume by a full percentage point to just 2.6%, which would represent the slowest expansion in the decade since the financial crisis and have impacts across trade lanes and modes.

Europe will not escape such a slowdown, but some countries will be affected more than others. “For example, merchandise exports from Germany - the most externally exposed of Europe’s large economies - to China represent about 7% of all German exports and around 3% of German GDP,” said Nomura.

“Over and above the direct effect, there is the indirect effect that general concerns about global trade might have on European sentiment, financial conditions, investment and growth.”

European companies also face negative consequences due to the trade war. A new report from the European Chamber of Commerce in Beijing found that a quarter of European companies with activities in China had been affected by the trade dispute between China and the US.

10% of European companies were moving or considering moving factories out of China, with Eastern Europe and South East Asia the areas most often cited as possible locations for those seeking to reduce exposure to US taxes.

However, while the negative repercussions of the US-China trade war for Europe - and European businesses in China - are clear, there is a flip side, not least the delay in President Trump's opening of another “front” by placing his proposed tariffs on auto imports from Europe which have now been postponed for at least six months.

“This is a benefit to European sentiment and growth” said Nomura. “In addition, there is the possibility that some trade between the US and China - made more expensive by the application of higher bilateral tariffs - will be diverted towards Europe.”

How the trade tensions between the US and China will eventually play out for the European Union depends to a large extent on the bloc’s ability to align positions and  consolidate maximum negotiation power at EU level, according to Wolfgang Lehmacher, leading logistics consultant and the former Head of Supply Chain and Transport Industries at the World Economic Forum in Geneva and New York.

He told Lloyd’s Loading List that the EU has a golden opportunity to establish a balanced relationship with China by leveraging the current geopolitical situation to its advantage.

“Personally, I look at the world of shifting trade patterns and supply chains as an opportunity for Europe,” he said. “Discussions with China need to be made a top priority for the Union.”

Lehmacher said the EU was becoming increasingly important for China and that the latter’s dispute with the US made now a good time to drive a hard deal, not least because the EU would be the next Trump administration target for tariffs.

“The world’s largest trading bloc has been constantly calling on China to adapt to the EU's rules and norms for years,” he added. “So far, the Chinese did not take action and the EU never held them accountable. “Now, this call might be dealt with.

“The possibility that the EU may close the common market to Chinese investors or introduce barriers similar to those that European companies face in China would be make it very difficult for the People’s Republic of China to run its economy smoothly - to avoid having capital flee out of the country for example.

“The US has probably inadvertently helped the EU to achieve some progress at the EU-China summit in Brussels that took place in April 2019. There, China committed to respect deadlines, to prevent forced technology transfers and to tackle the topic of state subsidies. “

He said further EU discussions with China should include access rights to ‘Belt and Road’ infrastructure and the more stringent rules for Chinese investment in critical European logistics infrastructure.

“This should be achievable as healthy long-term collaboration and cohabitation is also in China’s interest,” he added.

Image: Shutterstock.com

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