China Trade With EU

I’m not very happy with the ‘US Trade Figures‘ post I put up last Friday. I think it’s a glorious mess. The key to the problem is that I tried to deal with two – interrelated but disinct – topics at once: the euro and China trade. So today lets ignore the euro (which has once more resumed the downwards drift, even as I write) and take a bit of a closer look at where we are – in trade terms – with China. (Btw: the planet has finally returned to its orbit, and Brad Setser has an analysis of the US trade data here).

The big item in this weekend’s news is, of course, the agreement reached with Beijing on textiles. The EU textile industry will now have three years to adapt, but since textile manufacturers don’t appear to have taken too much advantage of the ten previous years, it is hard to know whether this will serve any useful purpose. Doubly so, since it is not yet clear how the calculations will be made, and I have the distinct impression that much of the recent surge in imports will now, in effect, be consolidated.

Be that as it may, what about the broader issue?

The EU, like the US, has a large and growing trade deficit with China. The ‘original’ EU 15 had a deficit of 70.8 billion euros (US$90 billion) on their trade with mainland China in 2004, compared with 55.5 billion euros in 2003, and 47.6 billion euros in 2002.

The eurozone (which is not co-extensive, of course, with the old EU 15) has a trade deficit with China which is growing, and in the case of some member states (Spain, Italy) significantly so. Now even if the eurozone trade deficit hasn’t been attracting as much attention as that ‘other’ trade deficit with China, interest in the issue is growing, and whatever the final outcome of Mandelson’s recent visit to Beijing, there are going to be political consequences. The question is complicated by the fact that to date much of the attention has been focused a limited number of ‘headline hitting’ items but the issue is clearly much bigger than this.

So where are we?

Well the first obvious detail is that the external trade surplus of the eurozone in the first quarter is down significantly year on year from the first quarter 2004 (4.5 billion compared with 16.2 billion last year). This may not be as dramatic as it appears at first sight, since quarterly readings vary considerably, but the general trend is clearly that the surplus is reducing, and this is more than a passing phenomenon. One issue may be that some of the impact of the earlier euro ‘surge’ is only now being felt.

And what is the importance of China in these numbers?

A good place to start exploring this might be here:

In 2004 China remained the EU 2nd biggest trading partner (after the US) and, according to China’s statistics, the EU became China?s 1st trading partner (ahead of the US and Japan) China’s 2nd biggest trading partner (roughly on the same level as the US, behind Japan).

Whereas the EU enjoyed a trade surplus with China at the beginning of the 1980s, the EU-China trade relations are now marked by a sizeable and widening EU deficit with China (around ?78.5 billion in 2004); this is the EU’s biggest bilateral trade deficit).

Now remember, this is EU, not eurozone data. 13.6 billion of this deficit was with the UK, but even stripping this out still leaves plenty to share around the remaining countries.

In fact, although it is common to speak of the eurozone trade deficit with China, the reality is that there are many different trade deficits. As with almost everything else, a eurozone aggregate hides an enormous amount of national diversity.

Finland, for example, is the only EU member to have a systematic trade surplus with China – (others, such as Sweden and Austria, do occassionally run a surplus). Some simple points seem to stand out: firstly there is strict relation between the amount of trade with China and the balance on that trade. And secondly, and perhaps more ineterestingly in terms of EU politics there isn’t any necessary relation between the size of the deficit, and the degree to which it is perceived as problematic.

In the China context it is important to distinguish those countries who enjoy an underlying trade surplus – like Germany, the Netherlands, Finland – from those whose general trading and competitive situation is weak – Greece, Portugal, Spain. The Netherlands – for example had a deficit of 14.09 billion euros (and a feb 2005 y-o-y deficit increase of 41%), but trade for the Netherlands is not a big problem. Germany, with a total trade of 49.6 billion euros in 2004, is by far the largest European trader with China, but it is also in relative terms the closest to balancing its trade of all the major European economies, having a comparatively small deficit of only 7.6 billion euros. Greece by way of contrast had a deficit in 2004 of 1.3 billion euros, and an annual rate of increase in Feb 2005 y-o-y of 53%, whilst at the same time Greece’s overall balance of trade continued to remain in poor condition – a 6.9% CA deficit . (Spain had a CA general deficit of 5% 2004 – which included a deficit of 4.8 billion euros with China – and a Feb 2005 y-o-y rate of increase in its China deficit of 51%, Portugal which had a CA deficit of 7.7% GDP in 2004, had a feb 2005 y-o-y rate of increase of China related deficit of 64%). So we have two extremes: Germany and the Netherlands OTOH, and Greece, Spain, Portugal and Italy (see below) on the other.

Now somewhere in the middle of this picture comes France.

France’s deficit – 6.3 billion euros on a total trade of 17 billion euros – is far from being among the most important and is similar in size to Italy’s (which is running at 7.4 billion euros in a total trade of 16.3 billion euros).

As Duncan Freeman points out in a useful and intelligent review of the EU’s trade relations with China::

“Many French citizens are apparently convinced that their country is threatened by an imminent flood of imports from China. Looking across the range of opinion in France focusing on the increase in textile imports since the beginning of the year, it would be easy to believe that this was so. In fact, during the first two months of 2005, France enjoyed a spectacular improvement in its trade with China, performing better than any other major European economy. According to the latest EU statistics, French exports to China rose 61.7% in the first two months of 2005 compared with the same period of the previous year, while imports rose by only 14.4%.”

“Admittedly, the figures for two months do not necessarily tell the whole story, and France still has a deficit on trade with China. It is also true that the increase in French exports was as a result of aircraft deliveries to China. Since France is where the Airbuses are assembled, aircraft sales are the determining factor in how well French exports perform in China, and only if deliveries are maintained for the rest of the year will the performance of the first two months be sustained.”

Italy’s situation is very different from France’s in one important sense: Italy’s trade balance is in the process of deteriorating significantly. Italy’s y-o-y deficit with China rose Feb 2005 by 51%. A good summary of the kinds of issues involved can be found in ‘Italy Stuck in a Rut’, a study published by the EU Commission in May.

This study points out:

Italy?s product specialisation, unlike that of countries such as Germany or France, has not significantly changed over past decades in reaction to global economic developments. Italian industry remains strong in traditional, low-skilled labourintensive sectors for which global demand is growing below average. The inertia is generally attributed to a number of structural factors which are hampering change, including low levels of R&D investment, low human capital, low competition ? issues that fall within the remit of the Lisbon strategy.

For Italy, read Portugal, read Greece, read Spain. The ‘lethal’ cocktail of relatively cheap credit *and* cheap imports via a fairly strong currency is not – as predicted by the theory – producing modern, structurally sleek and competitive economies. It is producing debt, inflation and lack of competitiveness. Such may be the euro’s legacy in this little corner of the continent.

So what can we learn from this whilstlestop review?

Well principally that trade with China is a problem for those countries which have a preponderance of low value manufactured exports, since these are in direct competition with the nascent Chinese industries. Those countries who have competitive exports – UK, Germany, Netherlands, Finland, Sweden -are *not* threatened by China, indeed in these countries consumers can welcome the prospect of enjoying cheap manufactured products which they pay for by selling other products elsewhere. At root, I suspect the US problem is somewhat similar: some regions/states enjoy the benefits of trade with China whilst others see their economic livelyhood threatened. Unfortunately in the US system, those who are threatened seem to have a disproportionate political influence. I wonder whether one of the ironic consequences of the recent French vote will be that this same situation will *no longer* be the case here in the EU.

NOTE: The data used in this post generally come from – EU external and intra-union trade: monthly statistics

The article referred to in the text: EU-China trade friction – A problem of perception (by Duncan Freeman) is also well worth the read.

Brad Setser has a good summary piece on China and the US here, and a summary of a recent trip to China here (both with Nouriel Roubini).

3 thoughts on “China Trade With EU

  1. Good post. I do think lot of the change is due to the fact that China has a currency peg to USD, so while the dollar has fallen so has Remnibi (sic?).

    And according to latest first quarter data, January to March 2005 Finland doesn’t have a trade surplus with China anymore. Chinese imports at the period were 556 million euros, or 5.2% of total imports, with y/y growth of 46%. Finnish exports to China were 403, 3.3%, +3% respectfully. To put the figures in perspective 1% of Finnish GDP is something like 1.4 billion euros. Overall, Finland still has a hefty surplus (1.6 billion in first quarter) but unsuprisingly exports to USA are down 32% which I take as further evidence that this is mainly about Euro. Correspondingly, with Euro now lower we should expect the Chinese deficit to lower too for the whole euro zone.

  2. Interesting data. A few points. It shows again that trade results in winners and losers, in Europe and in the United States. What i’m missing is the overall picture of trade with China, which i think is still positive. I see essentially nothing wrong with running a trade deficit with China. In fact i can see something very positive about the current situation. While rich countries are running a deficit with China, that last country is absorbing imports in massive amounts from still poorer countries in Africa (oil…) and Latin-America (GMO soya from Argentina). All these countries are getting a notch up on the development ladder this way, and it would be a bad thing if protectionist pressures in Western countries would crash the whole system.
    And then there is France. Ah, it’s exports are up thanks to Airbus. Mmmm. I’m smelling unfair trade practices here (government involvement), the kind of practices we use to accuse China of. Oh, the irony.

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