By blaming China for its trade deficit, EU is barking up the wrong tree

Instead of complaining about the lack of access to China’s market, Brussels should raise its own productivity
It should also rethink the many ways it is stoking bilateral tension while reducing trade, including through a tough export control regime, suspension of a bilateral investment deal, and probes into Chinese industries

Zhou Xiaoming

Published: 8:30pm, 23 Oct 2023

Why you can trust SCMP

These days, complaining about the European Union’s trade deficit with China seems a fashionable thing to do in Brussels. China is the EU’s second-largest trading partner after the US, and bilateral trade hit an all-time high of US$847.3 billion in 2022. The same year, China had a record trade surplus of US$276.6 billion.

Brussels attributes this “trade imbalance” to the lack of access to China’s market. EU trade commissioner Valdis Dombrovskis criticised China’s level of openness as not being “the same as the level of openness from the EU side”. Meanwhile, the bloc’s chief diplomat Josep Borrell said China’s trade surplus with Europe had more to do with poor market access than productivity issues or a greater competitive advantage.

While the EU’s concern over its massive trade deficit is understandable, it is overlooking the fundamental causes.

The fact is, China’s trade surplus is the result of the interplay of market forces. It is, first of all, partially due to the country’s manufacturing prowess. This is true not just of Europe, but also the rest of the world.

One need look no further than at US-China bilateral trade to be convinced of the competitiveness of China’s export machine. Despite an average US tariff rate on Chinese goods of around 20 per cent, China’s trade with the US broke a record in 2022. Its trade surplus in 2022 was also a record high, according to Chinese customs data.

Second, China’s trade surplus may also have to do with the EU’s weakened competitiveness, relatively speaking. From the pre-pandemic year of 2019 to 2022, while the rest of the world exported 35 per cent more goods to China, according to Ministry of Commerce data, the EU’s exports to the country increased by a mere 3.2 per cent.

As a result, the EU’s share of China’s imports fell to 10.5 per cent from 13.3 per cent, down by 2.8 percentage points. Since no restrictive measures targeting the EU were taken by China during that period, the EU’s shrinking market share probably indicates a loss of international competitiveness.

The container ship Cosco Shipping Virgo, which ferries goods between China and Hamburg, Germany, calls at a port in Ningbo, Zhejiang province, on August 21. The EU’s share of imports into China has fallen in recent years. Photo: Xinhua

In response to the EU’s grievances, China has recently agreed to ramp up work on improving market access for cosmetics, infant milk formula and some other products the EU wants to get to China. These measures will boost EU exports to China, but they can only do so much. The trade imbalance cannot be improved significantly without addressing some of the key factors behind the deficit.

Currently, the EU’s drive to get more goods and services into China is hampered by its own stringent export control regime. The bloc maintains an extensive list of dual-use goods and technologies that need approvals before they can be shipped to China. Many products and technologies on the list have a ready market in China, and they are where the EU enjoys a competitive edge.

The EU’s export control regime has therefore worked to dent the crown jewels of its export sector, hitting exports to China. Yet Brussels has not even acknowledged that this is a contributing factor to its trade imbalance.

The EU has increasingly prioritised geopolitics and values over commercial interest. The European Parliament withheld approval of the China-EU Comprehensive Agreement on Investment in 2021, in the wake of Chinese sanctions on some European entities and individuals, imposed in response to the EU’s sanctions.

To break the deadlock, China’s Ambassador to the EU Fu Cong proposed that the two sides lift the sanctions simultaneously. Yet his proposal went unheeded.

Visiting EU foreign policy chief Josep Borrell (left) and Chinese Foreign Minister Wang Yi attend a press conference following the EU-China High-Level Strategic Dialogue, in Beijing, on October 13. Photo: Pool via AP

Under the investment agreement, China is committed to opening up its market to EU companies in a way it has never done before, covering sectors including new energy, cloud computing, financial and health services, and manufacturing. Consequently, the agreement addresses most of the EU’s concerns on market access. However, politicians in Brussels are known to sacrifice trade for values and ideology, and they have done so in this case.

Indeed, it could well be the EU’s geopolitical plays and budding trade protectionism that will largely determine the contours of its trade with China.

Although Brussels has objected to being viewed through the lens of US-China competition, it has been following Washington’s moves, including a ban on Huawei’s 5G equipment and a crackdown on the sale of advanced semiconductor technology to China. The EU is also planning to announce an anti-subsidy probe into Chinese steelmakers, at Washington’s request. This can only curb EU trade expansion.

In focusing on China, Europe risks missing true ‘de-risking’ dangers

Similarly, the EU’s de-risking strategy will eventually lead to a reduction in trade. When Brussels considers the interdependence between China and the EU as a risk, will Beijing reciprocate?

Meanwhile, trade protectionism is on the rise in Europe. Brussels has launched an anti-subsidy probe into Chinese-made electric vehicles, a move Beijing views as a “naked protectionist act”. If the investigation leads to punitive tariffs on Chinese EVs, China would have no choice but to retaliate in kind to defend its interests.

01:08

China’s largest shipment of electric vehicles sets sail from Shanghai port

Moves like these would stoke trade conflicts, frustrating the EU’s effort to get more goods into China. In an editorial on the probe, the Financial Times said, “Resorting to protectionist measures is not in Brussels’ long-term interests.”

Clearly, by ascribing its trade deficit with China to poor market access, the EU is barking up the wrong tree. To address the trade imbalance, it needs to shift its focus to the root cause, and tackle the problem head on – by improving productivity, depoliticising economic and commercial issues, and refraining from resorting to trade protectionism.

Zhou Xiaoming is a senior fellow at the Centre for China and Globalisation in Beijing and a former deputy representative of China’s Permanent Mission to the United Nations Office in Geneva