A trade war between the EU and China would be a disaster for Europe

The problem with EU tariffs is not their legitimacy, it’s their effectiveness.

Illustration by Mitch Blunt / Ikon Images

Over the past two decades, the EU became dependent on Russia for energy and on China for trade. Of the two, the dependency on China is of a greater order of magnitude. This dependency is going to become a big geopolitical problem.

You cannot see this from the trade data alone. The issue relates to how the European and Chinese economies are interconnected. European companies source inputs from China, produce intermediate components in third countries, assemble the final product both at home and in China, and from there export back to the European market. In other words, it’s complicated.

Josep Borrell, the EU’s outgoing high representative for foreign and security policy, said in August that a trade war between Europe and China was “in the logic of things”. I agree with his prognosis. But his shoulder-shrug response also suggests that he has not thought through the consequences. A trade war with China would be an absolute disaster for the EU.

Germany sits at the heart of the China crisis. The economies of central and eastern Europe are largely dependent on Germany, as are the Benelux countries. An EU-China trade war could do to manufacturing what Lehman Brothers did to finance in 2008. The world of finance was more interconnected than we knew back then; the same is true for manufacturing today.

In the past 20 years, Germany in particular helped China to build its manufacturing base, perhaps not realising the extent to which one day it would start to compete. China is no longer in the copy-cat business. It is ahead of Europe in most areas of high tech, except defence. With German help, China also managed to leap ahead of Europeans in many classic industrial segments such as solar panels. It is not just about electric cars.

The US identified China as a strategic adversary under the Trump presidency. The Biden administration extended that policy, restricting exports of high-performance semiconductors to China and imposing a 100 per cent tariff on Chinese-made electric vehicles. The EU announced its own tariffs on Chinese cars, albeit at lower rates of between 17.4 and 38.1 per cent. The Chinese chamber of commerce to the EU said that China may consider increasing tariffs on cars with “large-displacement engines”. This is another way of saying “German cars”.

The trade war has started. I am seeing more and more reports in the German media about companies warning that they can no longer compete with China. For the average European, everything that went well in the previous two decades is now going wrong. The cheap Russian gas is gone. The UK is no longer part of the EU. Joe Biden’s Inflation Reduction Act lured European companies to the US.

And now comes the China shock. China, the world’s second-largest economy, is doing what the Europeans, and particularly the Germans, were: flooding the world with uber-competitive manufacturing exports. I do not think this is a good strategy for China in the long run, but it works right now. It was also not a good strategy for Germany. The Germans live in the afterlife of a now-defunct industrial strategy. They have no plan B.

The best response to a flood of cheap Chinese imports would not be to impose tariffs, but to reduce the dependency on China. Enjoy the cheap prices now and start to build robust commercial relationships with other countries in Asia, Africa and the Middle East. With its Critical Raw Materials Act, the EU started to move in this direction by reinforcing supply chains for key commodities such as lithium, copper and nickel. But this needs to happen on an industrial scale, literally.

The very worst response is to impose tariffs. The problem with the EU tariffs is not their legitimacy, but their effectiveness. A trade war will hit European companies far more than it will hit Chinese ones, because European companies depend far more on China for their supply chains than the other way round. This asymmetry was the main finding in a recent study by Richard Baldwin, professor of international economics at the IMD business school in Switzerland, who took a deep dive into global supply chains. He concluded that “politicians who indulge in loose talk about decoupling from China need a clear-eyed look at the facts”.

A trade war with China would have a lot of unintended consequences. When the EU announced its car tariffs, it became clear that non-Chinese companies would be targeted as well. The EU tariffs also apply to cars produced by VW and Tesla in China and re-imported to the European market from there. In both cases, the EU ended up reducing the tariffs after howls of protests.

There is a parallel between the counter-productive nature of tariffs and the economic sanctions the West imposed on Russia. They are also not working, because the West misjudged the complexity of trade routes on the Eurasian continent. Politicians tend to rely too much on global trade statistics. The net balance in the trade between two countries does not tell you what you need to know. Russia gets its iPhones from Kazakhstan. And China has many ways to respond to our tariffs.

Geopolitics and economic geography impose constraints on the EU right now. It takes an instant to declare China to be your strategic adversary. But it takes decades to build supply chains, and decades to untangle them. If the US and China go to war over Taiwan, prepare for the EU to be conflicted over which side to support.