Filenews 7 November 2024 - by Lionel Laurent
As the clouds of Trump's announcements of new tariffs on European goods are slowly gathering over the European Union, several of the eurozone's once-mighty industries are experiencing one of their most difficult periods.
On the one hand, hundreds of French workers found themselves protesting a possible sale of the struggling chemical company Vencorex to a subsidiary of China's Wanhua Chemical Group. Volkswagen employees are threatening to strike over an expanded plan of cuts that could lead to plant closures in Germany as the automaker's 15-year dominance in China draws to a close.
Both examples illustrate the danger that China's increasing pressure on European companies brings – a condition that will continue to exist regardless of any "aggressive" moves by Donald Trump after his election. Luxury heavyweights such as LVMH and Kering are taking significant losses due to weaker demand from China, while microchip makers, chemical manufacturers and automakers are battling Chinese competition, which can often be described as "uneven" given Beijing's support measures – the boldest since the pandemic. Typical are the statements of Vencorex employees, who claim that their company will be bought by the same rival that "sank" them.
China is disrupting the European business landscape after a period of quarterly financial results in a negative mood, with half of the top companies failing to meet their targets.
China is Europe's second-largest export market, mainly through German industrial goods. After offering steady growth to European companies for years, Beijing is now a source of systematic rivalry and fierce competition, fuelled by what UBS defined as "rapid" investment in domestic production capacity and pressure for local supply chains. Major microchip equipment companies such as ASML Holding, medical technology companies such as Royal Philips and French electrical equipment company Rexel are among those sounding the alarm.
Beyond semiconductors, chemicals, industrial goods and the hit to luxury goods (where China absorbs a quarter of sales), the sector that bears obvious signs of unrest is automotive. China has now overtaken Germany in its area of traditional supremacy, eurozone car exports to the Asian country are declining and VW has issued two profit warnings in the space of three months.
Perhaps this would matter less if Europeans could fill the gap, but it is not. And since the U.S. is currently the engine of the global economy, Europe and China are essentially competing to "win" the American consumer. According to economist Nicolas Getzman, "the main competitor of the Chinese economy seems to be Europe."
European companies aren't completely defenceless: They could theoretically rearrange supply chains, invest elsewhere, or expect a recovery in China. Countries facing a flood of cheap Chinese goods domestically could pressure politicians to change the trade framework — as is the case with new tariffs on Chinese electric vehicles — or cut their own costs to make their products more competitive.
But the size of the innovation, energy and productivity gap haunting Europe, as outlined in Mario Draghi's recent report, means a bigger boost is needed. The traditional German strategy of stimulating competition by lowering wages may not work this time. China's massive state investment in manufacturing and its beastly scale pose growing obstacles to this race, according to Jamie Rush of Bloomberg Economics. Tariffs may therefore offer time, but they are not a 'magic solution', judging by competitiveness issues in sectors such as energy. A preferable scenario would be for Germany to use its strengths such as low debt-to-GDP, cheap borrowing rates and high savings to invest in innovation, energy and infrastructure.
What is happening in China and what may happen in the US after Donald Trump's victory should awaken Europe to its economic model, which promotes exports at the expense of domestic demand, technological progress and geopolitical security (as Covid-19 and Russia's invasion of Ukraine have shown).
As the English proverb goes, "old habits die hard." The EU is already seeking a compromise on tariffs on Chinese electric vehicles and appears optimistic that it can find ways to avert an imminent trade war with Trump. At the same time, however, Beijing's policy is beginning to bear fruit, and Trump has openly blamed U.S. partners "for the damage they have caused" to the U.S. economy. In this climate, the difficult times for Europe's economy have only just begun.
