China's order for 150 Airbuses signed during Premier Wen Jiabao's visit to Paris in December helped to put a year-end sparkle on what in some ways has been a difficult period for EU-China trading relations. Even if the benefits to the EU will not be seen for a number of years, the deal, which was the largest-ever single order for Airbuses, was a political and commercial gesture that helped to redress some of the trade tensions that arose earlier in the year.
The first half of 2005 was dominated by talk in Europe, especially in France, of surging Chinese exports to the EU, led by textiles. On the surface at least, the figures show this perception to have been correct. The latest EU figures indicate that 2005 followed the trend of recent years of rapid increases in EU imports from China, and much slower growth in exports in the opposite direction. But, leaving aside the emotive language of the EU being overwhelmed by floods of Chinese exports, it is difficult to draw clear long term conclusions about where trade between the two is heading.
According to EU figures, during the first three quarters of 2005, there was a 39.2% increase in imports from China made by the 25 member states. Exports to the mainland grew by a much slower 16.2%, the result being that during this period the EU trade deficit with the mainland jumped by more than half. Nevertheless, when considering the overall pattern of EU trade with China, it should be remembered that the EU consistently runs a fairly substantial trade surplus with Hong Kong, and that many goods from Europe are re-exported to China through Hong Kong.
The overall EU-China trade figures for 2005 may prove to be something of an anomaly given the surge in European textile imports resulting from the final removal of the distorting effects of the Multi Fiber Arrangement at the beginning of the year. It is difficult to read a trend from these surges. At least in the short term, the growth in textile exports will be held in check by the limits imposed by the EU, at least until they are removed. They may turn to be a one-off event that later stabilizes, as many in China have argued would be the case.
More significant is that the statistics available for 2005 show a tailing off in import growth for electrical and mechanical goods, which account for almost half of Chinese exports to the EU. In a year where the overall growth of Chinese exports has been below the rates often notched up in recent years, electrical and mechanical goods fared even worse. A slowdown in this sector is probably a better indicator of a fundamental trend in EU-China trade than the growth in textile imports.
EU exports to China have performed well in certain sectors. The best performance has generally been in areas where China has strong demand for raw materials. Among the major categories of EU exports to China, plastics, wood pulp and metals such as iron and steel, copper and nickel have shown strong growth. Even before the signing of the huge Airbus deal in December, it was also a good year for aircraft exports. Sales of mechanical and electrical goods are the most important category of EU exports to China, even if they are much smaller than the flows in the opposite direction, but they have performed poorly in 2005 along with vehicle exports, another category in which Europe has traditionally performed well.
The overall trends are reflected with variations in the trade of individual EU members. All of China's main trading partners in Europe have been increasing their imports significantly.
In the January to September period, Germany increased its imports by 24%, the Netherlands by 36.6%, the UK by 20.9%, France by 19.8% and Italy by 20.2%. Export performance by the major trading partners has been more varied. Germany, normally the most successful European exporter to China, actually saw exports fall by 1.6%. The Netherlands saw a slight increase of 3.6%, the UK did better with an increase of 12.4% and France even better with 17.9%. In contrast, a number of medium-sized EU countries such as Austria, Belgium, Spain and Poland actually seem to be enjoying significant rises in exports to China, with increases in the region of 30% in the first three quarters.
The fall in German exports is in part the result of a sharp drop in vehicle sales, which is not entirely surprising given the recent difficulties of the Chinese auto sector. But, sharing the responsibility is a smaller drop in exports of mechanical and electrical goods that form the core of the German export machine. By way of compensation, Germany, as one of the assemblers of Airbuses, has benefited from increased aircraft sales. In the first three quarters of the year aircraft deliveries from France, while up substantially, grew less than those of Germany, and exports of electrical and mechanical goods were also relatively stagnant. The UK and Italy, in line with the trend, had either small increases or actual falls in exports of machinery and electronics.
The increase in EU exports to China in 2005 may turn out to be a creditable performance. But it will be a disappointment that core sectors such as machinery, where Europe should excel, have not performed better. If these sectors cannot compete in the market, then it will take a lot more than a few Airbus orders to redress the trade imbalance with China.
Duncan Freeman, a writer and consultant in Brussels, specializes in China business.