Goods in the machinery and transport equipment sectors dominate European exports to China. Unsurprisingly, these are the foundations upon which the EU wants to build a model for lasting success. It believes that increasing market access for machinery will add billions of euros to its exports to China.
Although somewhat disguised by the EU’s large trade deficit with China, European companies have played a significant role in providing equipment for China’s booming industries.
This is in a large part due to Germany, which is by far the largest European exporter to China. In 2007, China imported US$30.6 billion in specialized industrial machinery. Japan was the leading supplier, with US$10.6 billion, followed by Germany with US$5 billion.
The next-biggest European supplier in this sector was Italy, which ranked sixth with US$1.3 billion. Other major EU economies like France and the UK came far behind, with sales to China of just US$433 million and US$300 million, respectively.
Back and forth
From an economic point of view this makes sense, given the evident comparative advantage each economy has. For example, the EU exports billions of dollars worth of textile and shoe-making machinery every year to China, and in return it imports huge quantities of the products that this machinery helps churn out. In 2006, Germany exported US$1.1 billion worth of textile and leather processing machinery to China and Italy sold US$545 million.
The success of Germany in recent years does not just depend on major multinationals like Siemens, as there are hundreds of smaller equipment producers who have been making strong inroads in the China market.
It is also the result of the reforms that the German economy has undergone. While labor costs in the country have declined in recent years, those in other European nations have risen. This has allowed Germany to retain its competitiveness in the China market despite the strong euro. Its regional neighbors, however, have struggled to keep up.
However, the success of European exports in the industrial machinery sector will face a number of challenges. The EU’s efforts to gain greater market access have had only limited success. There will be continued pressure from Brussels, but it is unlikely that there will be a sudden change of policy on the part of the Chinese government resulting in the removal of existing barriers.
The strong euro may also pose a challenge to EU exporters. Even if Germany has managed to improve its productivity, a strong euro will limit its competitiveness in China compared to the US and Japan. Other European countries, which can’t match Germany’s track record for reform, will suffer even more if the exchange rate continues to disadvantage them.
Increasing production in the machinery industry in China, from both domestic companies and from foreign investors, will challenge those who rely on exporting to the Chinese market.
Harder to predict is the potential impact of unforeseen events. China’s machinery imports are directly related to its capital investment. A slowdown in investment in China could therefore bring a rapid reduction of orders to producers in Europe.
This chain of events may result from the effects of a wider global slowdown of the Chinese economy. It may also follow from changes in the Chinese economy, as the government seeks readjustment by attempting to slow excessive growth in some sectors, and also by changing the focus of growth, especially in export-related industries.
There is little doubt that China’s changing economic priorities will bring about an evolution in the type of equipment that European companies can sell. Low-value-added export industries such as textiles and shoes are likely to become less important. China’s imports of machinery in this sector have already experienced falls in recent years. Companies will need to seek out opportunities to equip new priority industries.
European success will not only depend on greater market access. The EU will continue to be a major supplier in a growing market, but not all sectors will offer the same opportunities. Even if entry barriers are reduced, Europe may find that this still does not necessarily guarantee trade success in China.