On the surface, the trend in EU-China trade seems clear: there is an irresistibly rising tide of imports from China, swamping a much smaller flow of exports from Europe. This is of course the source of some angst in Europe, especially among those industries that face competition in their home markets from Chinese exports. While this picture bears some resemblance to the truth, the reality is more complex and suggests that some of the underlying trends are far from clear.
The growth in China’s exports to Europe peaked in 2000 at 41.9%, fell to just under 10% in the following two years, and then accelerated again to 17.6% in 2003 and 20.9% in 2004. The trend continued again last year as the 25 EU member countries saw a 24% year-on-year rise in products bought from China.
Although yet another increase in the growth rate, the figure is only slightly higher than the previous year, which perhaps indicates that at least the acceleration has peaked. Of course, as the base level rises, it is not surprising that it’s harder to achieve higher rates of growth.
Weak at the core
More interestingly, hidden within those overall figures was a sharp slowdown in growth for core sectors which have traditionally been the key drivers of Chinese exports. In 2005, exports to Europe of machinery grew at their slowest rate in more than 10 years, while growth in exports of electronics also slowed sharply. The bulk of last year’s export growth was down to textiles, which despite the imposition of quota restrictions still managed some spectacular increases.
All this makes it difficult to see a clear overall trend in China’s exports to the EU. The evidence so far this year is still unclear. In the first quarter, imports by Germany, the largest EU importer from China, were up 43.1%, a sizeable increase on growth seen during the same period of 2005.
On the other hand, the Netherlands – the second-largest importer due to its use as a transit point for goods going to neighboring countries – experienced a significant slowdown in growth, just 23.2% during the first three months of the year. Imports by the UK, Italy and France, the three other major importers from China, all grew at a similar pace to first quarter of 2005.
If nothing else, these divergences emphasize the difficulty of treating the EU as a single entity when discussing China trade.
Even if the overall figures for the first quarter of this year show continued strong growth in Chinese exports to Europe, the pattern is not the same as last year. EU quotas on textiles appear to have had their desired effect as export growth slowed sharply or in some cases even fell. By contrast, exports of machinery and electronic goods are once again growing fast. Despite talk of China beginning to price itself out of the international market in some sectors, there is little evidence to show yet that cost pressures are having a significant effect on its overall exports to Europe.
There are also few signs yet that any move to shift production capacity back from China to other East Asian countries is having much impact on trade with Europe. Although exports from the major East Asian economies to Europe have generally begun growing again following declines between 2001 and 2003, the growth rates remain low by Asian standards, and well behind those of China. In some cases, notably Japan, exports to Europe have yet to show any real recovery, and actually fell again last year.
One factor in the acceleration of Chinese exports to the EU, often ignored in discussion in Europe, is the role of currency movements. In businesses where small percentages make a big difference to narrow margins, exchange rates can have a significant impact. The major depreciation of the US dollar – and with it the RMB – against the Euro from 2002 onwards was certainly a factor in the accelerated growth in Chinese exports to Europe. The situation was exacerbated as it coincided with the appreciation of most Asian currencies against the dollar.
The decline of the dollar against the Euro was somewhat reversed in 2005, which should at least have helped hold back growth in Chinese exports to Euroland. But the impact is likely to have been minimal, even when combined with the slight upward movement of the RMB. The recent volatility of the dollar, and uncertainty over the direction of the US economy, make it difficult to predict the effects of exchange rates on EU-China trade.
Chinese exports to Europe continue to be driven by the same factors as in recent years. Currency movements have been a factor in the equation for Europe, but the fundamental advantages of China are also critical. Processing for re-export remains at the core of much of the trade, and it also continues to be driven by inflows of foreign investment, a significant proportion of which is coming from European companies. Nevertheless, although the flow of imports continues to surge upwards, there are signs of change lurking beneath.