Europe could be casualty in US-China trade war

Problems in Germany have a knock-on effect across Europe for many reasons including its reliance on other countries as sources of components used in manufacturing as well as for labour and services.



By Jon Van Housen and Mariella Radaelli (Euroscope)

Published: Sun 18 Aug 2019, 8:54 PM

Last updated: Sun 18 Aug 2019, 10:55 PM

Barely keeping its head above water with 0.2 per cent growth, Europe could be a bigger casualty in the trade conflict between the US and China than the principal combatants.
With China allowing its currency to depreciate to maintain a price edge even with US tariffs, exports to China will now be that amount more expensive for European companies. As well, Europe's legendary cities and sites - usually on the top of the bucket list for millions of Chinese eager to see the world - have become more expensive.
Now many of the 150 million Chinese traveling annually could be looking for cheaper alternatives. Some are limiting their holidays to within China. "Overseas travel is being hit with a double whammy of a weakening currency and rising political tensions," said Ernan Cui from Hong Kong-based financial services firm Gavekal Dragonomics. If the trade war worsens "more downward pressure on the renminbi would translate into more downward pressure on Chinese outbound tourism".
As the world's two largest economies remain locked in real and threatened trade sanctions, the general turmoil and specifics of European trade could even tip the region into recession. The climate has caused business confidence to fall in six of the past seven months in Germany, where exports are almost half of annual economic output.
Long the shining economic star in Europe, Germany, the region's largest economy and biggest exporter, took the biggest hit in Europe in the second quarter this year as its GDP figure slid to a negative 0.1 per cent. Problems in Germany have a knock-on effect across Europe for many reasons including its reliance on other countries as sources of components used in manufacturing as well as for labour and services.
Trying to uphold conventional agreements, trade standards and play by WTO rules, Europe seems an innocent bystander caught in the crossfire.
"Trade tensions stoked by US President Donald Trump are clouding the economic outlook in Europe," wrote analysts at Berenberg Bank in London. They noted that many European companies could also suffer because they produce and sell goods in both the US and China. Examples include German carmakers Daimler and BMW. In today's interconnected world, they both make cars in China and the US that are in turn exported to other countries.
In an effort to ward off a steeper slowdown or possible recession, the European Central Bank signaled it could provide more monetary stimulus in September, including more purchases of bonds to pump newly created money into the Eurozone economy. "What is hurting German exports currently is the uncertainty that has spread across the globe and has also paralysed many European economies," said Carsten Brzeski, chief economist for Germany at ING. "Looking ahead, the outlook for German exporters is clearly in the hands of the US and China."
And the erratic figure that triggered the crisis, US President Donald Trump, could even up the ante. In his zero-sum view of world trade, he is also unhappy with the trade balance between Europe and the US.
Figures released last week show that the EU's trade surplus with the US was nearly 75 billion euros in the first half of 2019, up more than 11 per cent from the same period a year earlier. Despite Trump's avowed aim to boost US production and trade, imports from Europe have continued to outpace US exports under his administration, and at an increasing rate. A decade ago Europe's trade surplus with the US was 18.7 billion euros, a quarter of what it is today.
Adding to the turmoil, Trump again demonised some of the former closest allies of the US just last week. "The European Union is worse than China, just smaller. It treats us horribly," said the president.
It all adds up to a complex machine so poorly maintained it can barely function. Some analysts have turned to more cataclysmic metaphors to describe the chaotic situation.
"Weaker global trade, a struggling global auto industry, Brexit and China's economic problems get pretty close to a perfect storm" for Europe, said Kit Juckes, a strategist at Societe Generale.
"I see fires everywhere, but not a lot of firefighters," said Sung Won Sohn, an economics professor at Loyola Marymount University and president of SS Economics. And true to Trump's crisis-creating atmospherics, a seeming breakthrough with EU Commission President Jean-Claude Juncker last summer has gone nowhere. At the time Trump called Juncker "a fantastic gentleman, a fantastic businessperson".
A year on, the previous complaints are still heard from the US president, while EU Trade Commissioner Cecilia Malmström admitted late last month that there continues to be "a stalemate". Real trade talks never even started. No doubt like so many, Europe's businesses and trade leaders are profoundly hoping the US polls are right this time: Polls show that Trump is unpopular with a strong majority of voters as the country gears up for elections in 2020. In 16 months a more rational, qualified person should be leading the world's biggest economy.
But a year and a half can seem a virtual lifetime. It's a long time to hold that sigh of relief.
Jon Van Housen and Mariella Radaelli are editors at www.luminosityitalia.com


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