Europe is among the most exposed to the China shock as it faces a price war, a massive surge of cheap Chinese goods imports and de-industrialisation.
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NEW DELHI — Europe is among the most exposed to the China shock as it faces a price war, a massive surge of cheap Chinese goods imports and de-industrialisation, but they are not taking the necessary actions against these threats because of fears of retaliation and coercion from Beijing, according to an article published by the European Council on Foreign Relations (ECFR).
The article laments that a comprehensive policy package to offset this imbalance with China — including import tariffs, public procurement restrictions, FDI conditionality or mandatory supply chain diversification standards — continues to be derailed by Berlin and other EU capitals.
Instead, the European competitiveness debate is largely dominated by fights over marginal solutions, not least because Chinese coercive threats are having a chilling effect on EU policymaking.
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For example, German chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni have made deregulation and slashing red tape the core of their response, with many European multinationals consistently warning of trade conflicts and retaliation should Europe adopt legitimate trade defences, the article points out.
It further states that while this lacklustre response is partly down to genuine disagreement among European capitals, it is Beijing’s coercive leverage that is largely responsible for the inaction.
The article highlights that China is ramping up its threats of economic coercion against Europe. In April, China’s State Council enacted the Provisions on Industrial and Supply Chain Security which instructs its companies not to comply with EU investigations or sanctions. Beijing also cut off dual-use supplies to seven European defence contractors over Taiwan, and made explicit threats over the EU’s proposals on its Industrial Accelerator Act and its Cybersecurity Act, it points out.
The article underscores that although Chinese innovation and competitiveness are real in pockets, “the systemic price advantage is largely a product of state capitalism. For example, the renminbi being undervalued by somewhere between 15-30 per cent acts as a de facto export subsidy on everything China sells abroad. Chinese industrial subsidies run at around 4 per cent of GDP, roughly double the EU average, while a record number of its companies are loss-making. The result is a fierce domestic price war that many Chinese manufacturers can only survive by exporting their way out, while Chinese banks depend on that export growth to keep rolling over the credit they have already extended.”
“Europeans can only successfully deal with the China problem when industrial protection and economic deterrence are combined into a comprehensive agenda. Either Europe finds a response that addresses both, or it will address neither,” the article observes.