How very different EU and US economic realities regarding China appear to be converging into one
 The two needed elements - Europe and America - in the current decoupling process from China are moving at different paces, but to much the same end it would appear. While they share similar motivations in wanting less to do with the Xi Jinping Communist regime, Europe and America have markedly divergent interests.
For America is the principal buyer of Chinese goods, but in terms of dollar volume, Europe is chiefly a seller of technology to China. To achieve a shared goal one must develop very different supply chains in one case and very different "sales chains" in the other.
In 2020, for example the European Union exported EUR47 billion (US$50 billion) of services to China, while China exported EUR31 billion to the EU.
America faces a very different problem, but again proving that yet again the China habit is very hard to break in both cases. US retailers are replacing their old “China plus one” sourcing model with a global sourcing strategy that includes a shift in production to southeast and south Asia, near-sourcing in Latin America, and a return of some production to the US.
That diversification of product sourcing is needed because the size of China’s workforce is declining, its labour costs are rising, and other countries such as Vietnam and India are investing in manufacturing and logistics infrastructure, said Paul Bingham, director of transport consulting for S&P Global Market Intelligence.
“China faces a difficult challenge for a number of reasons,” Mr Bingham told New York's Journal of Commerce.
To mass importers, a global sourcing strategy is needed because no one country has the capacity to immediately step in and replace the production capacity and transport infrastructure that China built over the years, said National Retail Federation vice president Jonathan Gold.
“It takes time to shift your supply chain,” he said. “There is no new China to take up all of the capacity that China had.”
The fact is that China, including Hong Kong, still dominates the sourcing landscape, supplying 40.7 per cent of US imports last year. But that was down from 42.4 per cent in 2021 and nearly as low as in 2006, when the share was just 0.1 percentage point higher, according to PIERS data.
The US automobile industry may gravitate toward more co-production with Mexico where parts and electrical components are shipped across the border for assembly using less costly Mexican labour, he said.
High-tech industries that are capable of replacing some of their labour requirements with automation, such as chip producers, will build production capacity in the US, said Mr Bingham.
Based on the direction of retail sales and consumer spending, retailers have experienced a decline in US imports through the first half of 2023, with a slight uptick in the second half of the year, Mr Gold said. This comes after strong retail sales growth of seven per cent in 2022 and especially strong growth of 14 per cent in 2021.
Retailers must also cope with inflation, high interest rates, and raw material and labour shortages. Sourcing uncertainties are also a factor as China attempts to recover from its declines in production due to Covid lockdowns and US tariffs.
Mr Bingham forecasts only slight growth - 0.5 per cent - in gross domestic product (GDP) in 2023 due to the Federal Reserve’s “single-minded” focus on reducing inflation to its preferred rate of two per cent. He said while the Federal Reserve in recent months has been able to push inflation lower by raising interest rates, the Fed's two per cent goal will not be reached until 2024, say optimists.
Andrei Lungu, president of the Romanian Institute for the Study of the Asia-Pacific (RISAP), writing in Canberra's East Asia Forum, presents a balanced view of the EU position, which he says is conflicted and confused.
At the same time, the EU has remained committed to engagement and cooperation given China’s crucial role in addressing global and regional challenges. In that regard, the EU’s current approach towards China set out in the “Strategic Outlook” Joint Communication of March 2019 remains valid. The EU continues to deal with China simultaneously as a partner for cooperation and negotiation, an economic competitor and a systemic rival."
While China talks about increasing ties of friendship and cooperation with Europe, it continues to make unfriendly moves. For example, the Chinese side refused to run a pre-recorded speech by European Council president Charles Michel criticising Russia’s invasion of Ukraine at the China International Import Expo. This was followed by the lack of any meeting between President Xi Jinping and Mr Michel or European Commission President Ursula von der Leyen at the G20 Bali summit, where President Xi met other European leaders.
"China has not really tried to arrest the precipitous decline in its European relations," said Romania's Mr Lungu. "The Comprehensive Agreement on Investment should have been such an attempt, but after the conclusion of negotiations Beijing torpedoed hopes for the agreement’s ratification by sanctioning the very people who were supposed to approve it in the European Parliament."
In areas like state distortion of markets, sensitive technology, human rights, worries of political interference in Europe or aggressive diplomacy, Beijing has only provided more ammunition to those who want to curtail ties with China, Mr Lungu said.
"Yet Chinese rhetoric consistently paints a different picture. The Chinese side calls the European Union a partner, pleads for closer cooperation, urges it to pursue ‘strategic autonomy’ and prevent any ‘third party’ from interfering in bilateral relations in every meeting or call with European officials.
The political environment in China makes any true detente unlikely, Mr Lungu said. "The Communist Party leadership’s grand narrative of China becoming strong - combined with its reluctance to admit mistakes - makes it highly unlikely that China would be the first to reach out to Europe."
Neither side can or wants to take the steps necessary to patch up relations, he said. "Nor do they want to recognise political realities and adopt a strategy tailored to the current geopolitical environment of confrontation. Instead, leaders on both sides fall back on the easy option of talks and meetings - even though these will not change trends in bilateral relations," said Mr Lungu.
As the geopolitical environment continues to deteriorate, it appears that economic ties and other relations will simply move on autopilot without any side having a clear or realistic view of where they want relations to go or how to get there.
The hardening political environment will eventually impact economic ties - as relations and cooperation become more controversial, both sides will implement economic restrictions. Future meetings might bring the illusion of communication but will do little to change the trajectory of EU–China relations, he said.
Thus, it appears that while the US and the EU are on different paths, they may well share the same destination. |
