High US tariffs make it more likely a bigger share of China’s industrial overcapacity finds its way to Europe. This would benefit European consumers by lowering inflation and boosting real incomes. But without any trade response from Brussels, it could squeeze domestic production and to counter that, targeted trade defence measures may be required.
This would mark another step in the shift in EU-China relations from cooperative to competitive, and could mean the consequences of a second China shock are different from the first.
The first China shock refers to the decade-long surge in US imports of Chinese goods following the latter’s accession to the World Trade Organisation (WTO) in 2001. Generally, most economists agree the shock led to higher aggregate consumer welfare and employment gains in the US despite the loss of local manufacturing jobs. By reducing input costs for firms and consumers, the shock stimulated overall demand and shifted job growth from manufacturing towards services and tech.
Europe saw a more mixed impact. France and the UK suffered substantial declines in industrial output and employment, and the lower value-added parts of production in Germany and Italy, such as textiles and steel, also shrank. But since China’s exports were concentrated in the consumer electronics, clothing and appliances industries, the higher value-added parts of production in the EU were more sheltered, including cars and machinery.
Of course, this is no longer the case. China has since specialised in many of the same industries the EU previously dominated, making the bloc more exposed to a second China shock than it was to the first. Indices of export similarity show China now competes with the EU in many more export categories than the US, UK or Japan.
