Floor. China is taking over market shares, especially in high-tech sectors, and there is no end in sight to the success. The development has increased the debate about what kind of trade and industrial policy the EU should pursue. It is important for actions to be based on an overall consideration of Europe’s future.
China’s export success has been strong in recent years. Exports rely more and more on high-tech sectors, such as green transition products and semiconductors. The rapidly growing exports have long been a topic of discussion among trading partners. For example, actions to strengthen China’s currency or reduce state support policies have been demanded for decades.
Trade negotiations between the United States and China have become commonplace. It is based on the great power competition between countries, where technology plays a big role.
In the EU, there is increasing concern about whether European companies will remain in the competition. Little by little, more trade barriers have been put in place, and this year the EU Commission has also proposed numerous measures aimed at changing the competitive landscape.
An unusual economic model
The concern is justified because China’s economic model differs from European market economies in many ways. The main influence on the export success has been the economic policy that strongly emphasizes investments and the way the business world operates.
Public stimulus measures have focused on investments instead of supporting the demand side. The large size of the financial sector and the restrictions placed on capital movements have made the financing of investments easy and cheap.
The result has been rapid technological development, but also extensive overcapacity problems in infrastructure, the housing market and industry. In a traditional market economy, these problems would have driven economic development into big problems more than once, but China’s publicly owned banking sector sweeps the problems under the carpet and investors have to settle for low returns.
There is no change in China’s economic or trade policy that would even out the situation compared to EU countries.
In recent years, the problem has been exacerbated by sluggish domestic consumption growth, which is reflected in a weak labor market and low wage pressures. Several factories report that wages have remained almost unchanged in China after the corona virus, while in Europe wages and costs have risen by tens of percent.
Therefore, Chinese production is now especially cheap, and there is too much of it in relation to domestic demand. Chinese companies are looking for profitable business from exports more often than before. It is not uncommon for a Finnish company to acquire Chinese production equipment for the first time these days, as the quality is high enough and the price level is tens of percent cheaper than a European product. The price difference is shockingly large.
Another challenge is related to the sheer size of China. The country is capable of taking over entire sectors. The fact that growth is now focused on high-tech exports has not meant a contraction of exports even in low-productivity sectors. On the other hand, for example, China’s electric car production capacity is believed to already cover the needs of the entire world. The authorities estimate that there are already 150 companies manufacturing humanoid robots.
The conversation is heating up
There is no change in China’s economic or trade policy that would even out the situation compared to EU countries. China’s consumer demand is growing slowly, and the country’s leadership does not seem to be directing stimulus measures there, as there is no valve for dissatisfaction like in democratic systems.
The trade imbalance is also increased by the fact that China is very active in increasing its self-sufficiency and independence, for example technologically, in which case European export opportunities to China are limited. In addition, the new policy goals aim to increase exports next in the service sector.
Everything points to the fact that the discussion about trade with China will continue to increase, as EU countries see the reduction of jobs in industry in their own countries and the transfer of production to China.
Traditionally, economics has found a lot of benefits from free-flowing trade flows, but China, with its own special characteristics, has brought new shades around the discovery. Science must quickly be able to answer the question of what kind of trade and industrial policy the EU must pursue in this situation.
It is clear that, for example, trade barriers also have their own adverse effects, and China will not watch the tightening environment quietly from the sidelines. In the end, it may be that the EU’s possibilities to implement the policy it wishes for are very limited, when we know our multiple critical dependencies on China.