\n China<\/a>\n <\/p>\n \n Trade<\/a>\n <\/p>\n \n Industrial Policy<\/a>\n <\/p>\n But for now, the U.S. keeps on importing, limiting the damage to the rest of the world economy.*<\/p>\n Follow the Money<\/p>\n Brad Setser<\/a>\u00a0tracks cross-border flows, with a bit of macroeconomics thrown in.<\/p>\n Imports are running ahead of their 2024 pace, even excluding pharmaceuticals.<\/p>\n China, on the other hand, is squeezing foreign imports out of its market<\/a>.<\/p>\n It hasn\u2019t quite mastered top-of-the-line chips, protecting Taiwan.<\/p>\n But it has mastered autos<\/a>\u2014both EVs and ICEs<\/a>.<\/p>\n More on:<\/p>\n \n European Union<\/a>\n <\/p>\n \n China<\/a>\n <\/p>\n \n Trade<\/a>\n <\/p>\n \n Industrial Policy<\/a>\n <\/p>\n And construction equipment<\/a>. And industrial robots<\/a>. And most specialty chemicals<\/a>. And batteries, permanent magnets, solar PVs and their chemical precursors, industrial diamonds, wind turbines, and high-speed rail.<\/p>\n While China hasn\u2019t quite mastered the production of top-line civil aircraft, Comac is ramping up<\/a>\u00a0the production of the C919. Plus, there are signs that the Chinese content<\/a> of the made-in-China Airbus narrow bodies is rising.*<\/p>\n In other words, China\u2019s continued manufacturing boom is eating into core European export strengths.\u00a0 Exports have been in steep fall as as a share of Europe’s economy since 2022.<\/p>\n That is obvious in autos.<\/p>\n Extend that series into a forecast, and European exports of autos will be down to around $10 billion by 2027.<\/p>\n No wonder Germany has been hit especially hard; it is now more widely recognized that falling exports to China are an important reason why Germany\u2019s overall economy has stagnated<\/a> over the last 5 years.<\/p>\n But the export slump is visible in most industrial sectors.<\/p>\n And it is a big enough shock to be of macroeconomic significance.<\/p>\n European exports to China (measured by China\u2019s imports) are now down about half a percentage point of European GDP over the last few years.\u00a0<\/p>\n While European imports from China rising again, the EU’s\u00a0trade deficit with China is set to double between 2020 and 2025 in euro terms: that is a negative shock to a European economy that hasn\u2019t exactly boomed over the last five years.<\/p>\n These calculations ignore the additional impact of increased Chinese competition in third party markets.<\/p>\n The second China shock\u2014which for Germany is really the first China shock\u2014now shows up basically everywhere. The auto shock, for example, is not over.<\/p>\n EV exports (in volume terms) have overtaken ICE exports in leading China\u2019s export surge, which continues to rise in volume terms (pinging Adam Tooze here\u2026<\/a>) EV exports in Q2 were running at a pace of 3 million cars on a rolling 3-month basis, which is significant relative to the current global demand for EVs once China\u2019s own (large) domestic EV market is netted out of the data.<\/p>\n Of course, these EVs show up in the continued Chinese dominance in global exports, as Chinese exports continue to outperform global trade.<\/p>\n It also shows up in the large contribution to growth that exports have provided to China in recent quarters. That growth was around two percent; that\u2019s a bump Europe would have loved for itself. China saw this level over last four quarters from net exports alone.<\/p>\n Von der Leyen told China\u2019s leaders that the European trading relationship is at an inflection point<\/a>. She needs to be back that point up with additional action if China doesn\u2019t change.<\/p>\n Counter-industrial policies for example. If China isn\u2019t going to change, countries have to find ways to either wall off their domestic market or subsidize production of key inputs.<\/p>\n Europe\u2019s wind industry shouldn\u2019t be allowed to follow the path of Germany\u2019s solar industry, and permanent magnets are too important to both autos and rearmament (fighter jets and missiles<\/a> for example) for their production to be remain concentrated in China.<\/p>\n<\/p>\n
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