[Global Focus] Europe Highly Dependent on Jung, Taking a Different Path from the US on Tariffs

US Announces Bomb Tariffs on Chinese Products
Requested 'Trade Barriers' for Europe Too
EU Draws Line Saying "Will Take Tailored Approach"

Germany's Largest Trading Partner for 8 Consecutive Years is China
BMW and Benz Sales Expected to Suffer

Concerns Over Inflation Reigniting if Tariff War with China Occurs
ECB Also Set for First Interest Rate Cut Next Month
European Companies Oppose Bomb Tariffs on China

As US-China trade tensions escalate toward the end of the Joe Biden administration, the European Union (EU) finds itself in a 'dilemma.' If the EU aligns with the US, its transatlantic ally, and joins the 'China-bashing,' retaliatory measures from China are inevitable. However, such retaliation could be even more devastating for Europe, whose economic growth has significantly slowed compared to the US. In particular, China appears to be exploiting divisions among European countries that are weighing the timing of interest rate cuts to overcome economic slowdown and inflation.

EU Sympathizes with US Concerns but Plans "Different Approach"

[Image source=AFP Yonhap News]

Ursula von der Leyen, President of the European Commission (pictured), in a foreign media interview released on the 21st (local time), expressed sympathy for the US concerns over China's overproduction but drew attention by taking a different stance on broad tariff impositions. She emphasized, "(The EU will take) a different approach from the US, a much more tailored approach." This was interpreted as drawing a line against US Treasury Secretary Janet Yellen’s statement on the same day during her visit to Germany, where she expressed hope that Europe would join the US in erecting trade barriers against China as a united front.

The Wall Street Journal (WSJ) reported, "Many EU officials are skeptical of the US approach to China." Given the high dependence on China across various sectors, imposing trade barriers against China could backfire as an economic shock.

Recently, the US announced 'bomb tariffs' on Chinese products across all industries, including electric vehicles, batteries, semiconductors, solar panels, ships, and steel. The US cited the problem of Chinese companies receiving massive government subsidies, disrupting the global industrial ecosystem. Some tariff hikes are expected to take effect as early as August.

The EU also shares concerns with the US regarding China's dumping practices. Low-priced Chinese products, especially in green industries such as solar panels, have flooded the market like a 'tsunami,' causing domestic industries to wither. Since October last year, the EU has initiated anti-subsidy investigations on Chinese electric vehicles, with related measures expected from July. Anti-dumping investigations are also underway for Chinese solar panels, wind turbines, electric vehicles, medical devices, and coated steel sheets.

EU’s High Dependence on China Makes Retaliatory Tariffs Inevitable

However, the EU faces a dilemma due to its relatively high dependence on China in its industrial structure. According to the Bank of Korea’s Frankfurt office report on 'EU’s Dependence on China for Exports and Imports in 2023,' China accounted for 14.6% of the EU’s total trade volume from January to September last year, ranking second after the US at 16.5%.

Germany is one of the member states actively opposing the US’s tariff bomb on China. This is understandable as China has been Germany’s largest trading partner for eight consecutive years. Among German automakers BMW and Mercedes-Benz, China accounted for 32% and 36% of last year’s sales, respectively.

China has already announced retaliatory tariffs against the EU. It is currently considering raising tariffs on large EU-imported cars with engines over 2.5 liters from the current 15% to a maximum of 25%. When this news broke on the 22nd, shares of Mercedes-Benz, BMW, and Volkswagen all plunged on European stock markets.

According to the Kiel Institute, if the EU fully decouples from China, the EU’s real income is estimated to decrease by 5.3%. Germany’s real income would decline even more sharply by 6.9%. Due to conflicting interests among EU member states in trade with China, it is expected to be difficult to establish effective trade barriers. This is why even if the EU imposes additional tariffs on Chinese electric vehicles, they are expected to be much lower than the US tariff rate of 100%.

Economic growth prospects surrounding the EU are also relatively sluggish. According to the British weekly magazine The Economist, since 2019, the US GDP growth rate has been about 9%, while the EU’s was only about 3%. Additionally, Europe’s per capita GDP is estimated to decline from 68% of the US level in 2019 to 66% by 2029. If a tariff war with China breaks out, the EU’s economic growth is expected to slow down even further.

Moreover, China is fostering divisions among European countries. Chinese President Xi Jinping’s recent European tour earlier this month, his first in five years, included stops in France and Hungary?both EU member states?and Serbia, a candidate country for EU membership. This is not unrelated to the current situation. These three countries warmly welcomed President Xi and he promised local investments, making it realistically difficult for them to actively join the EU’s China-bashing efforts.

EU Fears Inflation Reignition... Businesses Oppose Tariff War

If the EU intensifies a tariff war with China, economic repercussions such as inflation reignition are inevitable. According to Eurostat, the EU’s statistical office, the Eurozone consumer price index (CPI) rose by 2.4% year-on-year last month, showing a relatively stable level. The core CPI rose by 2.7%, continuing a further easing trend. Meanwhile, the Eurozone GDP growth rate, which had recorded negative growth for three consecutive quarters last year, grew by 0.3% quarter-on-quarter.

With inflation easing and signs of economic improvement becoming visible, the market expects the European Central Bank (ECB) to make its first interest rate cut as early as June 6. However, if a trade war with China breaks out, inflation could reignite, introducing new variables to the ECB’s monetary policy direction and acting as a negative factor for the political landscape ahead of the European Parliament elections in June.

Some analysts point out that because the EU has a high proportion of finished goods production and is vulnerable to supply chain bottlenecks, if China restricts exports of intermediate goods, companies could suffer significant damage.

There are also corporate leaders who have publicly voiced opposition to the bomb tariffs on China. Carlos Tavares, CEO of Stellantis, headquartered in the Netherlands, said in a foreign media interview regarding tariffs on Chinese electric vehicles, "Western companies could instead face restructuring." He explained that fierce competition with Chinese rivals could negatively affect not only production but also jobs. He added, "To fight against China’s 30% cost competitiveness advantage, social consequences will occur. However, European governments do not want to face that reality right now."