US-China trade agreement is significantly damaging to the EU

The recent Phase I agreement between the US and China will have a significant negative impact on EU exports of goods. It will probably cost the EU around USD 11 billion in exports to China. Among the EU countries, Germany is particularly affected, and among the sectors, especially aircraft and vehicle manufacturing.

The reason for the shifts in trade is the asymmetry of the agreement: the Chinese are committing themselves to accept significantly more goods from the US than they have done so far, which is in line with the Trump government's desire for a smaller trade deficit. "The additional imports of US goods promised by China will divert imports from other countries," warns Gabriel Felbermayr, President of the Kiel Institute. Roughly, according to the agreement, China's imports of certain goods from the USA in 2021 should be 95 billion US dollars higher than in 2017, when the trade war with the USA had not yet begun. This means a doubling of imports of these goods from the USA, as new calculations by Felbermayr and trade expert Sonali Chowdhry show.

EU mainly affected via trade in industrial products

In the area of manufacturing alone, China's imports from the USA are expected to increase by almost 33 billion US dollars this year and by almost 45 billion US dollars next year compared to the base year 2017. The EU, which accounts for about one fifth of Chinese manufacturing goods imports, is particularly vulnerable to trade diversions in this area. Of the top ten product groups that China imports from the EU, all fall into the area of manufacturing. T

he EU accounts for a very high proportion of China's imports of medicaments, vehicles, Aircraft, or medical equipment. Additional US sales are substantial in these areas, so that it is very likely that the EU will have to cede some market share.

According to the calculations of Felbermayr and Chowdhry, EU exports to China will probably be 10.8 billion US dollars lower in 2021 compared with a scenario in which the agreement and the tariff war between China and the USA would not have existed. The EU would then have to bear about a sixth of the overall trade diversion caused by the agreement.

In absolute terms, the biggest losers in the EU are the manufacturers of aircraft (-3.7 billion US dollars), vehicles (-2.4 billion US dollars), and industrial machinery (- 1.4 billion US dollars). In terms of relative changes, the largest relative losses would again be in the aircraft sector (-28%), vehicles (-7%), and pharmaceutical products (-5%). "The affected industries are mainly located in Germany, but France has also been hit considerably", says Felbermayr.

Massive shifts in trade expected worldwide

From a global perspective, the agreement will also lead to massive market share reallocations according to the scenario calculations. In percentage terms, the US would see its exports to China go up by about 48 percent relative to the undistorted 2021 benchmark, while the EU and other countries would, on average, lose 5 percent.

The largest market shifts would occur in the energy sector, where Chinese imports from the US would be 326 percent higher. In the agricultural area, the US market share of Chinese imports will be 25 percent instead of 18 percent. Other energy and agricultural exporters in the world will bear the negative consequences.

"The agreement is also a further blow to the World Trade Organization (WTO) because it undermines its basic principle of non-discriminatory trade and relies instead on bilaterally agreed trade volumes. China, which has repeatedly insisted on the values of the multilateral system, is thus making itself an accomplice in the violation of the core principles of the WTO," said Felbermayr.

Source and photo: ifw Kiel