China-EU trade

Since the beginning of 2012, China's exports to the European Union (EU) have shown a significant downward trend. Experts said both EU and China are responsible for the downward trend, but the former has much influence than the latter. The Spillover Effect of the debt crisis in Europe is increasingly apparent.

The European debt crisis is the major factor for the significant decline in China's exports to the EU.

According to the customs statistics of China, the total imports and exports of China to the EU reached about US$48-B in July 2012, a down of 8.9% Y-Y.

Among them, China's exports to the EU were about US$29-B, a down of 17% Y-Y. China's total exports increased by 7.8% from January to July but its exports to the EU fell by 3.6%.

According to the Eurostat, the total import and export volume between the EU and China reached nearly 139-B Euro from January to April, an increase of 2.5% compared with the same period of last year. Among them, the EU's export to China was 47-B Euro, an increase of 10% and the EU's import from China was 92-B Euro, down 1%. The accumulated trade deficit of the EU against China reached about 45-B Euro, down 11%.

A common conclusion can be drawn from the above-mentioned data: China's exports to the EU showed a significant downward trend in Y 2012.

What are the reasons? The increasingly aggravated debt crisis in the EU is the main reason.

First, the PIIGGS countries, namely Portugal, Italy, Ireland, Greece, Great Britain and Spain, were at the verge of bankruptcy financially, so the EU and the International Monetary Fund had to lend a helping hand to Greece, Ireland and Portugal. However, the debt crisis was not alleviated, but spread to countries such as Spain and Italy, triggering the banking crisis, damaging the real economy and leading to a vicious cycle. The shrinking of real economy means a decline in personal consumption and business investment and reduction of imports from other countries. As the major import markets, China and other emerging economies first were affected.

As far as China is concerned, the major reasons are the rise of labor costs and gradual weakening of the comparative advantage in labor forces. China's most exports to the EU are labor-intensive products with low value added and technical content. The shrinking of the EU economy curbed the demand for the imported consumer goods. In addition, the appreciation of Yuan and rising price of raw materials also weakened the comparative advantage of China's exported products in price.

Fundamentally, the main cause leading to the decline of China's exports to the EU is the debt crisis because the overall Y-Y growth rate of China's exports was still close to 8% from January to July of this year.

The EU increased its trade fortifications but will not turn to trade protection policy. Frederick Ericson, director with the European Centre for International Political Economy, said that currently the European debt crisis did not exert significant impact on its overall trade because it mainly affected some small EU members and those members having little dependence on other countries. The overall imports and exports of the EU did not shrink due to the debt crisis, but the trade growth rate has slowed, which will last for a long time.

If the European debt crisis deteriorates sharply, the EU imports are likely to drop significantly, causing impact on China and other countries depending on exports to the EU

Mr. Ericson said that the China-EU trade had undergone significant changes since the outbreak of the international financial crisis in Y 2008. China had a significant drop in its light industrial exports to the EU However, it now seems that China's export industries have become more and more high-end in the global industrial chain.

Mr. Ericson said that the EU hopes to increase the trade fortifications to help European enterprises to compete with Chinese enterprises, but it will not cause too much impact on overall China-EU trade and investment. If the European debt crisis continues to worsen, the trade protectionism is likely to rise, but that Europe will not turn to the real trade protection policy because that will hurt its own interests.

China is no longer cheapest supplier, needs to reform export industries. Duncan Freeman, a senior research fellow at the Vrije Universiteit, Brussels Institute of Contemporary China Studies, said the European debt crisis has severely affected foreign trade between China and European countries. The sluggish European economy has caused the EU to slash imports from China in the past year. Many European countries have implemented fiscal austerity, and there is a growing number of indebted households in several European countries.

Mr. Freeman says that the shrinking European consumer market has led to a significant decline in the number of consumer goods exported from China to Europe. By contrast, European exports to China have not been affected much by the debt crisis, and have maintained strong growth momentum. European companies are still benefiting from a strong Chinese market.

Mr. Freeman notes that China is no longer the cheapest supplier, but enjoys competitive advantages thanks to its massive infrastructure construction and successful integration into the global supply chain.

The real challenge facing China's foreign trade is not rising production costs, but how to continue improving productivity.

Mr. Freeman believes that China needs to reform its export industries and entire economy in the context of the European debt crisis. The debt crisis will likely continue to exist for some time to come, and the overall situation will not be the same as it was before Y 2008 even when the debt crisis is resolved.

China's export industries must adjust themselves to adapt to the new normal. China may need to explore new export markets, and the Chinese economy is moving toward domestic consumption-driven growth.

The EU is China's largest trading partner, export market, and source of technology transfer.

China, on the other hand, is the EU's 2nd largest trading partner and export market, its largest source of imports, and fastest growing export market.

Wu Hailong, ambassador of the Chinese mission to the European Union, noted in a recent article published on New Europe, By no means should we stand to let our co-operation decline. We must exhaust all measures to remove the obstacles in our trade and put our co-operation back on the upward trajectory. We believe that doing so, both sides could achieve more in economic development, and Europe will be in a better shape to address the debt crisis.

Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.