Taking the Pulse: In light of Trump’s tariffs, should Europe get closer to China?

The EU and China are both trade-surplus blocs: They rely on external demand and need buyers, not sellers, as the United States reduces its demand. China will not act as a buyer: It suffers from anemic demand and continues to rely on net exports to grow its economy. It may offer to drop tariffs on EU imports, but many of its markets are burdened by overcapacity, which means European firms cannot export profitably. The only meaningful offer China can make is to stimulate its domestic consumption.

EU exports to the United States are worth around 3 per cent of GDP, and many specialized engineering widgets are hard for the United States to replace. Losing some of those exports to Trump’s tariffs poses a far smaller threat to European industry than China’s exploding exports of cars, machines, and industrial kit. This will be supercharged as China redirects its surplus to Europe because of US tariffs.

Either China voluntarily restrains its exports or the EU will end up deploying trade defense instruments as safeguards. But Europe will still lose other export markets to China’s goods exports glut. Europe is caught between the hammer of Chinese overcapacity and the anvil of US tariffs. The only way out for the EU is to direct demand into its own industry with industrial policy.

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