The ‘Triple Whammy’ Facing the European Economy: Energy, Cheap Chinese Goods, and Donald Trump
Europe, often seen as less dynamic compared to other regions, is currently facing a stagnation in multiple aspects. Following the energy shock caused by the Russia-Ukraine conflict in 2022, the European Union’s (EU) economy has only grown by 4% this decade, compared to 8% in the United States. Since late 2022, both the EU and the United Kingdom have experienced a lack of growth. To make matters worse, Europe is also dealing with an increase in cheap imports from China. While this benefits consumers, it can be harmful to producers, leading to social and industrial conflicts. Moreover, within the next year, Donald Trump could return to the White House and impose significant taxes on European exports.
Despite external shocks being the primary challenges Europe faces, mistakes from policy-makers can exacerbate the situation.
The Rise of Chinese Goods
Facing deflation, the Chinese government has injected subsidies to boost production, which already accounts for approximately one-third of global goods. China relies on foreign consumers to drive its growth. The country is focusing on green products, particularly electric vehicles. By 2030, China’s global market share in electric cars could double, reaching one-third. This will challenge European giants like Volkswagen and Stellantis. Furthermore, European manufacturers are also concerned about the rapid rise of China in areas such as wind turbines and railway equipment.
The Potential Return of Trump and Trade Tariffs
Meanwhile, after November, European manufacturers may continue to worry as the threat comes from the West. During his presidency, Donald Trump imposed tariffs on steel and aluminum imports, including those from Europe. In retaliation, the EU imposed taxes on motorcycles and American whiskey until both sides reached an agreement to suspend the tariffs under President Joe Biden in 2021. Today, Trump is threatening to impose a 10% tariff on all imports, which could escalate the situation further. European exporters, who brought in €500 billion ($540 billion) in revenue from the US in 2023, could face another trade war. Trump aims to achieve a bilateral trade balance, meaning 20 out of the EU’s 27 member countries, which have a trade surplus with the US, could become targets. Trump is also unhappy with Europe’s digital service tax, carbon tax, and value-added tax.
What Should Europe Do?
Europe faces a challenging road ahead. One mistake could result in excessively tight economic policies at a vulnerable time, as seen in the past with the European Central Bank (ECB). In recent years, the ECB has taken the right steps to combat inflation by raising interest rates. European governments are balancing their budgets better, leading to a cooling of the economy, while cheap Chinese goods directly reduce inflation. This presents an opportunity for central banks to cut interest rates to support growth. External disruptions will be easier to handle if central banks prevent the economy from falling into a recession.
Another trap to avoid is replicating the protectionism policies of the US and China by offering massive subsidies to favored industries. Competition over subsidies would lead to disadvantages and waste of scarce resources. On the contrary, trade makes an economy richer, even when trading partners adopt protectionist measures. The US manufacturing boom is an opportunity for European manufacturers to provide components. Cheap imports from China can facilitate the transition to greener energy and benefit consumers who still face energy crises. EU retaliations against selective and proportionate protectionism can be seen as efforts to prevent the US and China from disrupting global trade flows, but the European economy and its goals may suffer as a result.
Instead, Europe should develop its own economic policy that suits the current situation. While the US pours money into its industries, Europe should invest in infrastructure, education, research, and development. Rather than following China’s interventionist approach, Europe should consider the benefits that Chinese companies gain from their large domestic market. Opening up Europe’s service market would encourage companies to develop, promote innovation, and replace some lost manufacturing jobs. The EU should also reform cumbersome and fragmented regulations that currently act as barriers to the service sector. Similarly, unifying capital markets, including London’s market, would have a similar effect. An interconnected grid would help the economy recover better from energy shocks and facilitate the green transition.