Europe warned to change fast or become a ‘shock absorber' of US-China trade war

The Star

18-05-2025

Senior European Union officials are breathing a sigh of relief over a US-China tariff deal that may delay a diversion of Chinese exports to Europe.
But they have been warned that the bloc must reform quickly or become a 'shock absorber' of tectonic upheavals in global trade imbalances.
The climbdown in superpower tensions following high-wire talks in Geneva last weekend has led to a mutual reduction in tariffs and a respite in the turmoil that has roiled markets since US President Donald Trump's return to the White House in January.
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It does not, however, meaningfully change a bleak outlook for Europe if it fails to quickly adapt to Washington's efforts to reorder trade with China and the rest of the world, economists said.
'There is talk in Brussels of Europe becoming a 'third pole' in a bipolar world dominated by the US and China,' said Michael Pettis, a finance professor at Peking University. 'But without deeper political integration and better coordination of fiscal and industrial policies, this ambition risks remaining a slogan rather than a strategy.'
'Europe might not become a pole at all, but rather a shock absorber – forced to adjust to the choices of others without shaping the outcomes,' added Pettis, an influential thinker on the changing nature of global trade.
'I say this because of some pretty simple arithmetic,' he continued. 'The US currently represents nearly half of global deficits, and with the UK and Canada they together comprise roughly two-thirds of all deficits.'
While last week's deal may not lead to a reduction in America's gaping trade deficit with China, the Beijing-based professor believed it would eventually come down and that Washington would put pressure on others to do the same.
Pettis, also affiliated with the Carnegie Endowment for International Peace, a US think tank, said 'one of two things must happen'.
'Either global surpluses must come down – and with China accounting for nearly half of global surpluses, this means that China's surplus must come down – or some other part of the world must run the large deficits needed to balance global surpluses, and for all practical purposes this mostly means Europe,' he explained.
European governments viewed last week's Sino-American deal as possibly buying them time on what is anticipated to be a wave of diverted Chinese exports to EU ports.
'We are seeing elements of de-escalation on the American side,' said Michal Baranowski, Poland's deputy minister for development and technology.
'The US has begun conversations with China. They reached a sort of an agreement with [the] UK, and that's a good sign,' he added. 'Negotiations with the EU are speeding up.'
The minister described the US-China agreement as 'a good first step', saying it was 'good for us as well because Europe is very focused on trade diversion. With US-China tensions de-escalating, we're less likely to see it in Europe'.
But observers have warned that this development must not distract the EU from the significant internal reform required to survive in a harsh new world order.
The bloc is divided, too, on areas of industrial policies that may afford it better financial means to compete with the US and China, with new German Chancellor Friedrich Merz appearing last week to rule out EU-wide joint borrowing.
'We cannot go into never-ending spirals of debt,' Merz said in Brussels last week.
Luis Garicano of the London School of Economics and a former member of the European Parliament urged the EU to shift its focus to reducing barriers within its own 27-member bloc rather than chase free-trade agreements.
'The IMF puts the hidden cost of trading goods inside the EU at the equivalent of a 45 per cent tariff. For services, the figure climbs to 110 per cent, higher than Trump's 'Liberation Day' tariffs on Chinese imports – measures many saw as a near-embargo,' Garicano wrote in a blog post.
'The [European] Commission may be expanding into new domains, but it's leaving its core mission – the single market – increasingly undefended.'
Although EU leaders have acknowledged the need for internal reform, a quick fix is unlikely.
Instead, the bloc is expected to adopt a multipronged approach of trying to cut trade deals with partners including India and the Mercosur group of South America as it also negotiates directly with the economic superpowers themselves.
Talks with the US continue, with trade chief Maros Sefcovic speaking with US Commerce Secretary Howard Lutnick by phone on Wednesday. A deal has thus far been elusive.
'I think the US and Europe may be a bit slower,' US Treasury Secretary Scott Bessent said this week. 'My personal belief is Europe may have a collective action problem; that the Italians want something that's different than the French.'
Brussels officials, meanwhile, are awaiting the first assessments of a task force set up to monitor the impact of Trump's tariffs on trade flows. They are ready to deploy safeguard measures that can quickly close the market to sudden surges of products that may harm local industry.
Customs statistics suggest that circumstances may have changed even in the short window in which the US and China maintained mutual tariffs north of 120 per cent.
Chinese trade data for April showed hefty declines in Chinese shipments to the US and big jumps in shipments to Europe. A 21 per cent drop in China's shipments to the US was mirrored by a 20.44 per cent leap in China's shipments to Germany.
At the same time, EU shipments to China are cratering. In April, China's EU imports fell 16.46 per cent, according to the Post's calculations of its official trade data. Bloomberg on Thursday reported that China's trade surplus with the EU reached a record US$90 billion in the first four months of 2025.
Amid these shifts, Brussels seeks to convince Beijing to take action that would address the potential trade diversion and China's manufacturing overcapacity. Otherwise, officials say, the EU market will start closing down.
But these threats appear to be falling on deaf ears.
'The overcapacity problem is huge, it's growing, it's massive and it goes across the sectors,' Marjut Hannonen, head of trade for the EU delegation in China, told a panel discussion in Beijing on Wednesday.
'Overcapacity is an issue which we don't see China addressing at all,' Hannonen added. 'On the other hand, they are just doubling down on more manufacturing capacity, which is going to make this situation much worse, and this is a global problem.'
In a sign that Beijing was playing hardball with Europe, talks between French and Chinese ministers this week failed to yield a deal that would see tariffs lifted on France's cognac imports, French Finance Minister Eric Lombard said following meetings with Chinese Vice-Premier He Lifeng.
Yanmei Xie, an independent analyst of China's political economy based in Barcelona, said the EU's efforts to get Beijing to change were likely doomed to failure.
'Europe keeps asking China to do something about it, but this is nothing short of asking China to change its economic system,' said Xie. 'Overcapacity is a feature not a bug in the Chinese model of techno-industrial upgrade through relentless manufacturing scaling.'
'To mitigate the effect of US tariffs, China needs Europe to absorb more Chinese goods while Europe wants China to export less and import more,' she added. 'Their objectives are diametrically opposed.'
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