What Industries Will Be Hurt By A China-Europe Trade War?

Trade wars have always been a complex issue, with far-reaching implications for economies and industries. A potential trade war between China and Europe is no exception. This article will explore the industries at risk and discuss the immediate impacts and possible mitigating actions.

(For the purposes of this article, we will refer to China as GC for Greater China which includes Mainland China and Hong Kong, and Europe as EU30 which is the European Union 27 countries plus UK, Switzerland, Norway)

Any GC-EU30 trade war has the potential to impact several industries due to escalating tensions and trade disputes. Let’s explore some of the sectors that may be affected:

Electric Vehicle (EV) and Renewables Industry: Chinese EV imports have surged in Europe. Concerns about unfair competition due to alleged Chinese government subsidies have prompted the EU30 to investigate and potentially impose countervailing duties. If implemented, this could impact Chinese EV exports to the EU30, which is a significant market valued at $12.7 billion in 2023. GC has become a dominant player in the global solar panel market, surpassing Europe. Lower production costs in GC and oversupply of panels have contributed to this shift. The European Union suspects Chinese government subsidies of solar panel manufacturers, leading to the consideration of imposing tariffs.

Chip Makers and Electronics Manufacturers: The Chip Makers and Electronics industry has long relied on a global supply chain, with specialized companies collaborating across borders to drive rapid innovation. Chip manufacturers, including those in Europe, have intricate ties with China due to joint research, partnerships, and collaborations. The current US-China trade war has had significant focus on chip makers, with restrictions both on sales of advanced chips to GC, and the restriction by GC on the export of metals crucial for chip manufacturing. Companies like NVIDIA Corp., Micron Technology, and Intel Corp. that rely on GC for sales are particularly vulnerable in a trade war scenario.

European Car Manufacturers: Tariffs on Chinese EVs could lead to price hikes for European consumers, potentially dampening demand for electric cars. Established European car manufacturers with operations in GC may face retaliation through export restrictions. The ripple effect could extend globally as other countries adopt protectionist measures. Rising tensions coincide with a delicate time for German carmakers. Volkswagen, once instrumental in building GC’s auto industry, now faces stiff competition from domestic Chinese brands. Internal software issues have also delayed the development of new electric models by Audi and Porsche. Despite calls to diversify supply chains, Volkswagen has announced significant new investments in GC.

When we examine the flow of trade value between GC and EU30 for subsets of these “at risk” industries (Exhibit 1) we can draw conclusions which would influence decision making in the event of a full-scale trade war:

• Chip components, critical to many of these industries, have a very balanced Import/Export relationship however GC has many other trade flows for their industry compared to EU30.
• Other electronic components and computers have a significant trade imbalance between GC and EU30, with GC owning a large imbalance with EU30 and also being dependant on each other as significant trading partners.
• Passenger vehicles and chip production equipment represent industries where the EU30 owns the trade imbalance of exports/imports. With vehicles, there is a greater diversification of markets away from GC, however the chip production equipment is very intertwined.

Exhibit 1: Value of total trade flows between GC and EU30 in significant sectors of electronics, motor vehicles, and chip production equipment. 

Size of bubble scaled to total size of economic activity for each entity and sector.

Data for calendar year 2022, based on UN Comtrade (Refreshed 2023-12-12)

If a trade war did break out, what could be the immediate impacts to industry and what would the effects be?

• Price Hikes: Tariffs on Chinese imports would likely lead to price hikes for European consumers. This could dampen demand for electric cars, photoelectric batteries, and solar panels, crucial elements in achieving the EU30’s ambitious green goals. For GC, there would be an effect on the local consumers as European branded items such as passenger vehicles, beverages, and luxury goods would increase in price, impacting social elements and sentiments.
• Retaliation: European manufacturers with established operations in GC could face retaliation through export restrictions, further hindering their business. The GC manufacturing sector is valued at $4 trillion and represents >25% of global output according to the World Economic Forum. The impact of restrictions of this output for European manufacturers will be immediate and challenging to resolve in the short term.
• Global Ripple Effect: The ripple effect could extend globally, as other countries might follow suit with similar protectionist measures. GC, in particular, is the largest importer of many raw materials and resources where few suppliers exist globally. This dominant position may allow GC to influence measures from its partners that negatively impact EU30.

With these immediate impacts, there are actions that can be taken, and could be implemented now as risk-mitigation actions ahead of any potential trade war.

• Diversification of Supply Chains: European manufacturers could diversify their supply chains to reduce dependence on Chinese imports.
• Investment in Domestic Production: EU30 could invest more in domestic production of exposed industries such as EVs, Photoelectric and Lithium-Ion batteries, and Smartphones to reduce reliance on Chinese imports.
• Co-operation with Other Countries: The EU30 could cooperate with other countries to create a more balanced global trade environment. This is particularly true for industries where there are many suppliers globally, however choices may have previously been made to import from a few (including GC).
• Strengthening of Domestic Industries: The EU30 could strengthen its domestic industries through subsidies and incentives, like GC’s approach. This could, however, have the unintended consequence of speeding up a trade war as GC and other countries would likely respond in kind.

Examining the concentration of trade between GC and EU30 when there is little global choice where few suppliers exist globally, and those industries when there is global diversity, but current trade flows are dominated by a few countries, gives some insights (Exhibit 2).

• PV Cells and Semiconductors represent the largest exposure for EU30 and should be the focus of risk-mitigation actions, particularly through the diversification of supply by developing local production and supporting other countries efforts to grow in this segment.
• Printed circuits and electric vehicles industries are likely driven by cost factors on GC supply as there are many options globally. Working on collaborative initiatives that reduce costs for alternative suppliers to GC would be an effective approach for EU30 to mitigate this exposure risk.
• Vaccines and Silicon industries will need actions to remain competitive and suppliers of choice to GC as they have majority positions, but alternative supply sources exist. Diversifying and increasing the value the trade flows of these industries to partners beyond GC should be considered.

Exhibit 2: Trade flows between GC and EU30 with top globally concentrated and locally concentrated sub-industries 

Total value of trade imports per sector shown as header on each column. Width of column repesents the comparitive total value

Data for calendar year 2022, based on UN Comtrade (Refreshed 2023-12-12)

With this analysis, and the emphasis on the potential of a trade war, rather than stating it as inevitable, the largest leading indicator of this being realised is a slowing global economy. A slowing global economy can increase the likelihood of a trade war for three main reasons:

1. Protectionism: Countries may resort to protectionist measures such as tariffs to protect their domestic industries from foreign competition. This can lead to retaliatory measures from other countries, escalating into a trade war.

How to watch for this: Follow relevant industry sources of information and examine any new or changing tariffs in key markets.

2. Decreased Demand: A slowing economy can lead to decreased consumer spending, reducing the demand for imported goods. This can prompt countries to impose tariffs to protect their domestic industries, potentially triggering a trade war.

How to watch for this: Examine GDP figures for critical trading partners, especially at the micro-level of industry segments. Pay attention to growth and contraction figures both in value and employment figures.

3. Geopolitical Fragmentation: Economic volatility can lead to geopolitical fragmentation, increasing the risk of conflict and economic instability. This will exacerbate trade tensions and potentially lead to a trade war.

How to watch for this: Keep track of political developments in key countries, particularly any rhetoric on the economy and strengthening local industries. Pay attention to investment announcements both in their size and their ambition.

In conclusion, a potential GC-EU30 trade war could have significant impacts on many industries, particularly vehicles (electric and combustion), photoelectric and lithium-ion batteries, and component industries. 

However, by understanding what current trade flows are and their own level of exposure to a trade war, leaders can implement strategic planning and action to mitigate these impacts and ensure the continued growth and sustainability of these crucial industries.