Slow Growth of European Union’s from International Trade Perspective

Slow Growth of European Union’s from International Trade Perspective By: Hteik Tin Min Paing, Rachele Foo

Research Head: Mrunali Doshi

Editor: Sakshi Sanganeria Abstract This article discusses the trade slowdown in Europe. It delves into the effects of the US-China trade war on the EU’s machinery and vehicles exports. This article also seeks to provide a glimpse into the future of the EU’s international trade.

In the third quarter of 2019, The European Union’s GDP saw a very small growth- of only 0.16 percent (the lowest since 2013). This slow growth could be due to a myriad of reasons. After all, in recent years, the 28 member countries of the EU (2013 - 2020) have gone through major disruptions such as the US-China, Trade war, Brexit and political uncertainties.

Fig 1.1 (Source: EuroStat, Gross domestic product, current prices) As of August 2019, total trade in the EU has slumped by 2.9% compared to where it was in the previous year (Workman, 2019). Slow growth in the economy cannot be discussed separately from slow growth in trade. 1. Trade war between USA and China- leaving the EU in the grey One of the key drivers that lead to the slowdown in global trade, quite obviously, is the trade war between the United States and China. Stuck between both sides (by metaphor and literal geography), Europe faced a detrimental impact. Both countries are the largest trading partners of European Union and made up roughly about 30% of the EU’s exports and imports in 2018 (European Commission, "Top Trading Partners", 2018). As the trade tension between US and China started to escalate in 2016, the export-import ratio of EU has dropped from 1.1 to 1.0 in 2017- for the first time since its steady increase in 2013 (Fig 2.1). The decrease in ratio implies that exports of the EU have contracted compared to the value of exports in the previous years.

After rounds of tariffs imposed by both US and China, the trade balance of EU has resulted in a negative of 25.8 billion EUR with majority of the negative balance of trade coming from China, Russia, Japan, Norway, South Korea and India ("News Release Euro Indicators", 2019).

Fig. 2.1 (Source:EuroStat,Share of European Union EU27 (from 2020) in the World T rade) 2. Particularly Affected Automobile and Machinery Trade The European Union’s economic growth is heavily affected by the production and trade of machinery & vehicles. Among the 28 countries of European Union (2013-2020), Germany, being one of the largest car exporters of the world, contributes on average 37.6% in total exports of automobiles and machinery in the last 10 years ("Intra and Extra-EU trade by Member State and by product group", 2020). In the year 2019, Germany’s automobile sector has been severely hampered during the trade war between the two largest economies of the world. As the US put a hefty tariff of 27.5% on car and service parts from China in 2018, China has retaliated with 15% to 40% of customs duties on vehicles imported from the United States. As a result, the German car manufacturers in the US had to bear the consequences and faced difficulties to sell their manufactured cars and parts to Chinese market which is the second largest importer of motor vehicles from Germany with the value of 23 billion EUR as of 2018 (Koptyug, 2019). In the following year of 2019, Germany has narrowly avoided a recession with the lowest vehicle exports since 2010 of merely above 200,000 vehicles ("Germany

Motor Vehicle Exports: Car", 2020). European Union’s other top export is machinery- making up 14.1% of the total exports (Workman,2019). The slowing demand of this export is one of the reasons for slowing trade overall (IMF,2019).

Fig 2.2 (Source: S&P Global Market Intelligence, S&P Global Ratings. Universe is Global Capex 2000.) 3. Slowing Global Trade The trade slowdown is not isolated to a region or country- but appears to have a domino effect. China’s slowing economic growth, in part due to the trade wars, is especially affecting their trading partners- resulting in a poor business outlook and falling expectation of future output. With such negative forecasts, there is a natural shrink away from capital investment. (Murugaboopathy and Dogra, 2019). This is evident from the falling Capex growth, particularly in the Asia- Pacific region (- 1% in 2019 while China’s capex growth was at -2% (S&P,2019)). With China being the EU’s second largest exports partner, and 84% of EU’s exports to China being machinery and automobiles, a fall in China’s Capex growth alone is enough to cause the demand for EU’s machinery exports to suffer (S&P,2019). To add to that, China’s economic state has been shaken up by the global pandemic. The coronavirus outbreak has already affected China’s economy negatively as can be seen from the fall in the Shanghai Composite Index by 5.29% in just the last month. Demand for imports in China is expected to fall and hence demand for the EU’s exports will undoubtedly be affected (Grüll,2020). Additionally, many companies (including German automobile manufacturer-Volkswagen) have shut down factories in China in an effort to slow down the spread. With the shutdown, supply chains of the EU companies with production plants in China will suffer (Grüll,2020). This might result in a possible shortage in exports, especially in the automobile industry, resulting in a fall in export revenue. Furthermore, according to the German Institute of Economic Research (IFO), if China’s economy declines by 1%,

Germany’s economy will fall by more than 0.06%. (Grüll,2020) This estimate however was based on SARS and with increasing interconnectedness with China in the past 10 years, the impact might be much greater now. On the other end, the United States is also grappling with a slowing economy due to imposed tariffs (North America’s capex growth fell short of expectations with only a 4% growth). The total share of APAC and North America is 64%, significant enough to control the trend of the global Capex and its impact on EU’s export growth. Therefore, the slowing growth in demand in the US, together with the negative growth of China’s demand, resulted in the fall in EU’s machinery exports. 4. Future Outlook There seems to be no relief from sluggish trade in the near future- in fact, there seem to be possibilities for further deterioration. Plagued by post-effects of the pandemics such as the coronavirus and long drawn out effects of political events like Brexit, trade outlooks seem rather dismal for Europe. As for the longer horizon, the EU’s soft power which advocates free trade agreement and encourages labour rights enforcement, fair and ethical trades will set the EU apart from the other largest economies of the world which are shifting towards protectionism. (Demertzis & Fredriksson, 2018).It is now essential, more than ever, for the European Union to continue supporting multilateralism as part of their trade policy objectives and strengthen strategic partnerships with other countries. However, with the WTO in agreement with United States for levying tariff on aerospace products produced within the European Union, there is another potential impending trade war. It will be interesting to see how the ‘Fate of Trade’ in the European Union plays out- depending on whether it retaliates in if the situation worsens or whether it remains in their continued support of multilateralism using the soft power (Marx, 2019).


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