Sometimes it seems that more attention is currently being paid to monetary policy decisions than to the main drivers of economic growth – the quantitative and qualitative changes in supply and demand. We cannot forget that if the European Central Bank (ECB) lowers interest rates (sooner or later), it will not solve the economic problems of the European Union by itself. Of which the biggest headache is the demand for the production produced by the European Union, the global competitiveness of that production, which requires innovation to ensure (hence the efficient innovation ecosystem, ie talent and capital).
As early as 2023, the research and analysis unit “Economist Intelligence Unit” said that the economic recovery of the European Union will depend on the economic recovery of China. Both still have their own problems, but there is one thing in common – geopolitical polarization, which leads to changes in the geographical directions of international trade and investment.
Even if the politicians of both the USA and the European Union have already recognized that “de-couple” (separation) from China is impossible, both the USA and Germany are taking the path of “de-risking” (risk reduction), and China itself is taking measures to reduce risks. Such steps on both sides lead to the reorganization of previously established export markets, supply chains, increasing control over the supply of critical natural resources, changes in suppliers, changes in geographical directions of investment, attention to strategic sectors, innovation and defense.
The question arises, to what extent is the economy of the European Union dependent on the economy of China? Let’s look at the interdependence of the European Union’s international trade with China.
Even if the European Union is not the world’s largest economy, it is the world’s largest exporter and importer. Its economy is more dependent on the export of goods and services than that of the US or China. In 2023, the US GDP reached 27.3 trillion dollars, China’s 17.7 trillion dollars, and the European Union – 17.8 trillion dollars. However, exports of goods and services to the United States and China are estimated at the same level of 3-4 trillion dollars, while exports to the European Union exceeded 9 trillion dollars (more than twice as much as exports of goods and services to the United States or China). If the annual value of US exports of goods and services is about 12 percent. its GDP, that of China – 20 percent. GDP, and about 40 percent of the European Union. GDP.
Thus, the internal economic well-being of the European Union (created additional added value turns into additional jobs created to meet domestic demand and new investments) depends to a large extent on exports and what is happening in the export and import markets.
In 2023, China was the third (after the United States and the United Kingdom) largest export partner of the European Union (exported 8.8 percent of total exports) and the largest import partner of goods (imported 20.5 percent of total imports). The European Union’s dependence on Chinese imports has grown consistently since 2000, when only about 7% of total goods imports were imports from China, and it consisted of less strategically important products (clothing, toys, furniture, etc.). Over time, the import structure of electronics, pharmaceutical materials and tools increased.
Those countries whose industry generates a larger share of the national economy are more dependent on Chinese imports. Such countries also include Germany, which in 2023 imported 18.4 percent from China. 43.5% of all European Union goods imported from China and exported. of all its goods exports and it is the only European Union country that generates a positive trade balance with China in the long term (from 2011, excluding 2022). In addition, many other member states of the European Union provide their intermediate products to German manufacturers, who then export the final products and thus indirectly become dependent on the Chinese market (such as Estonia, Belgium, the Netherlands, Lithuania). In addition, Germany generates about a quarter of the total GDP of the European Union, and exports of goods and services amount to about 50 percent. country’s GDP.
In addition to the import of the final product, the increasing added value it creates in the European Union is dependent on intermediate products imported from China. The largest part of the added value created is dependent on imports of intermediate products from China in the metal, chemical, electronic and electrical equipment sectors. In addition, the European Union imports about half of its critical natural resources from China.
Let’s go back to the question, is the economic recovery of the European Union dependent on China? Obvious. Dependent. It is impossible to replace one of the world’s largest suppliers of intermediate products and final products in the short term. In the longer term, partial market diversifications to reduce strategic dependence are possible, but a complete replacement should not be expected. If anyone thinks that India could replace China for the European Union, it will not happen in the near future (primarily due to India’s infrastructural deficiencies).
And for now, we cannot assume that if the diesel engine of the boat (German economy) works hard, then its lack of power will be fully compensated by hand rowing. (Furthermore, the engine is currently being repackaged and some of it, in the form of foreign direct investment, is to be moved to other countries, as more and more German companies are looking to invest outside of Germany.)
In 2023, German foreign direct investment in China amounted to 10.3 percent. of the country’s total overseas investment and was the largest share of investment in China since 2014. Large German companies are reducing their investments in Germany but continuing to invest in China. Investments in China by the four largest companies (Volkswagen, BMW, Daimler and BASF) account for about a third of all German foreign direct investment in China. About a third of all sales of the German automobile industry are also generated in the Chinese market.
As unpleasant as it is, we have to admit that the economic recovery of the European Union still depends quite significantly on the economic cooperation between China and the European Union.
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Eglė Stonkutė is an economist-analyst of the Lithuanian Confederation of Industrialists (LPK).
