What a US-China trade war could entail

A trade war with China looks both undesirable and increasingly difficult to avoid as the European Union faces a widening economic gap. With the bloc’s unemployment on the rise, EU officials have become adamant that accepting Europe’s deindustrialization as inevitable is simply not an option. Trade hostilities have continued to heat up over the past few months despite Brussels’ repeated demands that Beijing rein in its industrial overcapacity — shorthand for flooding foreign markets with artificially cheap exports to offset weak domestic demand.

Strategic sectors face the brunt

Most of the analysts who spoke to The Parliament said any confrontation would likely be contained to a handful of strategic sectors, but that even such sectoral skirmishes would be punishing for both sides. “Both Beijing and Brussels have the potential to seriously hurt each other’s economy,” said Camille Boullenois, associate director at Rhodium Group. For China, losing access to the EU’s €18 trillion single market would be particularly painful because its growth model is built around exports, and there are no signs that course will change under the government’s latest five-year economic plan.

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In Brussels, officials have already begun fortifying defenses. Last September, the European Commission introduced new steel safeguards to push back against China, the world’s largest steel producer. Chemicals could be next, although the EU executive may wait until after the October meeting to table any legislation. Earlier this week, the Commission slapped anti-dumping tariffs on imports of Chinese nylon, which is accused of imperilling thousands of jobs in Croatia, Italy, Spain, Romania and Slovenia.

Meanwhile, the EU has recently adopted a broader Made in Europe agenda that aims to strengthen domestic manufacturing and reduce reliance on China-linked supply chains. The fear, of course, is that Beijing will counter by restricting exports of rare earths. Last year, the EU famously became collateral damage in China’s retaliation against Washington’s trade hostilities. When China restricts these materials, the effect is often immediate and visible across multiple industries, creating a bottleneck that European manufacturers cannot easily bypass.

Supply chain vulnerabilities

To begin with, the EU is heavily dependent on China for critical raw materials. Beijing dominates the production and processing of rare earths and other minerals that underpin everything from drones, tanks and submarines to electric vehicles and solar panels. “Chinese firms command overwhelming majorities in many essential component types,” said Daniel Burke, senior analyst at Dutch intelligence firm Datenna. “Disparate sectors like neodymium magnets, active pharmaceutical ingredients and titanium production all see strong Chinese supremacy.”

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In recent years, Brussels has scrambled to loosen China’s grip on the critical materials supply chain, signing non-binding partnership with mineral-rich countries and pursuing a broader strategy of “de-risking.” So far though, those efforts have yielded only méagre results. A recent report by consultancy SCE Insights found that electronics, electrical equipment, shipbuilding, machinery and textiles are among the sectors most exposed to Chinese supply chains. This dominance of critical inputs allows the Chinese government to easily make life difficult for European citizens at a whim.

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