MNI INTERVIEW:China More Able To Reroute To Europe Than In '18

China is more likely to be able to redirect goods to the eurozone than in the 2018 edition of its trade dispute with Washington during the first presidency of Donald Trump, due to the global scale of the latest round of U.S. tariffs and its growing competitiveness in high tech, a European Central Bank economist told MNI.

This time it will be harder for Chinese products to find their way to the U.S. market via third countries, Vanessa Gunnella, author of a box in the ECB’s latest economic bulletin about the lessons of 2018 U.S.-China trade conflict, told an MNI podcast.

“If other countries such as the East or Southeast Asian countries are facing tariffs to the U.S., the scope of rerouting could be reduced this time. So, making a redirection to the euro area more likely, because Chinese goods cannot find their way to the U.S. as they used to find,” said Gunnella, senior economist in the ECB’s Euro Area External Sector Division.

In 2018, an 18-percentage-point increase in trade barriers against Chinese goods implied a 2-3% rise in Chinese exports to the eurozone, as well as to Mexico and Canada, with greater growth in shipments to other Asian countries, according to the work by Gunnella, Giovanni Stamato and Alicja Kobayashi published in the bulletin.

“Now the situation is different. So, for this reason, we cannot simply apply our estimates for what happened back in 2018 to the current situation,” she said, adding that the extent of redirection of goods to Europe will also depend on the final configuration of U.S. tariffs following negotiations between Brussels and Washington. Gunnella's views are her own and do not represent those of the ECB, she noted.

INFLATION IMPACT

Gunnella’s published work focussed on trade volumes and not prices, she said, though she added that the ECB was now trying to examine the potential inflationary impact of changes to trade flows, and to determine whether a rush of Chinese imports might constitute a strong or structural disinflationary force. (See MNI INTERVIEW: Central Bank Supply-Chain Data Old, Incomplete)

The cyclical conditions of the Chinese economy have also changed, Gunnella noted, and Beijing’s economic stimulus will also be a factor. China’s presence in European markets is also larger than seven years ago, and it has become more competitive in medium- and high-tech goods, she added.

But the European Commission will also play a role in addressing trade spillovers, Gunnella said, noting that Brussels has explicitly said that it will monitor any rerouting of Chinese exports.

Still, while the EC was previously acted effectively, taking measures against steel and aluminium imports and applying antidumping tools against Chinese solar panels and electric vehicles, these tools were applied against specific sectors, whereas this time the scale of redirection of trade may be much greater.

“We need to see how these are going to be implemented and how long it would take for potential investigation to sign off measures,” she said.