Can the EU afford a trade war with China?

Pascal Lamy, Director-General of the World Trade Organization (left) and Supachai Panitchpakdi, Secretary-General of UNCTAD. Discussion in Rio+20: How can trade best support sustainable development? Opportunities and costs. Evolution of the international trading system and its trends from a development perspective. (  UNCTAD photo library, Sep. 26, 2012)

Last week the Chinese Ministry of Commerce announced the imposition of anti-dumping duties on two products originating from the EU and the US. Imports into China of the widely used solvents ethylene glycol monobutyl and diethylene glycol monobutyl ethers, produced by a number of European and American companies, will be penalised with anti-dumping duties ranging from 9.3% to 18.8%. This is obviously a reaction to the recent anti-dumping investigations and measures introduced by the EU and the US against very important Chinese products and companies.

“Atlantic” anti-dumping

It suffices remembering that Europe and America recently penalised two major international companies of Chinese origin. Huawei Technologies Co. and the smaller ZTE Corporation were accused by the US as being a “threat to national security”. Also, the EU has introduced investigations against both of them for dumping practices.

On top of that, more recently all of a sudden the EU recently announced that is examining the imposition of anti-dumping duties on two very important Chinese products imported in Europe, the solar panels and steel. Those products are being imported into the EU for many years under the same market conditions but the European Commission just now discovered that their selling prices contain bumping elements.

These are the most recent incidents of “Atlantic” penalisation of Chinese products. On many occasions over the past decades the European Union and the United States have being imposing anti-dumping duties on sales of a large number of products of Chinese companies. During the past five years, however, with the economic and financial crisis raging over the western economies, the EU and the US have stepped up this practice, openly aiming at unilaterally protecting their own produce and jobs.

China has changed

However, times have changed now. China is nowadays the second largest economy of the world and by far the largest creditor of the US. More than two and a half trillion of dollar denominated securities have been accumulated by China. Moreover, the EU is also expecting and praying for the Chinese contribution to solve its own credit crisis. Given all that, a trade war with China could take in the future quite different dimensions than in the past. More so in case the EU and the US anti-dumping measures are proved of being of an arbitrary character, aiming at enacting protectionist walls.

It seems that the first signs of the changing character of Chinese reactions to western unilateral trade practices are now emerging, with straight away applicable anti-dumping duties on those two solvents of EU and US origin. According to Beijing, as of tomorrow and for the next five years ethylene glycol monobutyl and diethylene glycol monobutyl ethers produced in the EU and the US and sold to China, will be levied with anti-dumping import duties ranging from 9.3% to 18.8%. No EU or US companies will be excluded from this.

A trade war would threaten global economy

Undoubtedly this development may mark a totally new era in the huge universe of economic relations between the EU and the US on the one side and China on the other. Trade between EU and China was around €500 billion last year, while the US-China commerce was a bit less than that. As for the investment flows, they reach hundreds of billions annually on both directions. In short, these investments constitute the powerhouse of the world’s economy. According to the United Nations Conferenc on Trade And Development (UNCTAD), China in 2011 accepted foreign direct investments of at least $130 billion, while the country at the same time invested $70bn abroad.

The key question remains though, if we are witnessing the beginning of a trade war between the West and China. Is there any logic in it? Unfortunately, both the EU and the US economies seem very fragile. The European Union actually is in recession as from the second half of last year. Its relations with China constitute a major hope for returning to growth in 2013.

If China chooses to wage “a trade war”, hopes for return to growth will be ruined for the export oriented Eurozone countries. Let’s hope that reason will finally prevail in Brussels and the European Commission will think twice before taking the next step in this minefield. The World Trade Organisation and the UNCTAD could offer a base to resolve the issue. With unemployment in an upwards path, ordinary working Europeans simply cannot withstand a trade war with China. Hundreds of thousands of jobs may be lost in it.

The European Sting will be following closely this issue which may lead to uncharted trade waters.

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