The European Union exports a negligible amount of steel to the United States compared to the biggest importer of steel into the US, Canada. Likewise, China only accounts for 6% of the total US market for imported steel which is only sightly ahead of the leading EU exporter Germany which accounts for 4% of the US steel market. By contrast, Canada accounts for 15% of the total US steel market, while Brazil is only one percentage point behind, leaving South Korea at 13%, rounding out the top 3.
But while China has expressed its overall disappointment of the US trend towards tariff driven protectionism under Donald Trump, it is the EU which thus far has complained the loudest, while threatening highly visible countermeasures.
The EU has stated that it is prepared to take its complaints over the new 25% US tariff on steel and a 10% tariff on aluminium to the World Trade Organisation, unless Brussels and Washington can come to a compromise agreement. Furthermore, the EU has threatened to put up its own tariff walls targeting name brand luxury goods from the US including Levi’s jeans, Harley-Davidson motorcycles and popular brands of American bourbon.
The real worry for Europe however isn’t over its modest steel exports to the US, let alone about would-be protests from EU consumers about the rising cost of a bottle of Jack Daniels. The concern in Brussels centers around a so-called ‘slippery slope’ factor whereby steel and aluminium are just the beginning of a wider tariff blitz from Washington. Donald Trump has thus far done everything to feed these concerns. He recently Tweeted the following,
If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!
— Donald J. Trump (@realDonaldTrump) March 3, 2018
For the EU, car exports are king and when it comes to car exports from the EU to the US, this overwhelmingly means German cars. Of the many trade imbalances the US has with the EU, cars are the second biggest, just behind chemical products. At present the US is running a -$30 billion trade deficit on cars and other vehicles with the EU. Thus, the main threat that the EU is concerned about is related to Trump’s threat to put up tariff walls to European car exports.
However, there is another statistic that ought to be examined both by the US and EU. While throughout the 20th century, the US was consistently the world’s largest car market, in 2009, China overtook the US to become the largest single market for cars and this trend has consistently expanded. Likewise, in terms of production, China also overtook the US as the single biggest exporter of cars at the same time.
While domestically produced cars remain a favourite among consumers in China’s domestic market, imports are also popular and this is especially true for German cars. As of 2017, the US was the single biggest export market for EU cars at 25%, while China was number two at 16%. While Trump is banking on the EU relaxing its own tariffs against US products amid the early stages of a trade war between traditional allies, what he isn’t counting on is that if the WTO favours the EU’s position vis-a-vis the US, it could result in an embarrassment for the US in the short term and in the long term, it could push China and the EU closer together than they have ever been.
From world-class cars to haute couture and internationally recognised agricultural products, many of the EU’s most visible exports are luxury items. This is not to say that the EU doesn’t produce more ‘mundane’ goods that are valuable on the export market, but rather, that when it comes to big ticket items, the EU has long prioritised quality over quantity by its own strategic admission. As Chinese consumers increase their purchasing power, they will become even hungrier for such ‘legacy items’. By contrast, China’s ability to mass produce goods ranging from electronics and computers to textiles and furnishings, has always frightened some, particularly the EU’s western European power centres who are afraid of ‘flooding the market with cheap goods’.
This reality however, is rapidly changing, even if it has barely discussed openly in Europe. China is rapidly developing a reputation not only for efficiency in the mass production of cost effective goods, but also in innovation and quality. One must remember that in the 1970s Japan had a reputation for mass producing cheap goods, rather than one of producing quality goods. Today, Japanese electronics and cars have a reputation of quality that they did not have just several decades ago.
At the rate that China is expanding its economy and with President Xi Jinping putting an emphasis on a quality revolution that he says will transform the ‘made in China’ label to the ‘created in China’ label, Beijing is quickly moving into a market that many never expected it to conquer. While something of a niche market, audiophile sound equipment is often a very helpful barometer of a nation’s ability to produce high quality goods. In spite of little promotional activity in the west, Chinese audiophile equipment is becoming increasingly available in the US and EU markets thanks to far-sighted import specialists. These Chinese products are anything but ‘cheap’, but the prices are still generally more affordable than their legacy counterparts from the EU or US. What’s more is that the quality is incredibly high, as is the durability. While Chinese cars have some way to go in respect of catching up with the EU, in this market too, China is rapidly advancing. Already, China is capable of making affordable luxury cars that while not necessarily as orate as a Mercedes-Benz or BMW, are more than competitive with mid-tier luxury vehicles, including those from the US and to an extent, those in Japan, where the luxury market arguably never quite developed the inter-continental name brand legacy of BMW, Mercedes-Benz or US made Cadillac.
The EU should be paying attention to this, because the moment that China corners the luxury market, the EU will have competition in the one area that it traditionally held its own against both the US and Japan. Thus, the time is right for the EU and China to work on a win-win trading scheme whereby mass produced Chinese goods will have an easier time getting into the EU market (which right now is still more China un-friendly than almost any high spending consumer market in the world), while reciprocally, luxury EU brands whose value remains esteemed in the eyes of many Chinese consumers, will have an easier road into China.
This kind of win-win agreement is now looking more attractive than ever from an objective standpoint and from a geopolitical standpoint it should look attractive to the EU not least because China has for years been willing to sit down with European business and political leaders in order to thrash out a modern trade deal. The problem has been that the EU hasn’t historically been as receptive to China as it ought to have been. Now though, with its traditional US trading partner becoming increasingly hostile, EU leaders no longer have the luxury of burying their heads in the sand when it comes to China.
Already, EU businesses are several steps ahead of the political elite. Mercedes-Benz recently ran an ad on Chinese social media that quoted a Tibetan separatist leader, unaware of the inflammatory nature of such a quote for the average Chinese consumer. The lengths that Mercedes-Benz went to apologise to China’s political leaders and the Chinese public, demonstrates that in the boardrooms of Germany, people are all too aware of how important the Chinese market is, even if they have yet to fully grasp a good marketing strategy. Already there are many whispers in Germany of a gradual pivot to the wider ‘global east’ which first and foremost means China.
Meanwhile, Donald Trump is hoping that he can scare the EU into restructuring a deal to allow US goods to flow into Europe more cheaply in return for not raising tariff walls on prominent EU exports. While a short-term compromise of the sort Trump seeks may well be on the table in spite of vocal EU protestations, in the long term, Trump’s move has been more decisive for the future of China-EU trade relations than for EU-US trade relations.