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Europe Will Be Next To 'Go Trump' On China If This Keeps Up

This article is more than 4 years old.

They’ve almost taken over the European bicycle manufacturing industry. They’re nearly banned from selling random items like aluminum radiators and coated fine paper due to anti-dumping duties. How long before the Chinese just buy Italian coffee house Lavazza? I give it ten years, max.

Thanks to the trade war, China manufacturers are reorienting some of their sales towards Europe. Exporters in China are now looking to the European market as the key market to replace the U.S. Firms have lowered prices and ramped up production of EU-bound goods, one source who was not talking on the record told me.

In conjunction with moves by individual Chinese companies, yuan weakness versus the euro is making Chinese products cheaper than their main competition in South Korea, Taiwan, Singapore and Japan. China exports to Europe are gaining, while the aforementioned foursome is watching their exports to Europe collapse.

See: China Money In The U.S. Has Evaporated — Forbes

Even before the trade war, China has made it a policy to manufacture more high-end equipment at home, rather than import it from the heavy machinery, high-tech hubs of Europe.

Wind turbines are a case in point here.

China wants to be a renewable energy power. It makes sense. Their cities are some of the most polluted, smog-ridden in the world. Despite China’s status as the world’s leading manufacturer of solar panels, Beijing has yet to mandate (which it so obviously could) the installment of solar panels on every single government building. Regardless, China sees clean energy as a huge market. Just not at home. It’s big in the richer countries, namely Europe.

Denmark wind-turbine manufacturer, Vestas, is one of the biggest and the best. But they are losing market share now to China. This is especially true in China, where they have lost market share to local players like Gold Wind. China manufacturers now have at least one third of that market, and they did so in less than ten years.

It’s only a matter of time before they catch up or replace European wind-turbine tech. They can do it cheaper due to weaker regulations, massive scale, government subsidies that reduce risk of failure of invested capital and lower labor costs.

Sorry, Denmark. China’s probably going to beat you in this one. Your clean energy industry may very well be dependent on China. It’s fine ... if you don’t mind that.

China Finds New BFF

Europe remains the main source of China’s external demand since the trade war went into high gear last September. Exports to the EU are up around 5% year-to-date.

Here’s the kicker: Nowhere in Europe is the economy growing even half that fast. Manufacturing is also in decline.

“In our discussions with Chinese exporters the most frequently cited response to (American) tariffs was ‘to seek other markets.’ Europe is the only other market,” says Rory Green, an economist with TS Lombard.

Green wrote in a report published July 12 that “Chinese producers are slashing prices and essentially dumping goods into Europe.”

For trade competitors, the result has been a reduction in market share for Asian exporters and negative EU export growth.

According to a European Commission report on anti-dumping duties imposed on other countries, published in March, of the ten products facing countervailing duties, six are from China.

The European Commission has been using these measures to protect local industries for years. It saved local ceramics manufacturers. Now it’s trying to save bicycle manufacturers.

Anti-dumping duties for that segment of the economy started in 2013. European investigations showed that Chinese excess capacity is an important tool for taking over a market. One of the Commission’s latest investigations established a spare capacity of bike manufacturing at 25%, meaning China had that many more bikes sitting unsold in warehouses above the entirety of EU consumption. If Europe made 100 bikes a year for 100 buyers, China had 125 of them sitting unsold in a warehouse somewhere.

Tariffs allowed the EU bike industry to return to “modest yet sustained profits,” according to the March report. Without that action, bike and bike parts manufacturers would have folded, losing out to China due to oversupply and unrivaled scale.

Next up, electric bikes.

In January 2019, the Commission imposed measures against imports of electric bicycles from China. Why? Because the Commission said the Chinese electric bicycle exporters were benefiting from state subsidies.

If all of this sounds familiar, it is because this is what the Trump administration has been fighting since January 2017. State subsidies are at the core of the changes the U.S. wants to see from China. China does not want to change its industrial policies. We are at a stalemate. Only, the U.S. is at loggerheads with China. Europe is limping along, seemingly convinced that Siemens bullet trains will always be better than the Chinese ones.

Europe Is Weak And Getting Weaker

All of this is happening at a time when the European economy is in retreat.

It costs money to save money in countries like Germany. Negative yields are now commonplace, even on junk bonds. Investors in equities are doing no better. Over the last five years, the FTSE Europe and the MSCI Germany indexes are down roughly 9% while the S&P 500 is up 45%. MSCI China is up a little over 9% in the same period.

Europe is going the wrong way. It’s a money-loser.

Industrial activity in Germany—the manufacturing powerhouse of Europe—surprised to the downside in June. The unexpected broad-based contraction of -1.5% monthly and nearly 2% on a quarterly basis confirmed a reacceleration of the industrial downturn after a temporary respite in the first quarter. It’s the largest slump in manufacturing since 2012 for the Germans.

Germany should fall into a recession this quarter, Barclays Capital led by Iaroslav Shelepko wrote in a note to clients this week.

Total EU quarterly growth is seen coming in at just 0.2%, according to Barclays.

Wolfgang Munchau, a popular columnist at the Financial Times, wrote yesterday that the EU “only recently emerged from a decade-long crisis and is now facing an economic downturn, a global currency war, a technology shock in the car sector, possibly a no-deal Brexit and an Italian government crisis.”

(He forgot increasing Chinese exports that will upend more of Europe’s blue-collar manufacturing base, leading to more Brexit-like politics and keeping the European trade commissioners really, really busy. Someone will be blamed. First it’s the migrants, then it’s China. It’s always the political leaders heads on a platter. Enjoy!)

A full-blown confrontation between Rome and Brussels is already brewing, potentially dictating the direction of the European Union project. Who thinks that Italy is in favor of watching some family business like Lavazza get clobbered by China? I don’t think they’ll be in favor of going easy on China at any time, even if China is importing Ferraro spumante like it’s going out of style.

If this keeps up, countries like Italy will join forces with the U.S. against China, throwing a monkey wrench into globalization, at least until the dust settles. It will also make it harder for the EU to play the good cop role in the China trade imbroglio because not everyone in power there is on the same page.

It’s going to take a while.

Investors will stay in safe havens for now. Wait ... in Europe that means losing money. Time to invest in safety deposit box manufacturers, and lock euros in there. European savings and fixed income is nearly worthless.

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