In the wake of the energy crisis, Europe is facing unprecedented growth in Chinese imports and the threat of Trump’s tariffs, The Economist reports.
Today, Europe looks stagnant by any standard, although it was not known for its dynamism before. Disturbed by the energy shock that followed the outbreak of military conflict in Ukraine in 2022, the EU economy has grown by just 4 per cent in this decade, compared with 8 per cent in the US; neither it nor Britain has grown at all since the end of 2022. If that weren’t bad enough, Europe faces a surge in cheap imports from China, which, while beneficial to consumers, could hurt producers and exacerbate social and industrial strife. And in a year’s time, Donald Trump could return to the US presidency and impose huge tariffs on European exports.
The period of decline for Europe is badly chosen. The continent needs strong growth to fund increased defence spending, especially after US support for Ukraine dried up, and to meet its green energy targets. Its voters are increasingly disillusioned and inclined to support right-wing parties such as Alternative for Germany. Long-standing growth problems – a rapidly ageing population, overbearing regulators and insufficient market integration – have gone nowhere.
European capitals are seeing a frenzy of activity as governments try to respond. And while modern society demands quick solutions to problems, officials should be cautious. Although the turmoil Europe is facing comes from abroad, mistakes by European politicians can make an already dire situation much worse, according to The Economist.
The good news is that the energy shock is past its maximum point: gas prices have fallen far from their peak. Unfortunately, the others are just beginning. Faced with a deflationary slowdown, the Chinese government should be stimulating frugal household consumption, which could replace property investment as a source of demand. Instead, President Xi Jinping is using subsidies to boost production in China, which already accounts for about a third of global goods output. He relies on foreign consumers to support economic growth.
China is focusing on green goods, most notably electric cars, whose share of the global market could double to a third by 2030. That will be the end of the dominance of European national champions such as Volkswagen and Stellantis (whose largest shareholder, Exor, is co-owned by The Economist’s parent company). European manufacturers – from wind turbines to railway equipment – are also wary of competition from the east.
After November, manufacturers may also look west. Last time, Mr. Trump imposed tariffs on imports of steel and aluminium, including from Europe, which led to retaliatory measures from the EU on motorbikes and whiskey until an uneasy truce was brokered under President Joe Biden in 2021. Today, Mr Trump is threatening to impose 10 per cent tariffs on all imports; his advisers say he will go even further, The Economist reports.
Another round of trade war threatens European exporters, whose sales in America will be €500bn ($540bn) in 2023. Mr. Trump is obsessed with bilateral trade balances, meaning that the 20 (out of 27) EU member states with trade surpluses in goods are natural targets. His team is also unhappy with Europe’s digital levies, border carbon tax and value-added taxes.
So what can Europe do? The road ahead is strewn with pitfalls. One of them could be too tight economic policy in a moment of vulnerability – a dangerous path the European Central Bank has already followed. By raising interest rates in recent years, the bank has assiduously fought inflation.
However, unlike in Washington, where free money is being spent, European governments are bringing their budgets into a more balanced state, which should cool the economy, and cheap Chinese goods will directly reduce inflation. This gives Europe’s central banks the ability to cut interest rates to support growth. If central banks prevent a downturn in the economy that prevents displaced workers from finding new jobs, coping with external shocks will be easier, according to The Economist.
Another trap could be copying US and Chinese protectionism by giving huge subsidies to favoured industries. Subsidy wars are zero-sum wars and a waste of scarce resources: Europe is already in the midst of an intra-continental downward race. China’s recent economic woes demonstrate the shortcomings, not the virtues, of excessive government planning; America’s industrial policy has failed to excite voters as President Joe Biden had hoped, and tariffs have cost more jobs than they have produced.
On the contrary, trade makes an economy richer, even if its trading partners hold protectionist views. America’s manufacturing boom is a chance for European manufacturers to supply components; cheap imports from China will ease the transition to green energy and provide relief to consumers who suffered during the energy crisis. Selective and proportional retaliation against protectionism may be justified in an attempt to deter America and China from further disrupting global trade flows. But this would be costly to the European economy and also defeat the intended purpose.
Instead, Europe must develop its own economic policies appropriate for the moment. Just as the US supports industry with public money, Europe should spend on infrastructure, education, research and development. Instead of emulating Chinese interventionism, Europe should look at the advantages that Chinese companies derive from the vast domestic market. Integrating the European services market, where trade remains difficult, would help companies grow, encourage innovation and replace some lost manufacturing jobs.
The EU should reform the burdensome and fragmented regulation that also holds back the development of services. Uniting capital markets – including London’s – would have the same effect. European diplomats should sign off trade deals wherever they are still on offer, rather than letting farmers derail them, as they have in several recent negotiations. Uniting electricity networks will make the economy more resilient to energy shocks and smooth the green transition.
Such an open agenda in an era of protectionism may seem naive. But it is deep, open markets that can accelerate Europe’s growth as the world changes around it. In the face of global upheaval, policymakers need to start from this reality.
