US punitive tariffs: Will Europe face a tsunami of cheap Chinese imports?

The trade war between the United States and China continues. Europe, and Germany in particular, are worried about getting caught between the two sides. If Washington and Beijing impose tariffs on each other, China will need new sales markets for its export goods. A common fear is that the EU will inadvertently become a flood basin for Chinese overcapacity. This could potentially have far-reaching repercussions for its already battered industry. How seriously should we take such fears?

The Kiel Institute's KITE trade model shows that with the current tariffs, China's exports to the USA will plunge by almost 50 percent in the short term. Real-time shipping data is already indicating a sharp decline. With an export volume of over USD 400 billion from China to the USA, this means that almost USD 200 billion in goods will no longer be shipped overseas. These will then have to be absorbed. Of these, goods worth around 80 billion – mainly smartphones and computers – have been exempted from tariffs. However, if the remaining export volume is diverted, up to USD 150 billion worth of Chinese products could still end up on the global market.

But to where? A look at the trade flows shows that around 15 percent of China's exports go to the EU. If this share also roughly applies to the redirection, European imports from China will likely increase by 10 to 15 billion US dollars in the short term. In the long term, the effect could be even higher. Is that a lot? The EU's GDP is close to 20 trillion. Therefore, 20 billion in additional imports would only be 0.1 percent of economic output. From a macroeconomic perspective, that would probably be manageable. However, the air could become thin for individual sectors.

However, a closer look at Chinese exports to the US, which are now being diverted, also shows that neither Germany nor the EU will suffer the most from the additional competition. Other countries are more affected, as the main sectors are textiles, shoes and simple consumer goods. Increased Chinese exports could also shift market conditions in high-tech segments such as consumer electronics, as there are only a handful of European players in this sector.

The situation is different in some Central and Eastern European countries. They have specialized in specific industrial goods and supplier components, which is why Chinese competition could cause significant problems. And beyond Europe's borders, export industries in countries such as Vietnam, Bangladesh and Cambodia will also be affected. Here, low-cost competition from China would be a potential headwind for the successful export-oriented economic development of recent years.

In any case, there is one winner. European consumers would benefit most from the overcapacity, and in two ways. Firstly, prices for many simple consumer goods will fall. Secondly, falling prices will make further interest rate cuts by the ECB more likely, making buying a house more attractive again, among other things – a welcome relief for consumers.

However, preliminary products could also become cheaper for European companies. This will open up new opportunities on the US market. In short, it looks as though the overall economic impact on Europe and Germany will remain manageable, even if uncertainty and volatility will continue to weigh on sentiment.

Prof. Moritz Schularick is President of the Kiel Institute for the World Economy (IfW).