The European Union’s trade policy has recently shifted from being a committed free trader to adopting a more geostrategic approach. This change is driven by concerns about dependence on certain countries, particularly China, for critical goods. One issue that has caused alarm is the EU’s growing trade deficit with China, which has tripled in the past five years. However, it is important to note that this deficit is primarily due to a rise in imports rather than a fall in exports. The increase in imports is seen across various categories of manufacturing, with machinery and transport equipment potentially playing a significant role. Additionally, the rising prices of imported goods from China have contributed to the deterioration of the trade balance. Despite these concerns, recent data suggests that import volumes and prices have started to decline. It is crucial to approach these trade imbalances with nuance and avoid knee-jerk policy responses. For example, the fear of China’s dominance in critical raw materials for green tech manufacturing could be addressed through affordable stockpiling rather than subsidies for domestic extraction. Similarly, the European fear of the US stealing its green transition investments may be unfounded, as the impact of US subsidies on the EU economy is expected to be limited. Overall, policymakers should consider a broader range of policy solutions and avoid panic when assessing trade dependencies and imbalances.
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