China's industrial rise: Euro area faces competition, disinflation
China's expanding industrial presence significantly influences euro area trade, production, and prices. It reduces costs but intensifies competitive pressures for European producers, posing challenges particularly in medium and high-tech industries.
Two sides of China's import shock
China's industrial rise profoundly impacts the euro area, simultaneously reducing input costs and intensifying competitive pressures for domestic producers.
Euro area firms have consistently lost market shares to Chinese competitors since 2020, particularly within medium and high-tech sectors where import penetration has surged.
This differs from the early 2000s "China shock," as recent growth in euro area imports from China is stronger in advanced manufacturing (e.g., electronics, automotive) than in traditional sectors.
Furthermore, the composition of these imports has shifted towards intermediate products.
Unlike the earlier period, the recent increase in Chinese exports to the euro area has not been matched by a rise in euro area exports to China, with Chinese imports from the euro area declining since 2021.
This asymmetry highlights a complex challenge for European industries.
Modeling the dual impact on production
Econometric analysis shows an asymmetry: intermediate goods imports from China boost EU industrial production by 0.6 percentage points, while final goods imports cause a 1 percentage point drag.
A multi-country DSGE model simulates how Chinese productivity shocks reduce export prices.
When imports are mainly intermediate, they cut costs and support EU production.
If imports are predominantly final goods, European consumers switch to cheaper Chinese alternatives, dampening EU sectoral production.
Cheaper imported goods generally raise aggregate demand, benefiting overall EU GDP.
Similar effects are observed if production subsidies, rather than productivity gains, drive China's competitiveness.
Short-term gains, long-term risks
While China's industrial rise offers favourable short-term aggregate effects on the EU economy, this coincides with weak Chinese import demand and market share losses for EU exporters.
The positive effects on EU GDP primarily reflect short-run channels, overlooking potential longer-run scarring from production displacement.
This also neglects structural risks and strategic vulnerabilities that could emerge.