Over the last quarter-century, China has become ever more important to the European trading bloc. As the far eastern country has opened up to trade, many companies have taken advantage of its low manufacturing costs and high skilled labor force to keep their prices low, or their profits high.
As a result, China is now Europe's second biggest trading partner behind the U.S. At a very basic level, this might seem less than preferable for the economies of Europe that have previously prided themselves on manufacturing – but only on the supremely simplistic premise that all imports are bad. As is frequently the case, the realities of economics are more complicated.
Processing profits for Europe as well as China
Not all imports are for the end user. Companies will import and export as the market demands – and crucially, imports can drive up profit margins for companies.
Many assume importing is bad for the economy, but approximately a third of imports to Europe from China have great benefits for European companies. These products are part of what's called the processing trade.
A product will have several stages of production. Many products are developed and designed in Europe, with core components sourced from around the world; they are then processed and assembled in Chinese factories but marketed and sold in Europe. This processing trade benefits European countries because the Chinese input is at the lower end of the value chain, with European companies at the higher end.
Let's take the example of a designer belt, for which the production costs in a Chinese factory may be $10. The factory charges the European designer $43, then the designer's stores sell it to customers for $825. The Chinese factory makes a profit on production but gets less than 10 percent of the sale price, with the bulk of the revenue – and profit – staying in Europe.
Although the processing trade is recorded on China's side (that is, as exports to Europe), more of the benefits flow to both European countries. And in 2017, that processing trade was worth 34 percent of the $370 billion in imports from China to Europe.
Clearly, at the moment Europe is doing well from this business arrangement. It's worth noting that Chinese companies are far from unaware of the balance, and that the balance may change as the market matures and China continues to grow.
"An important part of China's growth strategy has been to play a central and increasing role in producing more of the goods in the different stages of these value chains and moving up towards more higher value added products," Erik Berglof, director of the Institute of Global Affairs at the London School of Economics, tells CGTN. "That process is very important to China's growth and will have to continue."
China has offered a key combination of highly skilled labor and low production costs especially in electrical products like smartphones – without which many around the world would not have been able to afford to join the technology revolution. As China moves up the value chain, European companies seeking to maintain profits may look to import from elsewhere. "Some countries will probably diversify their suppliers," says Berglof, who thinks importers may seek "multiple suppliers." Where they are may determine the next rising economic center: might it be Africa, south Asia or eastern Europe?
Important exports
Remember, too, that the freight traffic does not just go one-way. China is the European Union's second-largest export market – and that market's growing fast. Since China joined the World Trade Organization in 2001, its imports from the EU have grown 800 percent; China has grown from the EU's fifth-largest export market in 2001 to its second-largest in 2018, leapfrogging Switzerland, Japan and Russia.
The EU's main goods exports to China are cars, aircraft, pharmaceuticals, integrated circuits and wine. China buys 17.5 percent of Europe's car exports, with 546,000 sales worth $26.47 billion; it purchases a similar proportion (18.8 percent) of Europe's aircraft exports, with 504 sales coining in $11.98 billion. As an example, European multinational Airbus had a 6 percent share of the Chinese civil aviation market in 1995; by 2018 that had mushroomed to 46.5 percent.
China takes almost a quarter of Europe's exported integrated circuits – the rectangular black "chips" that fire the circuit-boards of the digital revolution – and when you add in $12 billion of pharmaceuticals and 360 million bottles of wine, it's clear that China's burgeoning purchasing power has kept Europe's economy ticking over – and could help it recover from the fiscal after-effects of COVID-19.
"China's contribution to Europe's recovery is very important," Jim O'Neill, the British economist who in 2001 coined the term "BRICs" for the rising economic powers of Brazil, Russia, India and China, tells CGTN. "If you look at much of the evidence of the past few years, changes in the Chinese economy sometimes seem as though they are the single most important thing influencing an economy as big as Germany, because Germany has become such a big exporter to China."
As with any dominant market, this can have positive effects in a boom, less so in straitened times. "China slowing down in 2019 already had its consequences for a softer German economy, particularly in the auto sector," says O’Neill. "So any sign of a significant Chinese recovery would definitely help the German economy – and because the German economy is the biggest in Europe, that would help the rest of Europe."
That beneficial effect is also sweeping eastwards across the continent, from the established economies of western Europe to the developing markets of eastern Europe. "China's strategy towards Europe is to try to strengthen the relationships with central and eastern Europe. This has been a good thing for these countries," says Berglof. "I would argue that it's also important that one works with European partners in this and supports these countries, particularly now and in this situation with the COVID epidemic."
Service surplus
There is another hugely significant area in which Europe benefits from China, and it is a reminder that not all exports are tangible goods or widgets. Europe profits greatly from the export to China of services: hugely popular offerings like education, tourism and financial services.
In 2017, the EU exported $50.08 billion of services to China, a surplus of $17.5 billion. That surplus had increased 400 percent since 2011, as the service export to China grew at twice the rate of the EU's overall service export.
As the Chinese population grows richer, Europe feels the benefit of the expanded market. One obvious beneficiary is tourism. In 2016, 10.48 million Chinese tourists spent 24.77 million nights in EU member states – four times the number of 2008, bringing around $20 billion of tourism expenditure.
While tourists bring a short-term financial boost, education is a longer-term service export. According to Eurostat, by 2015 there were 303,400 Chinese students studying in EU countries, accounting for almost a quarter of the country's overseas students. This created an annual income of $1.1 billion for EU schools, but the benefit doesn't end there: a report by the Bruegel Institute estimates that if each Chinese student spends $30,000 per year, that contributes more than $9 billion to the EU economy and creates around a million jobs.
Then there is the world of financial services, again tipped heavily in Europe's favor. In 2017, EU exports of financial services to China reached $1.11 billion, while in the other direction China's export to the EU was $305 million – a surplus of $760 million.
The correspondents' view
Such movements of money are vital to keeping the economy moving. As Europe, like the rest of the world, looks at how to come back from the effects of the coronavirus pandemic, China seems a more important business partner than ever before.
CGTN asked correspondents around Europe how the local populations saw the relationship with China. In the UK, Juliet Mann described London as "a global financial centre looking east, because China is a fast-growing export destination for UK services and goods – from scotch whisky to aerospace and auto components to green technology and education. As the UK grapples with the fallout from the coronavirus and its departure from the EU, those trade ties become all the more important."
Over the channel in Paris, Ross Cullen noted that "France is looking for news about future opportunities for closer ties. Last year, France and China signed trade deals worth $15 billion; this year, with the pandemic, they're looking for opportunities to contain its impact on bilateral trade."
From Berlin, Ira Spitzer said that "in Germany, people are keenly interested in economic ties with China. Now Berlin's biggest trading partner, relations with Beijing will be a major focus when Germany takes over the EU's rotating presidency in July, finalizing an investment agreement and trying to work together to jumpstart the green economy will be at the top of the agenda."
And in Belgrade, Aljosa Milenkovic said "People in Serbia are most interested in Beijing's economic achievements. How did China succeed in elevating so many out of poverty? Are there lessons that Serbia can borrow? And as China has extended help to Serbia to tackle the coronavirus, how will bilateral ties develop in the post-pandemic era?"
The answer to those questions may well shape the next few decades in geopolitics.
Written with Gary Parkinson and originally published by CGTN Europe, 24 May 2020