The EU’s trade deficit with China shrinks to its lowest level since 2021

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The EU’s goods trade deficit with China has shrunk to its lowest quarterly level in almost three years, despite fears the bloc will be flooded with cheap Chinese products.

There are also signs of growing transatlantic demand for European products after the EU’s trade surplus with the US rose to a record high in the first quarter, data published by Eurostat on Tuesday showed.

Economists said the improvement in Europe’s trade balance reflected weak domestic demand in the region and a reversal of the post-pandemic shift in consumer spending from services to goods.

Andrew Kenningham of Capital Economics said much of the shift was “explained by the strength of US domestic demand and the weakness of EU demand”.

In the three months to March, the EU’s trade deficit with China fell to 62.5 billion euros, down 10 percent from the previous quarter and 18 percent from a year ago. That is the lowest level since the second quarter of 2021, after a peak of 107.3 billion euros in the third quarter of 2022.

Column chart of the quarterly trade balance (€ billion) showing that Europe's trade balance vis-à-vis China and the US has improved

European trade with China has risen to the top of the political agenda amid fears that Beijing will heavily subsidize its manufacturing in a bid to capture a dominant share of global markets in strategic areas such as electric vehicles, green energy and semiconductors.

US Treasury Secretary Janet Yellen on Tuesday called on the EU to follow the US lead in imposing additional tariffs on Chinese cleantech exports, warning that a glut of cheap Chinese goods could undermine the survival of could threaten factories around the world.

EU imports of electric vehicles from China, including from non-Chinese manufacturers with factories there, have increased from $1.6 billion in 2020 to $11.5 billion in 2023. The market share of Chinese brands in the sector has time more than quadrupled to 8 percent last year.

Brussels has opened an investigation into alleged unfair subsidies for Chinese solar panels and electric vehicles. However, European Commission President Ursula von der Leyen has said the bloc would not impose the same tariffs on Chinese goods that the US introduced last week, adding that the EU would take a different approach to the “ general rates” of Washington.

Despite fears of a rise in cheap imports, almost half of the recent reduction in the EU’s trade deficit with China comes from an improvement in the bloc’s trade balance in machinery and transport equipment – which also includes electric vehicles.

EU imports of Chinese machinery and transport equipment have fallen for six consecutive quarters, falling by a quarter in that period, while EU exports to China have remained relatively stable in this area.

Column chart of the EU's quarterly trade deficit with China in machinery and transport equipment (€ billion) shows little sign of Europe being flooded by cheap Chinese vehicles

Melanie Debono of Pantheon Macroeconomics said the drop in Chinese exports to the EU in this area reflected “a reversal of the 2021 wave” caused by the pandemic, and has risen since reaching near-trough in January achieved in three years.

European exporters also appear to have received a boost as the US imposed tariffs on many Chinese imports and offered subsidies to producers of green energy projects.

The EU’s trade surplus with the US rose to a new record of 43.6 billion euros in the first quarter, an increase of 27 percent compared to a year earlier. EU exports to the US have increased by almost 4 percent in that time, while imports from the US have fallen by more than 5 percent.

“The fact that the US is already excluding China will undoubtedly benefit the EU, as long as the US remains open to European imports,” said Sander Tordoir of the Center for European Reform think tank. “The EU is ahead of the US when it comes to the production and export of green technology.”

He added that European carmakers have been helped by the extension of tax breaks under the US Inflation Reduction Act to imported electric vehicles if they are bought by companies that lease them.

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