Europe cannot solve its economic problems by turning to China

After Canadian Prime Minister Mark Carney delivered his speech at the recent Davos Forum, the entire European continent was alarmed, as Carney described the rules-based order, which Washington had advocated for decades before “trampling” on it, as a mirage, and strongly criticized the hegemonic United States, which left the Europeans confused.

But before European politicians rush to emulate him, it might help to cool the enthusiasm for Carney.

Carney, who sounded tough in his speech during the World Economic Forum in Switzerland, warned the middle powers, saying: “When we negotiate bilaterally with a hegemon, we are negotiating from a position of weakness.”

This may have been in reference to the daily coercion that Canada is subjected to from the American administration, but perhaps he was talking about the more subtle contrast that he experienced a few days ago in the Chinese capital, Beijing.

In contrast to his challenge in Switzerland, Carney was “lenient” during his visit to China, where he signed a “new strategic partnership” between Ottawa and Beijing in preparation for an emerging “new world order,” and praised Chinese President Xi Jinping as his colleague in defending what he called “multilateralism.”

The visit also resulted in an agreement to exchange cars for canola, according to which Canada will reduce customs duties on Chinese electric cars from 100% to 6.1%, and raise the import ceiling to 49,000 cars annually.

In return, China will reduce customs duties on Canadian canola seeds from 84% to 15%.

Business partner

Over time, Ottawa also expects Beijing to reduce tariffs on Canadian lobster, crab and peas later this year, and to buy more Canadian oil and perhaps gas as well. It is certain that the agreement to launch a ministerial dialogue on energy will pave the way for eventually concluding deals.

These fruitful exchanges eventually prompted Carney to declare Beijing a “more predictable” trading partner than Washington.

And who can blame him? He was simply stating the obvious: after all, China does not threaten Canada with annexation, as the United States does, but there are observers who wonder whether he would need to be so flattered in China if his country still possessed some of the world’s leading technologies.

Fast turnaround

The truth is that we probably shouldn’t expect much from the Canadian oil and gas industry, as Chinese officials usually offer serious consideration rather than outright rejection out of “goodwill” alone.

Russia is an example of this. Moscow has spent decades in dialogue with Beijing over a pipeline aimed at replacing Europe as a market for natural gas.

The car-for-canola deal also contains some irony, as Canada imports the same technology that makes fossil fuels useless.

China is witnessing a rapid shift towards electric energy, as the International Energy Agency expects its oil consumption to decrease significantly early next year, thanks to “exceptional” sales of electric cars.

This means that Beijing may not be in desperate need of new foreign suppliers of petroleum products, and the ministerial dialogue is likely to continue without a conclusion, albeit politely, for a long time to come.

This situation of Sino-Canadian trade can be seen as a classic comparative advantage in action, as China is good at making things, and Canada has abundant primary goods.

But in the not-so-distant past, it was Canadian companies that sold nuclear reactors, communications equipment, airplanes, and high-speed trains to China. However, currently, there are many of these Canadian companies that manufacture advanced technology that covered the world. They have exited the arena or have become active in a very limited way.

Manufacturing momentum

Somewhere in this history of trade lies a cautionary tale for Europe. Industrialization can have its own momentum. As a country’s economic composition changes, its political economy changes as well.

When producers of goods disappear, their political influence also disappears, and the center of gravity of political pressure shifts toward end users and consumers who prefer readily available imports.

Europe already has its own version of this story, as cheaper Chinese products have pushed local solar manufacturers to the brink of disappearance for two decades.

Currently, the solar industry is dominated by installers and operators that prefer cheap imports.

Simply put, Carney’s car-for-canola deal is a balm for Canadian consumers and commodity producers, but it is also counterproductive industrial policy.

Trade shock

In very simplified terms, industrial policy aims to encourage the export of finished products over raw materials in order to build valuable domestic capacity and productivity.

But while Canada could perhaps deindustrialize, as Carney said in Davos, his ambition is to run an “energy superpower,” Europe does not have that option, and its agri-food and extractive food sectors are not enough to support the continent’s economy, even with the addition of sectors such as tourism and luxury goods.

China currently exports to the European Union more than twice what it imports, and at the same time Goldman Sachs estimates that Chinese exports will reduce 0.2 percentage points or more from GDP growth in Germany, Spain and Italy every year until 2029.

According to the European Central Bank, automobiles, chemicals, electrical equipment and machinery, the sectors that form the industrial backbone of Europe, face the largest job losses due to the “China trade shock.” About “Politico”

A more intense challenge

Europe shares Canada’s problem in dealing with the United States, which is now not only an unreliable trading partner, but an ally that has turned into a “hegemon.” For this reason, Canadian Prime Minister Mark Carney’s speech in Davos received widespread resonance, but American protectionism has only made China’s economic policy a more severe challenge to Europe, as America resists European Union exports, while Chinese goods continue to flow to Europe in larger quantities and at lower prices.

It would be a mistake for European leaders to look to reduce trade pressures by helping China as Carney does, and to cede the continent’s industrial capacity in the process. Whether to resist Russia or the United States, Europe still needs to hold on to its industrial base.

• Canada reduces duties on Chinese electric cars from 100% to 6.1%, under an agreement with China.

• Sectors that constitute the industrial backbone of Europe are facing the largest job losses due to the “Chinese trade shock.”