How Fast Is the Boat to China?

In our previous article we examined the Intra EU-27 trade during last decade and came to the conclusion that the most significant trend with respect to it has been the new EU member states gaining a significant share of the Intra-EU export pie as a result of their accession to the common market and gradual trade liberalization preceding it. Most of the EU-15 countries, on the other hand, have seen their share of the (growing) pie shrink while Germany and a few other countries have been able to maintain their Intra EU market shares roughly stable. We also quoted previous research claiming that Germany has been able to maintain its global export market shares during last decade primarily as a result of strong exports to fast growing economies and the complexity of its export basket while increasingly sourcing intermediate goods in the new EU member states.

In this post we take a closer look at exports from the EU to China. In 2011 the EU-15 countries still accounted for 95% of exports from EU-27 to China, thus we have excluded the new member states from this analysis. We also excluded from the detailed analysis Luxembourg, Greece, Portugal and Ireland due to the small absolute size of their exports to China in 1999. Finally, the Netherlands was not included because of its trade statistics being significantly distorted by its role as a logistics hub for Extra EU trade.

In the chart below you can see how the value of exports to China from the EU-15 countries has increased since 1999. The total value of exports has grown 6.7 times between 1999 and 2011. This should not be surprising given the impressive growth rates of the Chinese economy and the resulting increase in China’s economic mass in both absolute and relative terms. Although the EU has consistently had a substantial trade deficit with China and in 2011 the nominal value of EU-15 exports to China was still only about one half of the value of exports to the US, China has also become an important export market for the EU.

 

However, export performance has diverged considerably among the 10 EU-15 countries included in our detailed analysis. Germany has been a clear leader among them, although growth rates above the EU-15 average have also been achieved by Belgium and Spain. At the same time such countries as France, Finland and Sweden have seen the value of their exports to China grow at rates significantly below the EU-15 average.

In absolute terms exports from Germany are even more dominant. Its share of EU-15 exports to China has gone from 36% in 1999 to 50% in 2011 while the nominal value of its exports to China has grown from EUR 7 billion to EUR 64.6 billion. As can be seen below, in 2011 nominal goods exports from Germany to China accounted for 2.5% of GDP, by far the largest percentage among the EU-15 countries.

Furthermore, if we look at the largest broad category of goods in EU-15 exports to China, which as per SITC classification is machinery and transport equipment, the share of German exports in the EU-15 total is even larger – it has gone from 39% in 1999 to 61% in 2011 as the nominal value of machinery and transport equipment shipped to China from Germany went from EUR 4.9 billion to EUR 47.7 billion.

Conclusion

When it comes to entering the Chinese market, Germany is significantly ahead of most other EU countries. Taking into account the composition of EU-15 exports to China, Germany has apparently been very successful at capitalizing on the investment boom of the past decade in China. At the same time this success also means larger risks for the German producers of investment goods going forward. A hard landing in China would hit them particularly hard, and some observers are pessimistic about China’s future growth prospects. For example, Acemoglu and Robinson, in their book “Why Nations Fail” express skepticism about China’s ability to continue growing at extraordinarily high rates without major changes in their economic and political institutions.

Then again, access to the Chinese market allows German exporters to diversify away from the struggling Eurozone market.

6 Responses to "How Fast Is the Boat to China?"

  1. Ed Dolan
    EdDolan   August 28, 2012 at 12:56 pm

    "[Germany's export] success also means larger risks for the German producers of investment goods going forward. A hard landing in China would hit them particularly hard."

    Absolutely. I would only add that it would not really take a hard landing to produce this result. Right now investment is about half of China's GDP. Observers like Pettis, in their optimistic moments, envision a "soft landing" scenario for China in which GDP growth slows, but does not stop, while the consumption share of GDP gradually increases at the expense of investment. This would represent healthy rebalancing and could even be consistent with accelerated growth of the standard of living of China's population. However, because of the composition of German exports, it could still hit Germany rather hard.

  2. ThomasGrennes   August 28, 2012 at 3:45 pm

    Yes, the importance of China to the German economy is illustrated by Angela Merkel's trip to China this week. In addition to trade issues, will she also ask Chinese to invest in
    sovereign bonds of Eurozone members? It is interesting to see how both European and U.S. officials feel compelled to to travel to China to reassure Chinese leaders that their
    government bonds are prudent investments. It wasn't so long ago that American Secretaries of Treasury were offering unsolicited advice to Chinese about how to put their financial house in order.

  3. Aegean1972   August 29, 2012 at 3:04 am

    China is a huge market. Regardless of the slow-down or the hard landing (which is prolly inevitable down the line), the Chinese want western products, western education and a western type of living. Plus their industrial production, wants Euro or American technology in order to operate. Off course the world-recession will affect some of the German exports to China, but its up to the Germans to figure out new areas of trade and cover the losses.

    Its actually good (for Euro-american exports) for the Chinese bubble not to break and continue to "prosper" (as they want us to believe). So we act like "we dont know whats happening" and continue to sell them whatever we got. When they dont have any money left to buy, start with westernizing India or the Mid East. Actually start on a parallel level to westernize India. At the same time bring as many manufacturing jobs back to Europe and the US as possible. Thats a 20-30 year strategy for euro-american growth.

  4. ThomasGrennes   August 29, 2012 at 8:26 am

    The Chinese transformation from an impoverished and stagnant economy to the fastest growing economy in the world began with a major reform in 1978. A key feature of Chinese reform is that it was initiated internally with no foreign aid. As a result of domestic
    reform, China was then able to take advantage of opportunities to trade, invest, and migrate with the world economy. India has also had some success with reform, but it is difficult to copy China's reform in country's with different economic and political institutions. It does seem clear that a necessary condition for successful economic reform is that is must start at home.
    As for bringing manufacturing jobs back to Europe and the US, trade with lower wage countries has probably had some effect on manufacturing employment, but technical change has probably had a larger effect on manufacturing jobs. Total manufacturing employment has also fallen in China, and these jobs wil not return.

  5. cst   September 4, 2012 at 1:58 am

    It is obvious that the model need evolve more broadly the success of the system is without compare. As a long term reviewer of currents in the dialogues of man regarding these issues related to:
    economics, politics, trade, culture, even psychology
    it is interesting how the dialogue evolves, how the story changes, how drivers are misunderstood, how impacts are misunderstood, how specifics are emphasized, how the impact, nature and result of this that or the next thing is justified, reconciled, supported or decried.

    A good deal of mis-underestimation, confusion, madness in crowds, delusion in dialogues revolve around these things. It is interesting the camps in which people sit.

    Grennes speaks to China losing Manufacturing Employment, in fact more than any other, perhaps more than all other combined, because of movement away from a non-market economy with the begun, but not finished, reform of SOE's. It is unfortunate that that process away from SOE's reversed as late as 2004, perhaps during the 1998 CHinese Banking Crisis, but at least by the 2004 Chinese Banking crisis.

    Yes, most of the Chinese companies that people invest on in Nasdaq are nothing more than subsidiaries of SOE's. A scary proposition, where several years ago the CEO's of the top 3 mobile providers in China, were switched by the CCP at their whim just after one had been seeking financing in New York.

    The truth is that it is good that China has grown, the problem is that that growth is not asbroad based as is believed. Nor is the Global Middle Class Growth story as it is told on the financial media. We have heard numerous times, daily about the Global Growth Story, it is repeated, often, and coupled with the great potential of vast untapped markets here or there. What does that mean; read a statistic today (80% of world poor, 10% middle class 10% rich). If looking at countries, in consideration of per capita GDP then; Lessor Developed, Middle Class, Advanced then we
    are talking about Under 1,000 = LDC, 1,000-15,000 Middle Class = Middle Class, Above 15,000 advanced…..There are few LDC's left, only Haiti in the Western Hemisphere (although Sean Penn fears that American business will invest in Haiti).

    My experience, seeing, not simply believing:

    Global Overcapacity in Industrial Production existed at the beginning of the period (1998 to 2008 saw the Global Economy double from 30 trillion to 60 trillion, that caused the current financial crisis not Lehman's and mere speculation, CDO's, CDS's, or Fannie Mae).

    In most places globally, the value of assets are severely distorting.

    Countries will only entrench political and economic elites, while they use notions of history imperialism or culture to divert the blame, and increase notions of victimization among populations (along with all other critical theory claptrap).

    Anyway, you will never grow peoples standards of living beyond a point where an entrepreneur, for example with a restaurant, has 10,000 (USD in local currency) in monthly sales, 1,000 in monthly salaries, 2,000 in monthly food costs, 500 in taxes (or graft), 500 in miscellaneous, and 5,000 in Monthly Real Estate rental costs,with 1,000 for the entrepreneur. Roughly, along those lines, in a developing country,I know an entrepreneur with 3 such places. Imagine were those numbers reversed, and the surplus of markets were not dumped on markets globally enabling more sanity in the economic development of economies and a greater dispersion of production globally.

    The fact is more maturity, need eventuate in these matters,and no kowtowing to the rentiers in developing countries that skew the development potentials of their cultural "brothers and sisters" to buy Prada in Milan.