News

European elections: Kiel Institute recommends more free trade deals to reduce China-dependence

29.05.2024

Although China's importance for the EU's foreign trade is high, it has declined in recent years. The reason for this is that the EU has intensified trade with other countries. In a recent analysis, the Kiel Institute recommends the EU to continue on this course and conclude free trade agreements with countries such as Australia and the Mercosur states. In this way, it could reduce its dependence on China in the face of geopolitical tensions. China currently dominates as a supplier of certain electronic products and raw materials to the EU. If trade were to be disrupted, this would result in high costs in the short and medium term.

Although China's overall importance as a trading partner is declining slightly according to the Kiel Institute's analysis, the country remains the EU's largest source of imports (20.5 percent in 2023) and its third-largest export destination (8.7 percent), behind the US (19.7 percent) and the UK (13.1 percent).

"The EU should not trade less with China per se, but much more with other countries. We have benefited from trade with China, which has supplied us with low price products in areas such as electronics or the green transition. However, the dependence is problematic from a geo-economic point of view," says Alexander Sandkamp, trade researcher at the Kiel Institute on the occasion of his current analysis.

This dependency applies in particular to electronic products such as laptops and cell phones, but also to photovoltaic modules and LEDs. The same applies to raw materials that are important in the green energy transformation or for battery cells, such as germanium or magnesium, as well as rare earths in general. China dominates the global supply of these products and raw materials, with market shares of up to 90 percent.

China may be replaced as a trading-partner in the long term

In the event of a short-term trade freeze with China, for example due to an armed conflict with Taiwan, there would therefore be practically no alternative suppliers for the EU, particularly because other Western countries such as the US would also be vying for them.

However, in the long term—once new trade structures and supply chains have been established—China may be replaced as a trading partner. Simulations by the Kiel Institute show that the EU's economic output would then be around 0.8 percent lower each year, which corresponds to EUR 136 billion in terms of GDP in 2023. In China it would be 0.9 percent.

"A short-term trade ban with China would have particularly severe consequences, as the EU would be caught unprepared. It must therefore set the course today in order to be prepared for a conflict. Free trade agreements are the instruments of choice for this, as they significantly reduce trade costs and increase predictability. For raw materials such as rare earths, for example, the EU should resume negotiations with Australia, Malaysia, and the Mercosur states as soon as possible," says Sandkamp.

"Particularly in view of the European elections, the parties must now find the courage to stand up for free trade agreements with strategic partner countries, as this would enormously strengthen the EU's geopolitical position and increase the prosperity of everyone involved."