Commentary: Scared Of China? Not Europe

U.S. bugaboos -- a big trade gap and loss of jobs -- don't worry the Continent yet

Traffic in the center of Paris ground to a near-standstill after Chinese President Hu Jintao arrived in town on Jan. 26. But the gridlock wasn't caused by anti-China protests. Far from it. Police cleared traffic from the city's main arteries so the Chinese leader's motorcade could whisk him to a series of welcome ceremonies, capped by a dinner at the Elysée

Palace where he was toasted by President Jacques Chirac and dozens of corporate chief executives. The French, those masters of the beau geste, even had the Eiffel Tower bathed in red floodlights in Hu's honor. By the time he left town, French companies had announced new deals with China worth more than a billion dollars, from the purchase of 21 Airbus planes by China Southern Airlines Co. to L'Oréal's (LORLY ) acquisition of a Chinese cosmetics company.

What's going on here? At first glance, you would expect Europe to be quaking in its boots over an expected Chinese onslaught. The European Union's trade deficit with China is growing. With the euro stronger than ever, it's easy to imagine a scenario where Europeans snap up ever more made-in-China goods, in the process acquiring America's China Syndrome: a dangerously out-of-whack trade relationship and a dependence on a country that is taking away manufacturing jobs.

But in Europe, serious angst about China's economic juggernaut is hard to find. When Italian Economics Minister Giulio Tremonti complained recently that Europe's openness to Chinese products was "suicidal," the silence from other European leaders was deafening.

The Europeans have reasons to be confident. True, during the first 10 months of last year the 12 euro-zone countries imported $38 billion more from China than they exported back to the Chinese. But unlike the U.S. with its yawning trade deficit, the euro zone is running a $6.3 billion trade surplus with the world as a whole, with Germany, France, and Italy all in the black. In this context, the deficit with China seems less menacing.

MEETING DEMAND. What's more, some of Europe's biggest companies are making a boatload on exports to China. During the first 10 months of last year, the EU sold $41 billion in goods and services to the Chinese, nearly twice the amount of U.S. exports to China during the period. With Chinese growth cooking along at more than 9% last year, there's a huge appetite for infrastructure equipment, which is a forte of Continental European companies. Germany's Siemens has built large chunks of the Chinese telecommunications system while selling the nation equipment for dams, power plants, and railway projects. Swiss-Swedish engineering giant ABB Ltd. (ABB ) supplies the Chinese steel and petrochemical industries, while French utility companies Suez (SZE ) and Veolia Environnement have won billions in contracts for water and waste-treatment systems.

But aren't these companies simply hastening the day when a modernized China becomes an unstoppable economic steamroller? Perhaps, but that's a long way off, says Dirk Schumacher, an economist at Goldman, Sachs & Co. (GS ) in London. "The demand we're seeing in China is nothing that will fade away immediately." The Germans obviously think so. The Association of German Chambers of Commerce & Industry predicts that German exports to China will rise 20% annually for the foreseeable future. Chancellor Gerhard Schröder has led five trade missions to China.

This fast-growing trade complements Europe's deepening investment in China, in everything from cars to makeup. Volkswagen, already China's dominant auto maker, says it will spend $7.6 billion to increase production over the next four years. Paris-based L'Oréal has three cosmetics factories in China. "We have huge ambitions," says Thierry Prévot, the head of L'Oréal's Asian operations, who says sales in China grew 69% last year, to $200 million.

What about the threat that made-in-China products pose to European companies and jobs? Well, the Europeans shifted most of their lower-level manufacturing jobs out of the EU a long time ago, to Turkey, North Africa, and Eastern Europe. Now, those regions risk losing jobs to China. But they also could benefit from a Chinese push to set up low-cost manufacturing operations on Europe's rim. China Display Digital Imaging Technology Co., a Shanghai-based maker of television sets, is considering producing some components in Eastern Europe, to reduce transport costs and customs duties on TVs bound for the EU. Hong Kong-based investment guru Victor Chu is setting up a fund to invest in Chinese-Turkish joint ventures.

THE WAL-MART EFFECT. There's another reason why the U.S. has been hit much harder than Europe by a flood of Chinese imports. The U.S. is making sizeable investments in China -- $5.4 billion in 2002, compared to only $3.8 billion invested by Europe. But U.S. companies, far more than their European counterparts, are putting money into businesses that manufacture cheap consumer goods that then get shipped back to the U.S. and distributed by large retail chains, says Ken Davies, an economist at the Organization for Economic Cooperation & Development. The Old World has nothing to rival Wal-Mart Stores Inc., which imported $12 billion from China last year. With its relatively fragmented retail trade channels, Europe is a much harder market for the Chinese to crack. Stroll through Les Quatre Temps, a midmarket shopping mall in the Paris suburbs, and you'll find clothes from China on the racks -- but also plenty from Vietnam, Tunisia, and Turkey.

Certainly, some European industries are getting clobbered by China. Italy's centuries-old textile business is fighting for its life as big apparel makers increasingly buy lower-priced Chinese wool and cashmere. "We Italians went into China early, we brought them our methods, we sold them our machinery -- now it is like having a grown-up child who doesn't need you anymore," laments Beppe Pisani, president of Serikos, a textile producer based in Como.

But even here, there's evidence of a surprising nimbleness. Pisani, for example, says he now imports silk and synthetics from China, applies traditional Italian finishing and coloring techniques, and then resells the textiles to apparel companies. He's even selling finished textiles to Chinese customers, who now account for 3% of his sales. China is the new heavyweight in the global trade game, but there's still plenty of room for skillful players.

By Carol Matlack

With David Fairlamb in Davos, Jack Ewing in Frankfurt, Laura Cohn in London, and Maureen Kline in Milan

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