Photographer: Craig Warga/Bloomberg

Scared of China's Slowdown? For Europe, the Real Risk Is the U.S.

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The hit to European trade from a Chinese slowdown would pale compared with the drag from weaker growth in the U.S, new European Central Bank research shows.

A 1 percent decline in Chinese gross domestic product would have an impact of just 0.08 percentage points on euro-area trade, according to a study of global output chains published in the ECB's Economic Bulletin. The effect of an equivalent demand shock in the U.S. would be more than three times bigger.

The ECB analysis looks at the final destination of European exports to determine trading-partners' relative importance. It finds that China's impact on European trade is overstated in headline data, which double-counts some trade flows, whereas the U.S. remains the euro area's most crucial market.

“The trade impact on the euro area from a demand disturbance in the U.S. is likely to be substantial through both bilateral trade effects and echo effects,” according to the study. “A similar shock in China would have less impact on euro area activity.” 

A significant portion of euro-area exports to China are re-exported to other countries. Conversely, the U.S. benefits euro-area trade not just through direct flows but also because American demand drives imports of euro-area goods by many third countries, notably China.

ecb chart

In the case of the U.K., most euro-area exports are then re-exported to the currency bloc. That underscores the depth of the country's economic ties with Europe as Britons prepare to vote on their European Union membership.

To be sure, the dataset the ECB used only goes up to 2011. Still, it highlights structural elements of euro-area trade flows that are unlikely to have dramatically changed in recent years.

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