For some context, the French government released a strategy report this week and is one that is meant to be part of an advice to the prime minister as well as to help guide long-term policy setting. Included in that report is a call for the EU to consider either a 30% blanket tariffs on Chinese goods or 30% outright depreciation of the euro against the yuan (à la Plaza Accord style).
What’s with this drastic and dramatic proposal you might ask?
Well, this is largely aimed at trying to stop a massive influx of cheap imports from China. That especially after Trump tariffs have come into effect and that is now having some serious repercussions to the European economy. I’ve highlighted the problem last week already here: US tariffs impact show up in German and French trade numbers, but is there a bigger worry?
The main concern proposed by the French government advisory body is that it could push Europe to the brink of a cycle of “destructive destruction”. That especially if no action is taken to counter what is happening above. The body mentions that traditional defensive tools like anti-dumping measures are “insufficient” in dealing with the situation, requiring a more “massive and vital” policy shift.
At the balance, tariffs would be the easiest route as engineering a significant currency depreciation would be far more complex and difficult. But even so, any major change in trade policy or tariffs implementation as such would require qualified majority backing among EU member states. So, that will also be tough.
Now, this is only an idea put out by the advisory body to the French government. It isn’t one that represents the explicit stance of France and the EU itself. Nonetheless, it is coming under heavy scrutiny and backlash in Chinese social media and news headlines. So, that is something to be wary about.
We’ve seen with Japan how quickly these things can escalate, especially if China citizens feel incensed and/or demand retribution of some sort.
For now, Beijing is yet to respond to all of this and I reckon there is no need to. This is not an official policy stance undertaken by any members in the EU. It is just an idea that is being floated by a third-party of sorts, although a rather risky and scandalous one.
At this stage, both the EU and China are finding themselves unlikely allies of each other after having been pushed to the corner by Trump and his tariffs. So, there is a need to help each other out to get through this tough time.
But in the bigger picture, this sort of trade relationship might not last the test of time. The EU has to consider the key risks to the economy in continuing this relationship path. And eventually, policymakers and lawmakers will somehow demand action surely. It might not be today or this year, but arguably it will come one day.
And if anything, it speaks to how important it is for markets to also understand the shift that is taking place in the global trade environment as highlighted above.
This article was written by Justin Low at investinglive.com.