Which European sectors could benefit from a US-China trade war

Trade disputes between China and US are here to stay. It seems increasingly clear that the US is raising the stakes at the negotiation table and it is hard to imagine how China can accommodate the demands from the US. Against the backstop, it is reasonable to assume that US-China trade frictions will continue in the foreseeable future. The most likely scenario one can expect is a mini-deal or, even more likely, a postponement of the deadline specified by the US before imposing the import tariffs on China.

Within this context, the impact of what we considered to be a paradigm shift in terms of US-China economic relations could potentially benefit other major global exporters, with the most obvious being the European Union, which heavily depends on a number of general and sectoral factors. For the general consideration, the key is the response of the EU Commission (i.e. whether it will align with the US to protect its market from Chinese exports, or will maintain neutral policies). In the latter case, Europe could substitute the US and China in each other’s markets to some extent. At a more granular level, the situation is clearly very different across sectors.

This note dwells deeper into the potential sectoral impact of a US-China trade war under the assumption that the EU keeps its neutral stance. To quantify the benefits at a sectoral level, we construct a Trade Complementarity Index. The sector benefiting the most is the semiconductor industry, which could potentially expand its exports more than three times of its current exporting value. However, when the relative size in the EU’s export structure is taken into account, the most relevant gains occur in motor vehicles, aircraft/spacecraft and chemical products, with the maximum potential gains reaching 24%, 66% and 17% of their current exports.

Another important finding of our analysis is that the potential export gains are larger in the US market. In other words, within the sectors that the EU already exports, the substitution of China’s exports to the US accounts for 68% of total potential gains (equivalent USD 69 billion). The China’s market, instead, offers a potential gain of up to USD 32 billion to the European exporters (as far as the substitution of US products is concerned). The takeaway of this is that European exporters benefit more from US sanctions on China than from China’s retaliation.

We should note, however, that no due care has been taken with the complexities of the value chain in this analysis which makes our results less obvious for goods of which components are produced in the US and/or China (rather than being vertically integrated within the European production chain).

Finally, one more key note of caution is that, if China were to accept the US proposal at the table for negotiation (in particular an increase in US exports into China at the tune of USD 100 billion per year), European sectors heavily dependent on China would be severely affected.

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