The EU vs China: it’s complicated. With Bernd Lange

0:00How do you win a trade war with a country you depend on? The EU is trying to work it out as it plans to get tougher with China. Our trade deficit with China is now one billion euros a day. It has reached a tipping point. That's Ursula von der Leyen, the president of the European Commission, speaking in September. Chinese imports are piling into Europe in sectors from cars to chemicals. And unlike in the past, the Chinese are not buying much back. European leaders are treating it like an emergency, though it's still Europe. So quite a slow-burning emergency. But is this a trade fight that the EU can win? And if so, how? This is the economics show with Simea Keynes. I'm joined today by Bandit Lunga, chair of the European Parliament's Committee on International

1:01Trade and a loud and important voice in the EU's trade debates. Band, hello. Hello. On this show, we always start with a silly question, where the answer is on a scale of 1 to 10. So on that scale of 1 to 10, a very scientific scale, how much trouble is the EU in when it comes to navigating trade wars? So 0 is no trouble at all. Everything is great. 10 is disaster zone and crisis is inevitable. I would say 6. Okay, near the middle, edging a bit. Exactly. We have some problems with some big trading partners, but we have also some chances to stabilize the global order. Okay. 6, though, isn't great. You have been involved in the trade debate for a long time. And correct me, but it feels to me like the rhetoric towards China right now is particularly hawkish.

2:02What is your assessment of how the reality matches up to that rhetoric? Right? So on the one hand, it could just be that you've got protectionist interests, scorn mord, on the other, actually, no, this is a real challenge that's having effects on the ground, challenging the European industrial base. I guess we should really look to the effects on your quite right here and the parliament, but also the European Union. As such, we have forces which really have a China for B. And on the other side, we have forces saying we are so close in our trade relations with China. Don't provocate China. China's is not the reality. On the one hand, the export from China is quite aggressive. We have a lot of subsidies, more than 4% of the GDP is going in subsidies of industrial sectors. And we have to react to that. And at the moment, in China, we have also a situation that the domestic demand is going

3:06down, car sales, more than 20% down. So therefore, the export is so important for the economy and China that we, I guess, have a leverage. And the US market is more or less closed. So the key market is Europe. So as we are recording this, the EU Trade Commissioner is, I think, on his way or in China to talk to his Chinese counterparts to try and get some sort of, you know, agreement rebalancing from the Chinese to address this huge export surge that we've seen. What do you think is reasonable to ask of the Chinese? To make clear to the Chinese side that this, we are a dramatic increase in specific products could be limited, I guess, should be reasonable for the Chinese side. But I guess the important issue is that we are not arguing with specific pressure.

4:07Because my experience with the negotiations with the Chinese side as well, so that this change in the behavior has to be built on their mind and their activities. So yes, there could be some export restrictions in China. There could be some limitations for specific cars, but it has to be clear that China should start some measures which will limit the profit for Chinese companies to sell specific cars inside the European Union. And so that's for two, three years, not interesting for them to do it. It's interesting that you are talking about temporary measures because, you know, there is a school of thought, which I suppose I do subscribe to, which is that, you know, this is a structural issue. It is a structural mismatch between the way that the Chinese economy operates. It does support companies to just export their excess rather than responding to price signals

5:12to adjust. And so, you know, if you believe that, then it's kind of hard to see what that kind of agreement would achieve other than just a very temporary sticking plaster for what is a sort of semi permanent structural challenge. Yeah. On the one hand, of course, we are sticking to the W2 rules and we are really a fair partner if others are also playing fair. And of course, the history of Europe is based on high quality and innovation in industrial sectors. And if we are really have the opinion that this will be not the case in the future, then we have a serious problem. And at the moment, I see no reason why we should think so. We have the data of the production. We can combine the production with AI and even here we have an advantage also compared to the United States that we have the data. So there is room for improvement and that at the end of the day, the consumer has to

6:17decide which car he or she will buy. But do you really believe that? I mean, suppose that the European consumer decides, even with that temporary tariff or even a semi permanent tariff, that they just want a Chinese car, right? They want the flat screens. They don't want to buy European and actually maybe the European car industry would shrink quite a lot. Is that acceptable as an outcome? Not at all. Therefore, we have to fight. Look, we have also some problems which really combine the really problematic situation here. So the domestic demand is also decreasing. So this is not linked to China. It's really linked also to the demand in Europe. And we have also a decrease in export to the United States. So there are different elements where we have to look. And of course, we would like to see more investment and more production of Chinese cars in Europe.

7:21We are speaking in a week where President Macron and Chancellor Merz sent us, Lafontoline, the President of the European Commission, a letter with some striking proposals. There has been talk of killswitches. The commission might acquire the power just to eject a particular company from the European Union in the past when it comes to these trade weapons, Union consensus from Member States. It is hard to secure. But under these proposals, the commission would be able to act quickly and it could only be overturned by a qualified majority of states. What do you think of that kind of new weapon? First of all, it's an idea. It's not a legislation. Secondly, I recognize that to important Member States change their mind. And that's important. I was the reporter for one of the tools in our tool kit, the anti-cursion instrument.

8:27And in this negotiation with the council, the council wanted to avoid quick reaction because they had really the fear that economic and political weapons and measures would be combined and would lead to diplomatic problems. Now it seems that France and Germany have recognized that that's reality. China is using economic power as a political weapon under political pressure, sometimes really coercive. Therefore, it's good to know that now the council is ready, these two of the Member States, to react quick. And now we have to discuss how to deal with this idea. So I guess two ways. One is to modify the anti-cursion instrument to speed up and decision making process because we have a huge basket of possibilities to react if there are coercive measures coming

9:29from a third country. Or we are creating a new instrument and a urgency coercion instrument. There will be discussion in the council mid-October and then we will have a discussion in the parliament in November and then we'll see how we post it. That's really interesting. So the anti-coversion instrument is the best weapon that the EU has right now of fighting back when it comes under pressure from say the US or China. But in the past, when say President Trump made threatening moves on Greenland, they couldn't agree to actually use that anti-coversion instrument. Do you think if that were to play out again with this new instrument, they would have been able to do something? I guess this Greenland experience was really one of the elements where the change in the mindset of the member states happened.

10:31And I'm sure and I know that if the change of position of the President Trump in Davos would not happen, then of course the anti-coversion instrument would be started. And so yes, you're quite right. Before the Greenland exercise grounds of the member said we're really reluctant to use it. They had all their particular interest. You're in Germany, the cars, Italy, the mine and others, others. But I'm quite convinced that now all sources instrument might be used if it's necessary. Can I ask what you think would happen though? You know, I think you're right. There has been this remarkable change. Suppose the Chinese were to try to coerce the European Union. Suppose these trade talks were to go really badly wrong and the Chinese were to say, nice that you have those rare Earths, sorry, we're not selling you anymore, right? We can essentially shut down a lot of your manufacturing because of the importance of China in those supply chains. Would this new weapon really work?

11:33Does the EU have anything up its sleeve that could counter that? You're quite right. We find a way off the way ours is all sort of a class. And this is also based on the economic calculation of European companies. This was not naive. I had a really tough discussion with this EU of a big German company. He said to me, oh, regarding China, we were naive. No, that was not naive. They closed. We find a way for us in Germany and Europe. And what they process to China because of the low wages and mainly also because of the low environmental obligation. So it was economically good for them. And now we have the problem. And therefore we need also, we find a way for a way ours in Europe or in reliable partner countries. And we are working on that. So you're quite right. If we would now start an escalation regarding chaos and critical materials, China has a power.

12:37So I would not argue starting a trade war now because then it might be not clear who will win. OK. Can I ask now about the EU's defensive policies? So there has been a proposal called the Industrial Accelerator Act, which would try to bolster European industry. And there has been questions about when it comes to European preferences, who should be included? Right. And it's all very well trying to promote European industry. Does that include the UK? Does that include other trusted allies? Or is this going to be home only? Where do you fall on that balance? Should the UK be included? Sure. And so yes, some of my colleagues and also some member states are saying we should really limit public procurement and support subsidies to production based in Europe.

13:43I have some problems because we have legal obligation with the general procurement agreement with WTO. And we have also trade agreements with reliable partners like the UK, like Switzerland, like Canada, like Japan, like Korea, where we have also obligations on public procurement. Therefore I think they should be in, but we have to really control if they are really complying with the obligation. So this should be checked for UK, I have no problem. And we have a lot of close connections. By the way, I'm also looking quite close to the developed insights UK, the direction of getting closer to the European Union. And the Prime Minister mentioned last week that for him no option will be excluded. So let's see, at the moment I see this Switzerland plus possibility for the UK.

14:47Well, there will be some pleased Brits listening to that. Well, look, let us go to a break now, but when we get back, I'm going to ask about the EU's other trade problem, the US. The new episode of the next five is all about the freedom to invent with AI. Steve Tarza at Amazon joins me. I think there's such a huge opportunity for innovation. As does Jim Rowan at Deloitte. We see that when the sea suite is using AI, they get their teams on board as well. And Seth Fox at S&P Global. Our data is our crown jewels. We have to draw a bit of a line around the data, but not around the idea. Listen to the next five wherever you get your podcast. Enjoy. We are back from the break. OK, we have mostly been talking about China, but I want to ask you about the EU's other

15:49big problematic relationship, which is with the US. Although for now, trade relations are pretty stable, but the Trump administration has been carrying out various investigations into unfair trading practices, and it looks like the EU is still in its sights. So you've got investigations covering pharmaceuticals pricing, digital services taxes, and so-called industrial over capacity. So I think that there will be potential disruption ahead. Looking at that landscape, which of these investigations or which US trade actions are you most concerned about? Well, that's not so easy answer question. So as you know, after the deal from Scotland was concluded, the United States lifted products, they called it derivatives because they are containing still and aluminum from this agreed 15% up to 50%.

16:50And this is still a reality and this has to be changed. And even worse, they started a new investigation for 20 additional products, so-called derivatives. And then yeah, we have investigations, we have investigation and tariffs on pharmaceuticals, on drugs. At the moment, I think until the midterm there will be no further measures coming on the table because all these measures, all these tariffs have an impact also on the price situation in the United States. So therefore I always call the second of April where Trump announced the tariffs and he named it a liberation day. I call it always inflation day because you see clearly at the moment, I guess, about 4.8% inflation weight in the United States, it is his consequences. And therefore I guess before the midterm say we are safe, but it's only one month to

17:51go. And then I expect that specifically the security of the economy and the White House are looking for specific solutions for some particular problems. The USTR is at the moment more on a rational path and that's also quite interesting that in the United States there is a slight division of interest reflecting in the different bodies of the government. So the Treasury is looking for wins, whereas the USTR, as you said, more rational? Yes, because the USTR of course is presenting more the industrial interest and they are also looking quite clearly to the general establishment of tariffs and relation to other countries where the Secretary of Commerce is more looking to specific products and Peter Narau in the

18:54USTR is really more in the sphere of the Marga movement and have more political interest. So there are three different animals having the necessity to work together. Can I ask you about the EU-US agreement, the Turnbury agreement? It's my understanding that the US is a bit frustrated because part of that deal involved signing up to talks which could potentially align standards between the EU and the US and the Americans are a bit frustrated because the talks have been quite slow. What's your impression of what's been going on? First of all, we had some discussion about the implementation of the tariff side of the deal of Scotland because in our parliamentarian view we have to be clear and also integrate some

19:54safeguards and in this deal of Scotland we have also some aspects for further discussion. And of course this first discussion could only start after we fixed the tariff issue. And now we are looking a little bit how to arrange this but this has to be done in real partnership. It is not the possibility that one partner says to the other what he has to do. And we got a letter from the US side which was more or less formulated in this way. This is of course not acceptable. Now we are looking how to discuss this and define the different elements of course at the moment. This is also stopped a little because of the midter terms. I suppose with the EU the question is as with China if relations really did sour could it hit back? What is the EU's leverage?

20:55Because it looks like actually the US is extraordinarily powerful given its control over the digital sphere, you know financial networks. And so arguably the EU is in a pretty weak position relative to the US and China. Is there anything in the assessment I just gave that you would push back on? Is the EU in a better position with the US relative to China or vice versa? Of course. Digital we are really depending on AI and cloud server and so on mainly all to the US but also from China. So we have to work on that so we need more sovereignty, we need more economic security. But I think at the moment we have also leverage so there is a dependency in China from European products without about and on the US side as well. So in our list of countermeasures we have a lot of products where we could set tariffs on waste products but also some export rich rich on scrap for example.

22:01States have only electoral steel production and they need scrap from Europe. They are buying a lot of scrap and China is buying a lot of aluminum scrap in Europe as well they need it. So we have also some leverage if it's needed to give pressure to them but I think negotiations are better than escalation. Yeah I guess in a fight between a threat to shut off the payment system and export restrictions on scrap. I think I know which side I would want to be on but there we go. But thank you so much for joining me. This has been great. It's a really pleasure. Thanks a lot. That is all for this week. You have been listening to the economics show with Samaracanes. If you enjoyed the show then I would be eternally grateful if you could rate and review us wherever

23:01you listen. This episode was produced by Katja Comkova with original music and sound design from Green Turner. Our executive producer is Manuel Esaragosa. I'm Samaracanes. Thanks for listening. The new episode of the next five podcasts is all about AI sovereignty. Stefan Israel at AWS joins me digital borders for not become digital wars which are not interconnected. As does Catherine De Lorenzo at A No Sherman. It looked like a race to write the rule book and not just a race to build the most powerful technology. And Ali Ustan at McKinsey. Sovereignty, tankers, data centers, engineering and AI talent in the country. Listen to the next five wherever you get your podcasts. Enjoy. Capital reason is being redefined in real time from macro disruptions and shifting investor expectations to AI driven demand and the rise of private credit.

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