Eurozone: De-risking versus de-industrialisation – Rabobank

RaboResearch warns that Chinese competition is diminishing important European industrial advantages in automobiles, chemicals, and machinery, creating economic-security concerns. Europe is opting for selective de-risking measures, such as trade-defence and diversification strategies, to gradually slow down industrial decline instead of reversing it.

The automotive industry and other strategic sectors will serve as key indicators of this managed integration strategy. From 2016 to 2025, the EU's trade imbalance with China deteriorated in core industries, with vehicle and chemicals surpluses turning into deficits while machinery and electronic equipment deficits expanded. The Chinese market has witnessed an increase in car sales, solar panels, batteries, and other net-zero products.

The dispute now transcends the bilateral deficit, delving into industrial scale, investment, and technological dominance. Inaction by Europe could prove pricier as competition spreads across automotive, chemicals, machinery, clean tech, aerospace, and biotech, impacting sectors that generate skilled jobs, supplier networks, and research and development.

Losing market share could weaken technological prowess, deepen dependency, and exacerbate economic challenges. Moreover, Chinese clean-tech inputs lower transition costs but also expose Europe to potential disruptions or coercion. Managed escalation is more likely to mitigate European de-industrialization than reverse it. The strategic bucketing approach can help maintain capabilities in crucial sectors, but ultimately, Europe must address its domestic competitiveness shortcomings.

The automotive sector will serve as a significant test, particularly as Chinese companies intensify investments in European supply chains. Despite this, selective de-risking appears more sustainable than unbridled openness or extensive decoupling. The eventual outcome is anticipated to maintain trade within tighter boundaries: openness in non-strategic goods, conditional Chinese investment in pivotal sectors, and stricter protection of critical capabilities.

While last week's understandings in Beijing may ease the adjustment, a stable equilibrium is still a distant prospect. The trajectory is towards sustained trade, but within increasingly defined economic-security parameters.