The EU is set to raise tariffs on Chinese electric car imports to 38.1% starting July 2024. French Finance Minister Bruno Le Maire has called for further action to tackle China's overcapacity in other industries. The move is in line with a broader European strategy to protect domestic industry from what the EU sees as unfair competition due to state subsidies in China. Accordingly, this is not the last step the European Union, following the United States, may take to restrict Chinese goods in their local markets. In the European Union, not all states agree with this approach. According to Bloomberg, the German government is working to prevent new EU tariffs on Chinese electric cars from coming into effect, or at least to soften them if a full repeal proves impossible.
The Central Asian countries are located between China and the European Union. This makes them crucial for trade and transport. Geopolitical changes, particularly in the Red Sea region, have further highlighted the importance of these routes. Both the EU and China are important trading partners for Central Asia, making the region significant in terms of economic and trade relations. This increased importance is reflected in the growing development of transport corridors and strengthened economic ties between Central Asia, China and the EU.
Given the level of relations of the Central Asian countries with both the European Union and China, as well as the geographical location of the countries in the region, the following areas of possible impact can be identified. These include a possible decrease in EU-China freight traffic through Central Asia, increased Chinese and EU economic activity in Central Asia, and possible attempts by both Chinese and European companies to shift some of their production to the region to avoid new tariffs.
Decrease in freight traffic between the EU and China
There is a likely decrease in cargo transportation through Central Asian countries in trade between China and the European Union. This is due to a potential decrease in China's exports to Europe and vice versa, resulting from China's probable retaliatory measures against European manufacturers. Last year, Kazakhstan opened a logistics center in the dry port of Xi'an, responding to the previously growing transit through Kazakhstan.
According to Lsm.kz in 2024 through this dry port was planned to transport electronics and computer components, cars and auto components, textiles, clothing, shoes and accessories, food and agricultural products, construction products and building materials, as well as ores, metals and chemical products. Accordingly, the imposition of further bilateral trade restrictions between the EU and China may further restrict transit through the territory of Central Asian countries.
The extent of this impact will largely depend on which goods pass through the region's countries. Trade restrictions in one area do not preclude the growth of trade between China and the EU in other sectors of the global economy. Additionally, maritime transport remains the key method for delivering goods between these two economic centers. Simultaneously, it is known that the first express train from Shanghai to Düsseldorf, Germany, has departed. The train carries over a hundred containers of high-value products, including auto parts, mechanical equipment, and photovoltaic modules for solar panels.
The EU's approach to addressing overcapacity goes beyond the EV market. For example, the European Commission has initiated investigations in other sectors, such as wind turbines and solar panels, where Chinese overcapacity and government support, the EU believes, have led to significant distortions in the global market. The Commission's investigations are aimed at ensuring a level playing field for EU manufacturers who are finding it difficult to compete with the influx of cheaper, subsidized Chinese products.
Increasing economic activity of China and the European Union in Central Asia
If the EU imposes stricter trade measures on China, Chinese investment in Central Asia might increase as China seeks to solidify its influence and secure alternative markets and resources. Since China is dependent on its exports to the European Union, a decline in exports to the EU would need to be compensated by increased trade with other regions, including Central Asia. However, the European Union also views Central Asia as an important economic market for its products. Promoting the Middle Corridor is seen not only as an alternative route to bypass Russia but also to access Central Asian markets. According to Plamen Tonchev, we should expect “fierce Sino-European economic competition in a number of sectors, including natural resources and technological transfers”.
When comparing Chinese and EU exports to Central Asian countries, the automotive sector stands out as a potential area of competition. According to the International Trade Center, China's main exports to Central Asia in 2022 included textiles and apparel, machinery and electronic equipment and also other electronic goods. In contrast, the EU's key exports in 2022 to Central Asia were machinery, mechanical devices, land transportation equipment, and electrical machinery. Although both China and the EU may compete for the e-mobility market in Central Asian countries, China currently holds a significant advantage. Chinese automakers have established a dominant presence in Central Asia's car market. In Kazakhstan, Chinese brands accounted for over 30% of the total car imports in 2023, with around 45,984 vehicles. In Uzbekistan, Chinese automakers supplied approximately 80% of the 73,000 imported vehicles.
A trade war between the EU and China would likely deteriorate their overall relations, negatively impacting Central Asian countries. It could also reduce opportunities for cooperation between China and the EU in the region, particularly in developing transportation routes.
Transfer of production to Central Asian countries to avoid tariffs
Due to the conflict in Ukraine, several companies have moved their production from Russia to Central Asian countries. Similarly, some companies from China or the European Union may move some of their production to Central Asia to avoid tariffs. This scenario can be illustrated by the example of large companies shifting part of their production due to trade wars between the US and China in 2019. The US-China trade war has significantly benefited Vietnam, positioning the country as a key alternative manufacturing center in Asia. The imposition of tariffs on Chinese goods by the US has forced many multinational companies to shift production from China to Vietnam. This shift has helped Vietnam increase exports to the US by around 34.8% in the first nine months of 2019 alone.
Among the key industries that have seen growth are electronics, textiles, and furniture. Relatively low labor costs, favorable investment policies and lack of trade friction with the US have made Vietnam an attractive destination for foreign investors. Significant investments include Google's relocation of Pixel smartphone production and GoerTek's production of Apple AirPods headphones to Vietnam. Therefore, due to the outbreak of trade wars between China and the European Union, component and equipment firms may relocate their operations to countries such as Kazakhstan and Uzbekistan to take advantage of lower costs and strategic location.
Conclusion
The potential trade war between China and the European Union, marked by significant tariff increases on Chinese imports such as electric vehicles, could have profound impacts on Central Asian countries. These nations, strategically positioned between China and the EU, may experience changes in trade dynamics and increased economic activity. A trade war could lead to a reduction in freight traffic through Central Asia as both China and the EU impose retaliatory measures. This might affect the transit of goods like electronics, textiles, and machinery, which have recently seen increased flow through logistics hubs like Kazakhstan's dry port of Xi'an.
Both Chinese and European economic activities in Central Asia could intensify. China might ramp up its investments to secure alternative markets, while the EU could promote the Middle Corridor to access Central Asian markets. This competition could significantly influence sectors such as natural resources and technology.
To avoid tariffs, companies from both China and the EU might relocate some of their production to Central Asian countries. This shift could mimic the benefits seen by Vietnam during the US-China trade war, enhancing Central Asia's role in global supply chains and boosting local economies through increased foreign direct investment.
The Central Asian countries are poised to play a critical role amid the shifting trade policies between China and the EU. While challenges such as infrastructure development and geopolitical stability remain, the potential for increased investment and economic activity offers significant opportunities for growth and development in the region.
Written by: Eldaniz Gusseinov
Eldaniz Gusseinov, works as a freelance expert for Daryo and is a Non-Resident Research Fellow at Haydar Aliyev Center for Eurasian Studies of the Ibn Haldun University, Istanbul.
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