The other trade deal

Chart of the week

The Brexit deal wasn't the only Christmas surprise. In the long run, the investment agreement with China could prove almost as consequential for EU exporters.

Trade negotiators in Brussels have clearly not been idle over the holidays. In addition to the long-awaited agreement on a post-Brexit trade deal, they concluded another agreement that had taken even longer to negotiate. The European Union (EU) and China announced a "Comprehensive Agreement on Investment" or CAI.

Almost all EU countries already have bilateral agreements with China on the protection of existing investment projects. The new agreement provides more security and transparency for new corporate investments. In the future, for example, a German medium-sized company will be able to build a new factory in China its own subsidiary instead of working together with Chinese partners. Another potential benefit is improved market access for EU companies particularly to sectors such as cars and telecommunications. All of this is important insofar as corporate investment and trade are mutually supportive.

We would like to refrain from speculation as to what might have been the driver behind the acceleration of negotiations. What is clear to us is the substantial increase in importance trade with China has become. Exports from the Eurozone have grown by almost 12% per year since 2000, while the growth rate for exports to the U.S. over the same period was 1.8%. While exports to China accounted for only 12% of exports to the U.S. in 2000, this figure has risen to 56% in the last 12 months.[1] Among the major European economies, Germany in particular has benefited from China’s rising demand. As our "Chart of the Week" demonstrates, German manufacturers exported almost as many goods to China over the past 12 months as to the United States.

Looking at exports of individual months instead of cumulative 12-month totals, there have been several cases last year in which more goods left Germany for China than for the United States. Martin Moryson, Chief Economist Europe at DWS, adds: "China is simply growing much faster than the U.S. As a result, the markets of the future, especially for German products, are therefore more likely to be in China. And, not only for industrial products such as machinery, but also for durable consumer products such as cars."

20210108_Cotw_US China Trade_CHART_EN_72DPI.png

* 12-month rolling total
Sources: Haver Analytics, International Monetary Fund, DWS Investment GmbH as of 1/5/21

1 . Haver Analytics as of 1/5/21

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