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QuickHit: Europe is undergoing a ‘partial’ regionalization

 In QuickHit, Visual (Videos)

In this QuickHit episode, we’re joined by Velina Tchakarova, the Head of the Austrian Institute for European and Security Policy, to talk about the Europe reconfigurations and regionalizations on global supply chains, manufacturing, digitalization, and other industries.

 

The Austrian Institute for European Security Policy is a think tank, which works very closely with Austrian and European institutions. They provide a macro perspective for geo economic to strategic, geopolitical perspective on current and future developments in the fields of security and defense.

 

***This video was recorded on July 27, 2020 CDT.

 

Show Notes

 

TN: But it seems to me that you’re also seeing, observing ,and commenting a lot on things that are happening in China. And we’ve started to see a lot of structural change in western diplomatic and political and economic relationships with China as well as supply chains. What we’re seeing here in the States is a bit of a decoupling of supply chains from China and North America. So a little bit of re-shoring and I’ve been curious for a long time, is that same thing happening in Europe now? And what do you expect that to look like if that’s the case?

 

VT: I don’t have a ready answer but I can provide you with two main narratives that are right now relevant for the situation here in Europe.

 

On the one side, there are many, many statements coming from the highest ranking-level. One of them was the French President Macron or take the European Union Commissioner for Industry and they were namely sharing this view that globalization had went too far. Now, Europe has to take care of its own. They call it “strategic autonomy.” That means that in fields that are of strategic importance, specifically geo-economic fields, strategic sectors, strategic industries, that some of them have to go back to Europe. On the side of the so-called geopolitical commission, there is this clear statement that we want to introduce a green transition, a carbon-free economy by 2030, 2040. That means that dependencies on raw materials, on metals, and stuff like that is going to be cut and this is still in place because China has a huge market share.

 

Now on the other side, there is also the narrative coming from highest ranking politicians and representatives that the “strategic autonomy,” in terms of global supply chains is not possible. And that this kind of COVID 19 responses were crisis-related. Some part of the re-shoring was due to crisis response, to crisis management and once things start working again post COVID 19, we are going to go back to business.

 

We know that certain European member states have very strong economic interests in expanding relations with China and right now. I can name one of these countries that’s Germany. The German presidency of the European Council has began and there is no secret that the topic China was on the top of the agenda for the next six months. Now with the shift in terms of certain perceptions when it comes to dependencies on China, things are going to move slower. We’ll be slower. That means investment deals, negotiations that were planned are not going on according to the pre-COVID 19 plans.

 

Investment deals between Europe and China is a very important point. Investment screenings, buying up of companies in Europe that have declared defaults, all of these things are going to be on the agenda for the next six months. There is a debate on reconfigurations of global supply chains going back to Europe. But on the other side, there is an expectation to go back to business because the economies have been struck and have been hit very hard by COVID 19. And so we are right now somewhere in between.

 

TN: Five or eight years ago, there were a number of infrastructure pieces that were sold to Chinese SOEs — in the Puerto Peres, in Greece and the Portuguese electric utility. We had a number of things that were actually sold to Chinese SOEs that’s been slowed down quite a bit. In terms of supply chains, I was involved in that first generation of Eastern Europe build out of manufacturing in the mid to late 90s. And when China joined the WTO, we saw a lot of that manufacturing and the fixed asset investment associated with it moved to China in the first half of the 2000s and then accelerate.

 

Do you expect a scenario where we see reinvestment in Central and Eastern Europe for regional manufacturing? Do we expect a rebirth of that manufacturing or is that something that’s bygone era? We’re going to continue to see centralization of manufacturing in China or other parts of Asia and Central and Eastern Europe is kind of passe? It’s kind of very 20 years ago?

 

VT: We have to tell first and foremost the facts. And the facts are that two-thirds of the trade that takes place within the European Union is actually an inter-state trade. It’s taking place between the member states. So in that context, there will be no necessity for reconfigurations at all.

 

But what I am expecting to happen is that due to this decoupling between United States and China, and also due to the increasing awareness in the European capitals in terms of dependencies on China, there will be a reconfiguration to some extent.

 

So partial reconfiguration, which will be initiated, will be supported by the European institutions. The very fact that we have a European Commissioner now for industry points to the increasing realization of how important this. In that matter, there will be certainly a partial reconfiguration coming back to Europe. Not just manufacturing. We are talking also about digitalization, that it has to take place. We are still actually in the middle of the process of a fourth industrial revolution.

 

Six months ago, there was almost no discussion on 5G Huawei being initiated and supported by Huawei, by a Chinese company. Now with COVID 19, there are already strong signals and decisions in United Kingdom, in France. There will be some similar reaction in Germany that a 5G being introduced by Huawei will not be in the interest of European sectors. So this digital transition will certainly be also part of this reconfiguration of global supply chains. Partially, like I said. We should not expect too much. But there will be certain, certain expectations are already in place that this is going to happen.

 

TN: We’ve talked about from Complete Intelligence for the past couple years how our hypothesis has been that Europe would be the biggest loser of a US-China trade war. The reason we expect that is once China cannot export its deflation to the U.S., it will have to export that capacity to Europe because Japan has already, after the 2012 protest of Japanese factories, Japan’s already ramped down its imports from China. As the U.S. is gradually decoupling, it just seems that it’s likely that more deflationary goods will go to Europe and potentially hollow out European manufacturing even more. Is that something Europeans are thinking about? Or is that something that just seems a little too far out there?

 

VT: Right now, I have the feeling that our stakeholders and political decision makers are preoccupied with coping with the post COVID 19 social, economic repercussions. It’s all about how to revive the economies. So there is no serious debate right now on that matter.

 

But I think this is a very important issue that you’ve addressed. From a current perspective, I don’t see how Europe has a strong position, a strong card on that matter. On one side, there is the systemic decoupling taking place. On the other side, there is a trade surplus between the European Union and United States. And we all know that the U.S. President Trump is not in favor of institutions such as European Union. I am expecting pressure that he will probably impose on the European Union in order to provide a strong narrative prior to the US election.

 

The geo-economic relations between the United States and the European Union, that means the European member states are going to deteriorate. That’s my expectation. In terms of re-election, this is going to be further the case. Political decision makers in Europe would have to find other geo-economic allies. They will probably look for solidifying business interests. This narrative of going back to business with China is quite strong right now in European capitals without thinking of the long-term implications. I’m not saying that I personally agree with it. But I’m just outlining the reality the way it is.

 

You mentioned Japan. There are also other strong regional partners and regional players. Here, the European Union has on one side a regional card to play with the European Commission how to trade deals. This is something that they are going to push for. But on the other side, when it comes to the member states where the political narrative is being pushed and decided on in the capitals. Right now, it’s all about the French, German access because of the exit of the UK from the European Union.

 

I expect that there will be further push for solidifying business relations with China in order to have a sort of an exit plan in case that relations with the United States deteriorate. In the European capitals, everyone is hoping for Joe Biden to win the election in November because if that is not going to be the case, the expectation is that the relations specifically geoeconomics, they are going to deteriorate.

 

TN: A lot to think about. Velina, thank you so much for your time. I do hope we can reconnect in a few months just to see how this stuff kind of bears out over the next few months, and again thank you so much for your time this has been really, really helpful for us.

 

VT: Thank you for having me and stay safe and sound.

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