Europe Becomes China's Biggest Trade Partner

Even as Washington and Beijing slug it out over trade deficits and exchange rates, Europe has quietly overtaken America as China's No. 1 trade partner. Not only did Chinese trade with the EU soar to $306 billion through July of this year—compared with $243 billion of trade with the U.S.—China has also become far more dependent on Europe for importing the technology and infrastructure that underpin its breakneck development. European companies such as Volkswagen, which will sell some 2 million cars in China this year, have scored some of the greatest successes in serving China's domestic market. China, in turn, has been busy buying up European companies and seaports. Now, according to a new report by the Council on Foreign Relations, it has even begun to shift part of its estimated $2.7 trillion foreign-currency reserves out of dollars and into euros.

But the Europeans aren't half as worried as Americans about ending up in China's economic death grip. Europe's overall trade has remained roughly balanced, so its deficit with China (1.1 percent of the EU's 2009 GDP versus 1.6 percent of America's) is less of a worry. And with so many European jobs dependent on international trade (exports make up 55 percent of the average EU country's GDP compared with just 11 percent for the U.S.), popular trade fears tend to be lower than in the U.S.

What's more, EU exports to China are soaring at an annual rate of 49 percent as China sucks in European infrastructure, machinery, and high-end consumer goods. European companies have managed well against the Chinese competition by shifting into higher-end goods instead of shutting their factory doors: take the textile industry, where Italian firms have successfully specialized in luxury products while Germany's have moved into the fast-growing sector of high-tech nano-fabrics. The same holds for other industries, from chemicals to construction equipment. It's true Europe's exporters are getting help from a weaker euro, down by 10 percent against the yuan this year. But many companies did well even when the euro was soaring, because they compete on more than just price. That suggests that while the controversial yuan-dollar peg might play a role, it's by no means the only factor.

Can Europe translate its economic leverage into political influence? Don't bet on it. Europe has 27 national capitals without a single foreign policy, and all have been happy to leave it to the U.S. to deal with China's strategic ambitions. America's own poor track record in influencing China, even when Beijing was utterly dependent on U.S. consumption for its growth, shows the limits of translating economic ties into political influence.