Europe’s value chain increasingly dependent on China at the expense of its own regional integration

• In our previous report in a series dedicated to China’s role in the transformation of global value chains (GVC), we focused on the Asian region. We found that the deglobalization trend is not due to the rise of regional integration in Asia. In fact, for some countries such as China, its participation in Asia’s regional value chain is declining even faster than its participation in the global value chain (GVC) outside of Asia
• In this report, we look into the regionalization of value chains with a focus on the European Union (EU). We examine the degree of integration among EU member states and then into each EU member state’s integration with China’s value. This question is particularly relevant for the EU as efforts have been made for the last forty years to build a single market, which have helped build the most integrated regional value chain (RVC) in the world. The question then is whether this is still true today and what is the direction ahead as well as the role of China in the EU’s trade integration.
• The answer is that the EU is losing ground in terms of trade integration, which is especially true for intermediate goods, or, in other words, its regional value chain. Instead, EU Member states are generally becoming more integrated with China’s value chain. The problem with this development, though, is that such integration with China is increasingly asymmetric. Meaning, China imports increasingly fewer intermediate goods from the EU, but it exports increasingly more intermediates to EU member states for their re-export. The EU depends more on Chinese inputs for exports while China relies less on EU goods for its exports.
• This is worrying as the EU’s share of domestic value-added exports to the world is falling more than the US and Asia and that means declining job opportunities and wealth. Moreover, its closer relationship with China comes hand in hand with decreasing integration of the EU’s own value chain. This appears to be especially for countries politically closer to China (EU17+1 group).

Full report available for NATIXIS clients.