OUR KEY TAKE AWAYS ON HOW US-CHINA TRADE WAR COULD AFFECT EUROPE

While a trade war can hardly have any winner in absolute terms, as free trade is generally beneficial for global growth, there could be some relatively worse or better outcomes depending on the country and sector. After analyzing the bilateral imports tariffs between the US and China, we find that some European sectors c an benefit from filling the gap left by either the American or Chinese exporters. For the  first  batch of import tariffs ( $ 50 billion from each side), the key beneficiaries in Europe from substituting Chinese exports into the US would be  general purpose machinery . As for China’s market, European  car manufacturers , followed by  aircraft and aerospace , would be the key winners from potentially replac ing the US exporters. Therefore, the achievable gains (taking into consideration European producers’ capacity) are larger for the US market (at most $ 39 billion as opposed to $ 30 billion in the Chinese market). For the  second  batch of import tariffs (on $ 200 billion from US side and $60 billion from China’s side) , Europe’s potential gains in the US are extended to many more sectors such as furniture, although potential gains in the sectors will clearly be limited by Europe’s production capacity . European gains in China will also be more widespread, covering sectors such as  medical & precision products, basic chemicals and general purpose machinery . In the latter case, and logically so, as US import tariffs cover a much larger set of products, the potential gains to be made in the US market are much bigger ( $ 98 billion as opposed to $ 38 billion in China). All in all, it remains clear that Europe’s first best strategy regarding the US-China trade war, is to remain neutral so as to substitute part of the US exports into China and the Chinese exports into the US on which tariffs will be imposed. However, if the EU were obliged to take sides, the US market continues to be more relevant for Europe even in terms of the potential gains to be made from substituting imports from China in the US market as opposed to substituting imports from China. In other words, beyond Europe’s historical alliance with the US which may get EU policies closer to the US than they would ever be with China, European exporters have more to lose from the US, which will not help China lobby European governments to remain open to China, at least as trade is concerned. To sum up , if the EU is not forced to make a choice, its auto industry, machinery, aircraft, as well as furniture goods  producers should enjoy the US and China trade war, at least in relative terms.