In this CEIAS Policy Paper, authors Martin Šebeňa, Thomas Chan, and Matej Šimalčík provide an in-depth analysis of the role of the V4’s participation in European supply chains for goods that are exported to China by quantifying the actual value of exports to China, contrasting it with bilateral trade data, tracing the lack of this information in the decision-making and public discourse, and suggesting how its implications can inform policy-making.
Globalization, manifested by the development of global supply chains, has for decades been a key driver of economic growth in the V4 region, as it has been in China, too. However, amid rising competition between China and Western nations, various forms of economic links are under increased scrutiny, both on economic and security grounds.
While it has been recognized that direct economic links to China, such as imports of critical material or Chinese investment into strategic sectors, can be abused by political coercion, the weaponization of indirect exports is a much newer phenomenon.
As this analysis shows, the V4 countries are among the most economically exposed countries in Europe to China because of their often-ignored indirect trade links. Due to this, several key ramifications arise for the V4 countries:
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- Due to the nature of their manufacturing sectors and their position in global supply chains, export-related exposure to the Chinese market remains hidden from general discussions. Because China accounts for a relatively low share of direct exports of the V4 states, they tend to operate on the assumption of low trade exposure to China. However, due to their embeddedness in the German value chain, indirect exports (via third countries) account for the majority of their overall exports to China. The difference between China’s share of their direct exports and its share of their indirect exports can be as much as 80-250%. Disregarding this significant portion of trade results in a significant underestimation of potential exposure risks and in the need for trade diversification and economic de-risking.
- The relatively high exposure to the Chinese market, especially in the automotive industry, exposes the V4 countries to both the positive and negative impacts of changing consumer demand patterns within China. As Chinese demand for foreign-produced vehicles decreases, coupled with a rise in its domestic supply (especially from Chinese EV manufacturers), automotive companies in the V4 and their suppliers are at risk of significantly falling revenues. This will impact not only the financial performance of the companies themselves but also employment and tax revenues, thus further exacerbating potential negative impacts.
- Reducing their exposure to China requires implementing a tailored diversification strategy. However, since China is not the primary export destination for a large share of their products, the V4 states are limited in how they can promote diversification.
- China’s global dominance in EV and battery production presents another layer to the V4’s China exposure risks. As they attempt to transition their automotive sectors from internal combustion engine (ICE) vehicle production to EV production, they face a two-fold threat: competing with Chinese EV producers at the same time as having to secure necessary supplies (especially of batteries) from Chinese suppliers.
- Unfair competition in the EV sector due to the subsidization of Chinese producers has recently been identified as a major problem, leading to the opening of anti-subsidy investigations by the EU. While this approach might be objectively warranted, past experience (such as over China’s production of solar panels) indicates that it might not be enough to ensure that European, including V4, automakers remain competitive.
- Given the recent influx of Chinese investment in V4 battery production, countries in the region are running the risk of further increasing their exposure to China while shifting the risk from the demand to the supply side.
