“With the start of a full-scale war, the discussion of how to invent our unique “Ukrainian bicycle” has lost all meaning. In record-breaking short terms, less than 2 years, we submitted an application, received candidate status and the political “go-ahead” to begin negotiations on joining the EU. We have no other choice but to go this way at an accelerated pace, a maximum of 5 years.” Opinion.
WSJ journalists highlighted a trend in global trade related to China's new export "expansion" and a new possible shock to the global economy.
In the late 1990s and early 2000s, the world economy experienced its first shock from China's increasing share in global trade. On the one hand, prices for imported goods fell, which was good for consumers in developed countries, primarily low- and middle-income countries, on the other hand, production of such goods was closed, whose manufacturers could not withstand competition and transferred them to countries with cheaper labor (in particular, to China).
The economy is preparing for a shock: why is China here and what are the threats?
The global economy is now bracing for a second shock from Chinese imports, but this one will be different. After fully lifting Covid restrictions in 2022, China is again trying to boost its exports to restart the economy, overcome the housing crisis and overcome weakened domestic consumer demand. Exports of goods in 2023 grew by 31% compared to 2020.
As twenty years ago, this has had some disinflationary effects around the world. In particular, in January 2024, the value of Chinese imports to the US fell by 2.9% year-on-year, while the value of imports from the EU, Japan, and Mexico increased. This is partly due to deflation in China itself, fueled by falling producer prices. China is now exporting this deflation around the world.
Unlike zero, China's exports now include a much larger share of manufactured goods, with a foreign trade surplus of $1.7 trillion more than double the total trade balance for all goods ($0.82 trillion in 2023). Experts agree that increasing exports of technology products such as electric vehicles, semiconductors, wind turbine parts, solar panels, charging batteries, etc., where China has its own long value chains and competitive advantages, is one of the pillars of the country's new strategy to support economic growth.
There is a “perfect” case of Beijing’s tightening grip on economic power in Russia, which in recent years has become much more dependent on technological exports from China
However, in this segment, Beijing is increasingly competing with technologically advanced Western countries, which consider China their main geopolitical and economic competitor and, unlike the zero-sum countries, are taking measures to protect their strategic industries. Hence anti-dumping investigations (as against Chinese electric cars, launched in the EU), outright import bans (as against individual suppliers of solar panels and components, telecommunications equipment in the US) and many other non-tariff restrictions in addition to Trump's "tariff legacy".
The outcome of this trade battle for developed countries is still to come. However, it is already obvious that as a result, part of the disinflationary potential from Chinese imports may flow to countries with a lower level of trade protection and lower incomes. This is good for consumers there, but the industry in these countries will find itself in an even greater “vise” of the economic power of China (as it was in the early zero in Western countries), which retains a dominant position both in the supply of cheap consumer goods and has become a leader in the export of advanced technological products.
I will add from myself that the trends highlighted by the WSJ are not new. We have been observing their development, in particular the transfer of production from China by developed countries and more aggressive, including through state subsidies, investments in education and science, entry into the markets of technological products of Chinese manufacturers, for at least the last 5-7 years. On the other hand, there is a “beautiful” case of strengthening the grip of Beijing’s economic power on the example of Russia, which in recent years has become much more dependent on technological exports from China. Of course, there are enough such examples in many countries of Asia and Africa.
So, the global economy is already facing a second shock from trade with China, which was partially mitigated by Covid-19 and the war in Ukraine. First, due to disruptions in supply chains, and then due to the formation of deferred demand for durable technological goods. But these imbalances were largely eliminated in 2023, in which we saw an escalation of trade disputes and a slowdown in merchandise exports from China (versus 2022). These contradictions will only intensify in the next few years.
Trade, farmers' protests in the EU and competition: what are the conclusions for Ukraine?
I have repeatedly repeated that the full-scale war has finally and irrevocably removed the discussion on the paths of development of Ukraine and the structural transformation of the economy, now post-war, including industry. Unfortunately, the history of this transformation over the past 30 years, especially in the manufacturing industry, is more about losses than gains. This is a separate story, why it happened this way.
But in this history, before the great war, there was still room for discussing Ukraine's "unique path", within the framework of which we could be considered as a transit state (although in this regard there were already significant restrictions after 2014), as a platform for the expansion of the same technological Chinese goods into EU markets, taking advantage of the FTA with the EU (in fact, this did not happen, as evidenced by the extremely low FDI figure from China at $140 million at the end of 2021 and significant transit restrictions on our participation in the "New Silk Road").
With the start of a full-scale war, the discussion – how to invent our unique “Ukrainian bicycle” – lost all meaning
This, by the way, did not prevent active mutual trade, where China remained the number 1 country in terms of trade turnover (15% in imports and almost 12% in exports in 2021). However, the structure of our trade with China, within which we mainly exported corn, sunflower oil, and agricultural products, and imported finished products of the manufacturing industry, only cemented the raw material and oligarchic nature of the Ukrainian economy, aimed at the extraction and export of natural rent.
With the outbreak of a full-scale war, the discussion of how to invent our unique “Ukrainian bicycle” lost all meaning. In record time, less than 2 years, we submitted an application, received candidate status, and the political “go-ahead” to begin negotiations on joining the EU.
We have no choice but to go through this path at an accelerated pace, within a maximum of 5 years, becoming a full-fledged member of the EU. This is no longer a dream, but a matter of time. It is also a matter of survival, and this in itself is a significant motivating factor that no candidate country has had.
The war makes its own adjustments, but it is certainly not an obstacle to strengthening the institutions that guarantee the rule of law. This, in turn, will allow after the war to attract FDI, integrate into higher global value-added chains, and find its own niches. Now, despite the war and the difficult situation with its EU neighbors, it is necessary to maximize the benefits of the 4 freedoms and equalization, when the EU financially pulls up candidate countries for accession. Actually, the Ukraine Facility program, which will change and be filled with new content in 5 years, is a tool for such preparatory pre-accession work.
In this competitive struggle, we can find our niche by becoming, as a candidate country for EU accession, one of the countries for moving production “closer to the borders” of the EU
You may ask, what is China doing here? And besides, the competition between the EU and China in the production of, first of all, medium- and high-tech goods will intensify in the next 5 years. This will inevitably strengthen the already mentioned trends towards the transfer of production by Western countries from China home, to friend-shoring and/or “closer to home” (near-shoring). The main direction for friend-shoring in the near future will be India and Vietnam, for which there is already a competition between Western countries and China, which, under the influence of rising labor costs, is also trying to transfer production beyond its borders. However, we have to do our part - in this competitive struggle we can find our niche, becoming, as a candidate country for accession to the EU, one of the countries for transferring production “closer to the borders” of the EU.
To do this, it is necessary to strengthen industrial ties with the core of the EU (Germany - France) and the United Kingdom , where leadership, due to geographical proximity, much stronger economic ties and membership in the EU, will be with Germany. Of course, it is easier said than done. But Ukraine is not unique in this regard. The same path of industrial transformation, primarily under the influence of German capital, was followed by Poland, the Czech Republic and Slovakia. For example, the latter found its niche in the automotive industry.
Our neighbors, the EU countries, whose businesses are looking to the future, understand all these risks of Ukraine's strengthening after the war like no one else. Hence the certain "hysteria" and "charging" of protest potential of various political persuasions that we are currently observing, with the aim of slowing down trade, and therefore Ukraine's economic integration into the EU. I agree with many experts that attempts to "break through" in the EU with the "agriculture", which accounts for 60% of our exports, only intensify this protest. This is definitely a bad story from all sides, both for us and for the EU. I will simply remind you that in the EU there is no country with a share of agriculture in the structure of added value of more than 5% (5% is the level of Bulgaria and Romania, which have the lowest per capita income in the EU), and in Ukraine it is 12.7% in 2021 and 9.3% in 2022 (according to UN statistics).
At the same time, if we find and develop our unique niches in exports to the EU (for example, in green energy, metallurgy, chemistry, mechanical engineering), involving European, primarily German, capital in industrial restructuring, and gradually shift the emphasis in foreign trade, then this resistance will be less. Yes, these are medium- and long-term structural changes, but they are inevitable if we integrate into the EU.
Our experience in the military-industrial complex can give impetus to the development of many related industries of mechanical engineering and services with high added value.
The intensification of the EU's competitive struggle with China may be useful to us on this path of structural transformation of the economy and restructuring of industry. But an even better reason, which you don't need to look for, is the strengthening of industrial cooperation within the military-industrial complex. This is our "reinforced concrete" unique niche for production specialization and exports after the war, because global demand for weapons and military equipment is predicted to grow. Taking into account the accumulated practical experience during the war, as with the same surface drones, which have already become a game-changer in this war, changing the situation in the Black Sea, no one will definitely take this niche away from us. It can give impetus to the development of many related industries of mechanical engineering, services with high added value (engineering, design, engineering, etc.), science and education.
