China’s increasingly important role in the global economy has transformed the nature of global competition and reshaped international trade. Meanwhile, the European Union has long been the most important power in global trade and continues to run a very large trade surplus. We address whether China is an increasingly relevant competitor for Europe in third markets, and in particular in Latin America. More specifically, we empirically estimate the elasticity of substitution between European exports and Chinese exports to Latin American economies (ie how their exports to Latin America respond to the changes in relative exporting prices).
Our results show that the degree of competition between China and the EU in Latin America has increased over time. Before 2007, China and the EU competed less with each other, partly reflecting the fact that China was mainly exporting low-quality products. However, the elasticity of substitution has increased since 2007, reflecting China’s ascent up the value-added chain. We also look at competition between China and the EU in the key EU sectors that export to Latin America. We find that China-EU competition is fiercer in electrical machinery and road vehicles. This finding should be a wake-up call to Europe in its quest to remain competitive at the global level.