US-Europe trade booms as old allies draw closer | Popgen Tech

The US imported more goods from Europe than from China this year, a big shift from the 2010s when China emerged as America’s dominant trading partner. From Swiss watches to German machinery and Italian luxury goods, money and products are flowing across the Atlantic like never before. It helps Europe’s struggling manufacturers, which are grappling with soaring energy prices. And it pushes East Coast ports ahead of their West Coast counterparts in container volumes after years of being a US hub to Asia.

Germany’s exports to the US rose by almost 50% year-on-year in September alone. The weak euro gives European companies an extra edge in the huge US market. European companies are also pouring resources into North America, including Mexico, lured in part by access to cheap energy.

The US, meanwhile, is turning into one of Europe’s biggest energy and military suppliers, replacing Russia as a natural gas supplier and helping Europeans beef up their defenses. Germany plans to buy 35 US F-35 fighter jets built by Lockheed Martin corp.

US services exports to the European Union are rising, up 17% year-on-year in 2021 to 305 billion euros, equivalent to $315 billion, according to EU data.

The emerging trans-Atlantic relationship is part of a reorganization of the global economy along East-West lines. Russia’s cutoff from European energy supplies and fears of over-reliance on China have changed how companies do business. On both sides of the Atlantic, governments have encouraged companies to produce critical products locally instead of in Asia. Some German companies have started exporting to the U.S. from plants in Germany instead of China, in part to avoid tariffs, trade groups say.

At the same time, small and mid-sized German companies in particular have diversified investments away from China, where they face increasing domestic competition, rising labor costs and burdensome Covid-19 regulations, according to a recent study by Rhodium Group, a consultancy. firm.

“We like the US even more in the current geopolitical context,” said Solvay CEO Ilham Kadri SA,

A Belgian chemical company with around €11 billion in annual sales. It recently unveiled an $850 million investment to build battery manufacturing facilities in the southern US, including in Georgia, with the aim of taking advantage of booming sales of electric cars.

“There are restrictions in China as we speak. Europe is facing a major energy crisis and inflation, where we have to live with less gas than we can imagine,” said Ms. Kadri said. “Then you look around and you say, the US has it all, right?” Key features of the US include cheap oil and gas, skilled workers and government support to build clean energy infrastructure, she said.

The US received foreign direct investment worth $74 billion in the three months to June, by far the most of any country, and compared with $46 billion for China, according to an October report by the Organization for Economic Co-operation and Development.

The US economy still has considerable momentum despite the Federal Reserve’s aggressive actions this year to cool demand, and it is on track to import $4 trillion worth of goods and services this year, about one-third more than in 2019 , according to data from the Bureau of Economic Analysis.

Germany’s mechanical engineering companies, a sector that employs around one million people, increased exports to the US by almost 20% year-on-year in the nine months to September to €18 billion. In contrast, the sector’s sales to China fell 3% to €14 billion in the period, according to the German Mechanical Engineering Industry Association, or VDMA, a trade group.

“There are increasing obstacles to contend with in China while the US is open,” says Ralph Wiechers, the association’s chief economist, partly referring to China’s repeated strict Covid-19 restrictions in the past year.

As transatlantic trade picks up, container volumes at East Coast ports such as New York have risen ahead of West Coast counterparts such as Los Angeles in recent months, according to Josh Brazil of Project44, a supply chain analysis firm. The Port of New York and New Jersey said it was the nation’s busiest container port in September for the second month in a row, handling 35% more cargo than in September 2019.

American tourists are also pouring into Europe, taking advantage of a strong dollar. Europe received almost three times as many international visitors in the first seven months of the year as during the same period in 2021, driven by travel from the US, the World Tourism Organization said in late September. French luxury goods group Kering,

whose brands include Gucci and Yves Saint Laurent, said last month that its sales in Western Europe rose 74% in the three months to September, as American tourists flocked to the region’s cities.

“The economic relationship between the EU and the US is stronger than it has been in some time,” said Margrethe Vestager, executive vice-president of the European Commission, the European Union’s executive body. “You see it in the numbers.”

Partly as a result of Russia’s invasion of Ukraine, European governments are bolstering their military capabilities and cyber defenses, seeking to build more semiconductor plants at home and pushing for local production in industries such as artificial intelligence.

“It is a dependency that runs in two directions,” Ms. Vestager said, noting that Europe has the world’s leading manufacturer of machinery to manufacture semiconductors in ASML Holding NV, which is based in the Netherlands.

European foreign direct investment in the US increased 13.5% to about $3.2 trillion last year from a year earlier, according to data published in July by the US Commerce Department. US FDI in Europe rose by about 10% last year to about $4 trillion. These amounts dwarf investment flows between the US and China.

Some of the recovery in European investment in the US is being driven by concerns among Europeans about the prospects for their economy. German chemical group Lanxess AH

is focusing on future investments in the US and no longer plans to invest any money in expanding its German plants, Chief Executive Matthias Zachert said this month, warning of Germany’s declining competitiveness, largely due to high energy prices.

Spanish energy giant Iberdrola SA

is targeting the US for almost half of the €47 billion it plans to invest in electricity grids and renewable energy over the next three years, said Ignacio Galán, the company’s executive chairman. The group distributes electricity in New York, Connecticut, Massachusetts and Maine and is helping to develop a wind farm off the coast of Massachusetts that will be able to meet the energy needs of more than 400,000 homes.

The opportunities that the USA offers at the moment are great, said Mr. Galán said. “US policymakers are taking the lead globally in creating an attractive climate for investment in the energy transition,” he said.

The rapprochement is not without friction. Inflation, fears of recession and efforts to reduce the West’s economic dependence on China have led to certain protectionist policies on both sides of the Atlantic.

The US’s new tax incentive program for electric vehicles – designed to reduce reliance on Chinese battery components while addressing climate change – has sparked strong protests from the EU and other US allies who say the policy discriminates against their manufacturers.

The EU said in a comment submitted to the Treasury Department this month that the incentives “fuel a harmful competition for inputs at a time when both the US and the EU have committed to closer cooperation on supply chain resilience.”

As governments protest, European companies, from solar panel makers to battery makers, are racing to take advantage of the new US subsidies. Italian energy giant Enel SpA said Thursday it will build a solar cell factory in the U.S. in a project that could cost more than a billion dollars, according to estimates by The Wall Street Journal.

After the Biden administration introduced a tough policy in October to limit the export of advanced semiconductor technology to China without the participation of European and Asian allies, the Biden administration negotiated with the Dutch and Japanese governments to limit the impact of the policy on addressing their semiconductor manufacturing equipment manufacturers.

The US and the EU also face a huge task of coordinating tens of billions of dollars in subsidies through their respective programs to revive domestic semiconductor manufacturing.

“There is a sense of renewal of the economic model” with the push to produce locally, Ms. Vestager said. She said the US and EU should work together to set global standards for emerging technologies, which would benefit companies in both regions.

—Yuka Hayashi in Washington, DC, contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com