Shedonomics: Can Europe Survive China’s Manufacturing Machine?

[SWING] To understand the economy, you have to understand human nature. [MUSIC PLAYING] This podcast is powered by A Cast. [MUSIC PLAYING] How are you doing there? It is time for the podcast, and we have a fantastic podcast for you today. That's always-- Well, I think, as always, as always, but we're going to talk, John, about China, your favorite subject and your favorite person subject, Donald Trump. Yes. And we're going to conclude that maybe Donald Trump is right about China. But that-- Yes. Oh, my God. After many years of lampooning him, we're going to talk about China. We're going to talk about the China shock. I mean, John, you know everyone's talking about the oil shock at the moment. Yes. Yeah. Of course, the oil shock is a serious, serious dilemma. But the interesting thing about the oil shock is that it ain't going to be permanent. In the sense that at certain stages, oil prices will come back down. Peace will be declared at some stage. Prices will come back down, and oil prices are usually demand-driven at the end of the day. Right? But the China shock is a very different shock. Now, you might-- you've got four girls living under one roof. I do. Does your doorbell ring regularly with men from DHL and from Amazon and from TAMU and from Shine? TAMU and Shine Chinese companies? Yeah. It's ringing all the time, being bunging away. Absolutely. So what we're going to talk about today is the China shock. The Harsal economy, the Shared economy, we're going to give it a little bit of historical context comparing what's happening with China now to the rise of Germany in Europe in the beginning of the last century. Okay. And we're going to ask the question, if this continues, this is Chinese flooding the markets of Europe with goods, what are Europeans going to produce by 2014? And if Europeans have nothing to produce to the Chinese, produce everything cheaper and better than we do, well then what is the point of trading with China when China's objective is absolute dominance rather than two-way trade? And that might bring us-- That's kind of Trump talk, isn't it? It's kind of Trump talk, but let's look at the numbers. Yeah. Never let it be said that this is a podcast that doesn't want to change its mind, I can't change it mind. As I said, do you remember I said to you about consistency? Yes. Consisting thinking is the hub goblin of the average mind, John. Yes, it is indeed. But actually, just before we go there and given that China has been for the last number of years, the kind of powerhouse in manufacturing and stuff, that was also based on their energy and their importation of the economy. And they're the ones who are going to be-- who are being affected most deeply, along with the Europeans as well, by restrictions on the straight to hormones and oil? Yeah. Being restricted. How's that going to work? Well, what is going to work is, well, everyone's been affected by it. Yeah. But the oil importers who are in the main China, Japan, and the European Union, China, Japan, and the European Union are the three largest exporters in the world. So what we do in effect is we import fossil fuels and we turn those fossil fuels into manufacturing goods. Yeah. All three of us do that. The Americans are way, way behind in manufacturing because their economy has become financialized in the sense that over the last 20 years America has put the interest of finance above both the interest of manufacturing and services. And as a result of that, their manufacturing base has been eroded. So the three biggest exporters in the world are also the three biggest importers of fossil fuels. At the end of the day, when all this is said and done in the Gulf, it is the demand from the biggest importers of fossil fuels of oil that will determine the price. But if over the next 10 years China continues to do what it's been doing for the last 10 years, and everything from cars to clothes to manufacturing, input goods to every single thing that can be made. If they continue to do that, then there will be a situation for Europeans, which is we will end up making nothing. Yeah. And we're going to have to look at that. But the historical context of this John is if you go back 150 years, let's say if you go back to 1887, the British introduced an act called the merchandise mark act. The merchandise mark act was an act to protect British industry and the export markets that British industry was dominant in from knock off products made in Germany, but pretending to be British. How did the act work? That you basically had to have a rule of origin. So what the Germans were doing is in the 1870s made in Britain was the most premier mark you could have the premier brand in the world. Britain was the world's industrial powerhouse. It was the world's financial powerhouse. It was the world's military powerhouse and it was the world's diplomatic powerhouse. So Britain in around 1870 basically had everything. It also had the largest empire in the world. And it was at its peak. And the mark made in Britain was a mark of quality. Right. A bit like guaranteed Irish. Very like guaranteed Irish John, very like guaranteed Irish carry gold and things. But in in 1871 Germany unifies when we mentioned Bismarck, I think in the last for a couple of weeks ago under Bismarck. And then German industry was largely regarded as second rate, particularly it was regarded as a sort of a knock off version of Britain where they took the British originals, they copied them and in effect they then exported them trying to pass them off as British goods. So the Brits said enough of this we're going to have rules of origin and we are going to stamp each product with a rule of origin. This is kind of what China has been accused of over the last 30 40 years. Yes, exactly. So the Germans were accused of that 100 and our years ago, right? Of course, what the Germans did was they realized the Britain was preeminent and lots and lots of German industrialists used to go over to the UK on holiday. But natural back what they were doing was they were doing little espionage industrial espionage wreckies. They were going to factories, they were trying to figure out what the Brits were doing, how they were innovating, how their scientists seem to be aligned with British industry, what their entrepreneurs were doing, what their banks were doing, how they financed everything. And they brought all that information back to Germany and they began to copy what the Brits were doing. Of course, that precipitated the Brits breaking in this merchandise market act, but it didn't stop the Germans. So between 1895 and 1907, the amount of workers deployed in German machine building, and they built from half a million to one million, and that had the effect of dramatically reducing immigration out of Germany. Immigration out of Germany fell by 84% between 1880 and the mid 1890s. So they took the other day about how the Irish in America were an urban immigrant nation. The Germans were a rural immigrant nation. And still today, the biggest ethnic minority in America is not Irish, but it's German, but they just don't have a coherent, yeah, they don't have a coherent movement, but they are the biggest ethnic minority in the United States. As Germany starts becoming really industrialized, they start to copy the British, they start to make better things in the British. This is exactly the story of the Chinese over the last 20 years, John. Yeah. And this is what everyone talks about. They're involved in espionage, they're taking the best details, they're taking the best innovation. They're sending their people out to get trained in the best companies that are coming back and setting up Chinese companies is exactly the same story. But by 1914, Germany was producing twice as much steel as Britain and had produced more Nobel Prize winning scientists than Britain and America combined. Wow. So that changed you a total change, right? Now, when I look at the persistent rise of China in the 21st century. And I look at the explosive arrival of Germany on the global stage in the early 20th century, I can see the similarities and it's all export led. So I'll give you some figures about what has happened. This podcast, by the way, is prompted by figures that were released last week, which shows that Chinese exports to the EU increased by nearly 28% in January and February. Of this year alone, vis-a-vis the same figure last year, 28% that is phenomenal. What was that down to? Is that down to more marketing? Is it down to more marketing? down to more demand from the Europeans, is it down to like are we substituting our goods for Chinese goods from somewhere else compared to. - Yes, now you've got your finger on it. It's all got to do with Donald Trump's tariffs. - Right. - So Chinese exporters have been shut out of America because of the Trump tariffs. So what they've done is they've pivoted to Europe straight away. The US, for example, is the only major economy to experience a decline in imports from China last year down 11% in total. Now these goods have ended up in Europe, adding to already huge trade deficit that we have with China, we now are running a trade deficit with China. Think about this, of 359 billion euros per year and that is a 20% increase. So that's 2025. We don't have the 20, 26 figures yet. Obviously we won't have until the end of the year. But that 359 billion trade deficit we have with China is a 20% increase on the trade deficit of 2024, which is only 304 billion. And if you go back a little bit further, you can see the pace of Chinese export dominance 20 years ago, 2001, our trade deficit with the Chinese was 39 billion. It rose to 168 billion by 2010. It's double that now. So what you can see is almost geometric rates of explosion in the Chinese trade surplus with Europe. And is this in any particular sector? Now this is where we're going to talk about some fantastic stuff here. I'm going to talk first about cars, John. But then I'm going to talk about what we spoke of at the top, the parcel economy. Yeah. And then I'm going to tell you about something amazing called the Shared Economy. This is fantastic stuff. Oh, by lots of sheds, Erie. By lots of sheds. And we're filling them with Chinese goods. So let's talk about cars because cars are kind of a bell weather. They are high tech, high spec, high value, high wage commodities. So countries that are good at cars tend to be good at lots of other things, right? Because now, of course, cars are not just mechanical. They're electronic. They're data driven. All that sort of stuff. And if you're good at cars, it means your manufacturing base is sleek and it's fit and it's fit for purpose. And it's a just in time supply chain and all that stuff. Let's talk about cars, right? Last year, Europe imported 12.7 billion euros worth of Japanese cars. This represents a 1,591% increase in five years. Wow. That means there are 17 times more Chinese cars on European roads than there were before the pandemic. And they're all EVs. They're all EVs. It's BYD. I'd never heard of that brand, right? About 10 years ago, new Europeans had ever heard of Chinese cars. Today, China is the single largest source in the EU of car imports. It accounts for 16.7% of all car imports into the European Union. That is greater than Japan, which used traditionally be the biggest source. Yeah. That is a 16%. The UK at 14%, and the US at 11%. So what you see is China is now the biggest exporter of cars into the European Union. And once the electric vehicle fleets becomes the norm, the Chinese shares going to get greater why? Because they have invested in battery technology before everybody else. So they are way ahead in battery technology. Now, this, of course, is going to clobber Germany, because the Germans are the biggest car manufacturers in Europe. And if it clobber's Germany, it's not going to just affect Germany, why? Because we did a podcast not that long ago on Switzerland and Austria, that area. And what we saw was the Swiss Austrian Polish check. Manufacturing base was largely a base that fed into the German manufacturing base, which is dominated by cars. So the ramifications of the knock on effect of a stumbling Germany will be felt far, far more widely than just the federal republic. Yes. So that is cars jump. And the reason cars are set up important is because they are a bellweather. They are a significant industry, right? But now here comes the madashit jump. OK. You've heard of all sorts of economies. You've heard about the green economy, the agriculture economy, the industrial economy, the high tech economy, the data economy. You never really heard about the parcel economy. This is the Bing Bong moment, John. Right. This is the one that's doing your head in as you're sitting at home. Right. Explain it to me, please. There has been an explosion, John, in parcels coming from China to your small parcels, e-commerce, small-scale e-commerce, shirts, clothes, trousers, all these things, right? The platforms, you're probably aware of. They're what it's called shine. What it's called, tamu. They are basically Chinese Amazon's. And they are devastation, European retailing. The growth is phenomenal. And one way to see it is the growth and advertising spending, right? Right. OK. Yeah. So the growth and advertising spending since May 2025, in both of these companies, shine as introduced its online ad spending by 35% in France and by 20% in the UK. Now, what does that mean? It means the side bars down whatever things you're looking at are full of ads for Chinese companies. Why? Because people are being coaxed to buy stuff in China. And the evidence of that we have is from May 2024 to May 2025, the downloads in Europe of the shine up went up by 25% of water increase. And the download and the team who up doubled. It's incredible actually, because you see these ads. I don't know, when you're on social media, certainly when I am, I'm just being bombarded by this kind of stuff. And it's really clickbait kind of advertising. And you click through, well, there's a there's a bargain. That looks nice. It's for next to not an and the next minute you're you're down a rabbit hole of Chinese goods. And you're spending a fortune. Yeah. Yeah. And the big thing is free phrase. It's one of the big selling points of these companies, just to give you, right? So what happens is cheap Chinese imports. So if you think you're a European retailer on the main street here in Dunlurie or whatever, wherever you're listening to this podcast, be it Australia, be in America, be it in the UK, wherever you are, right? And you have your kind of your main retailer. So at that retailer, in order to open the door, the shop every morning, he or she has to pay wages, has to pay rents, has to pay rates, as in corporation tax and rates, has to pay utilities just to open the door. Yeah. And they pay them at European prices. There's no way in the world they can compete with TEMU or Shine where you're paying Chinese prices and it's getting delivered to your door in the parcel economy. To give you a sense, the scale in the parcel economy, right? The EU imported 4.6 billion low value parcels that's under 150 euros in 2024. Now that figure doubled from 2023 and tripled from 2022. So that gives you a huge sense of the scale of acceleration of this business. 91% of all parcels, under 150 euros that came in to Europe, came from China. 91%. That's amazing. And one of the reasons is the system relies on the fact that imports under 150 euros avoid all taxes and duties in Europe. That is about to be changed and the will from July of this year be a three euro levy on parcels under 150 euros, but it still isn't a lot. So what you're finding now is that the main retailers, so cars are one thing and big white goods are another thing. The one talking about T shirts, shirts, anything that is typically sold on the high street is now in the sites of Chinese companies. Now what is that doing? That is creating devastation on the high street number one. Yeah, you can see that. You can see that all over the place. And it means that also retail shopping is now divided into only the very rich and the very poor. So what you have is the very rich still go to high end outlets which are a buying experience. So the main street of all our towns now have either really rich boutiques for rich people, our pound shops and discount stores for poor people. There's nothing in the room. middle and what you see in the middle are, you know, nail bars, Turkish barbers, all that sort of stuff. But the carton's soul of retailers been ripped out by not by the Chinese, but by us choosing to go with the Chinese. Right? Can it just go back to that three euro levy? Is that just Ireland or is that across Europe, all of Europe? That's across all of Europe. But it's really nothing because it only adds like 150 euro parcel, yeah, it's now under three euro. Yeah, yeah, yeah. It's a 2% levy. 2% levy's don't stop anything. Yeah. Yeah, yeah, it's just take a little slice of us actually. So what you're seeing is China is penetrating European markets at an extraordinary pace, right? Can I? Ordinary pace across a whole range of products? Can I just ask you one other question then? Is Ireland going to benefit a little bit from this given that shine have set up their European headquarters here? So we're going to be getting the kick back through our corporation tax? Yeah, but it's making most of them. We're talking about, I mean, you're probably right. Like there will be a small, a small positive. But what we're talking about is a generational structural change in people's shopping habits. Yeah, if you think that, for example, at the turn of the 20th century, the most exciting thing to happen in urban economics was the arrival of the department store. Right? That was a matter of thing, right? Yeah, people going into town to shop, right? That's what people did. Yeah. And it was a way out and you went in and there was things there. That's right. All of our zoning is based, you know, there's a pole zone residential, there's a whole zone retail. So the way in which we plan urban cities has been reflected consistently to the fact that there is a shop in culture that is based on going into town to shop. All of our main streets have mixed use. So you're obliged to have a shop on the bottom floor of almost every town, which of course is a disaster for planning, particularly when people can't afford to set up a shop because online shopping via this parcel economy is destroying the very fabric of the main street, which means that our main streets will have to be turned back into exclusively residential streets very, very soon, because nobody in the right mind is going to set up a shop. If you've got to pay all these fixed costs before you even take money off your first customer. Yeah. Yeah. Yeah. And of course, what is happening is the Chinese are hovering up the parcel economy. So that's also a shift from kind of what was the window shopping to now screen shopping. You know, exactly. Like our mother's used to go into town just to window shop, walk up and down the streets and look at the window and then maybe buy something later. But now it's all on your tablet, all on your phone, all on your computer screen. But the other thing we were going to talk about was which I'm really curious about is the shared economy. But let's just a great one. Let's talk about that after a bit of this. So China is Chinese goods are changing the whole complexion of our urban streets and our shopping streets. But you mentioned before about this shed economy or shed economics. I'm really curious about this. Shadow of the shadow of the shadow of the there you go. Right. Our friend, Shumpeter. Yes. Always set that the economy adapts in ways in which you can never imagine because at the center of the economy is this curious creature called the entrepreneur. The person who sees an opportunity realizes that demand has shifted, tastes have shifted, demographics have shifted and produces a product to change and adapt to that shift, right? And that's why I find economics endlessly fascinating because it is this is the organism that's alive. Yes. Yeah. Yeah. Yeah. Yeah. Yeah. A great example of this is shed economics, right? So we've seen the parcel economy, right? Now what is the shed economy or shed economics? So as China's trade offensive into Europe has intensified, largely driven by the sheer demand associated with the team moves and shines in this world. Chinese logistics has become overwhelmed. They don't have enough warehouses to put this stuff in. Yeah. Think about it. You click on your your walking on the street, you see something on your phone, you click on you pay. Yeah. That goes to China goes to a factory, the factory register, they send that stuff to you by freight, right? Air freight. But of course, it has to go to a centralized warehouse before it is distributed. Okay. That's what you thought, John. That's what you thought. Yeah. But not anymore, right? Because what is happening now? It's an ingenious solution that has actually emerged due to the fact that Chinese warehouses are overwhelmed and their logistical capacity is overwhelmed, right? The Chinese diaspora across Europe. So Chinese people, right? Yeah. It's quietly turning their homes and their sheds into makeshift warehousing and logistics networks, their processing, their picking, their packing, and their labeling and their distributing these parts. So what has happened is really Chinese companies are enlisting their own diaspora to actually fix their logistical problems. So what's happening is all around Europe, Chinese people are setting aside a little bit of a shed or the box room to become a mini warehouse. They fill a full of bicycles and stuff and everything. Everything clothes, everything, right? It's amazing. It's a bit of imprim cutters. Okay. So this is a parallel economy that we have never really imagined. Okay. The Wall Street Journal had a great piece in this, the South China Morning Post. Again, if you're interested, listen, just Google the shared economy in the Wall Street Journal or the South China Morning Post, they reported that Chinese people who convert their homes are the sheds into these operations can earn up to four and a half grand a month. They've been paid to package and to label about one euro 20 per package. These are small packages. And of course, where they've been advertised to, they've been advertised on Chinese social media, right? I was going to ask you how this came about. So what's happening is if you're on red note, so red note is a very, very big Chinese social media platform, which speaks to the diaspora outside of China. So you get all these ads. The same way as you get an ad for team who for Manquini's, which I know you like. Yes. I love them, especially leopard print ones. When you are getting your ad for your leopard, manquini, right? A Chinese person is getting simultaneous ad to warehouse your leopard skin, manquini's, you know, order to actually label it and send it to you, right? Somewhere in Dublin. So what they're doing is because data mining is so efficient because the back end is so efficient, they say, okay, well, we're getting a huge amount of orders from Ireland. We don't have a warehouse facility here. We're going to send it to 20 sheds around Ireland run by Chinese people who are doing a nixer. This is just a nixer. Wow. And thought is how the vanguard of the Chinese goods are coming in here. That's incredible. It is incredible. So you have a nation that's harnessing all its resources. I mean, it's galvanizing its own diaspora to create unconventional, logistical hubs all over Europe, right? And it's using the idea that listen, if you do this is a little nixer, you can do it a month or night, you can move from work. Yeah, you go in the shed, you package everything, you basically download an app to give you the directions of how to do it. And you then become the postman. Right. Okay, you organized the vote. This brings a whole new meaning to the concept of man shed. Exactly. New in your man, Keeney. And I know, by the way, listener, you've no idea how strange this fella is. Anyway, let us move on, John. This is, you see, I'm getting excited by all this. Yeah. Your man, but by the economic organism that's living in our midst and front of us. Now, of course, you think, how can European companies compete with companies that are harnessing their own diaspora to do the work that typically was done by on post or DHL or whatever, right? Yeah. And that I think gives people a sense of what we are looking at. Now, for consumers, that's all very well, or at least that used to be the sort of way. So neoliberal economics always says, well, if people are getting the stuff cheaper than everywhere else, net net, this is great for everybody. But we know that that's not the case because Europeans need jobs. They need to go somewhere to work. They need to work in retail, they need to work manufacturing. We can't all just dismiss this as, oh, it's great for the consumer. Because you cannot consume alone because you need income. Well, maybe we can still for a box room with stuff. Yeah, but then you need to be able to read Mandarin. Yeah, that's what AI is for. That's what AI is for. This could be your way out, but I mean, no, but it leaves a bigger question. Yes, John. Yeah, yeah. Which is, if China can make almost everything cheaper and increasingly better than the rest of us, if it can get the stuff to us, and even when there are Botlex Chinese companies are coming up with these incredibly unconventional and very, very creative solutions, right? Eventually, what are we going to sell to them? Really, what are we going to sell to them? Because trade is meant to be a two-way street. So the whole basis of trade theory and economics going back to David Ricardo, David Ricardo, little fun fact was the first Jewish MP ever, ever elected in Ireland. He was elected into the borough of South Lich, which would have been, I think, then Queen's County John in the old days. Right. And his thinking was the basis of all trade economics and was basically the idea of comparative advantage. Yes. So you have an advantage in something like you're in Ireland, you've loads of grass, you've an advantage in making butter. And you're in England, you've loads of coal, you've an advantage in making steel knives. Yeah. So the people who make the butter use their comparative advantage. They specialize in butter, they produce more of it, and they trade with the English people making steel, right? But the idea of trade theory is that you have something to sell to the other person. But the other person isn't overwhelming, the dominant. But what happens, John, if the Chinese simply don't want any stuff we make because they're making it cheaper, they are heavily subsidized in their industries. On average, Chinese manufacturing goods cost about 30% less than European manufacturing goods, and retail and clothing and footwear, which is dominant cost about half of what European costs, cost about half of what this equivalent produce in Europe is. But we're still making them. What happens if they get so good at this stuff? The China actually kills trade. Now, it's hard for China as well because they need somebody to trade with. But I'm just saying this is the way we're going. Yeah. Well, I mean, it is interesting even in terms of things like wine. You know, wine was the preserve of France and Italy and Spain in particular. But now, apparently, Chinese wine is becoming a really big thing, along with Chinese whiskey. So like Europe ends up with just these kind of almost cottage industry type of products like Irish whiskey and French wine. I mean, they're not cottage industries. But they're very, very specialized and very specific. Well, they're location specific. So what they're doing is they're trading off the historical story. Yes. So we're not competing with them head-to-head on price or on quality. We're trying to do that thing that all branding is based on, which is we're trying to tell a better story. Now, eventually, what happens is you just end up with some luxury brands and tourism. And that is not the way in which you keep 500 million people employed. Yeah, I was going to say because there's simply not enough for those kind of products and industries to keep all of your people alive. So this is a big dilemma for us. Now, let's go back. We started in the 1870s, John. Right. We have an example of a different training relationship with the Chinese eventually didn't want anything either. They didn't want any European products. In the 1840s and 1850s, when our friends, the British Empire, arrived in Asia through the East Asian company, the one that largely was based in India, when they went to China, they tried to persuade the Chinese to buy European products. And the Chinese had nothing to do with them. Chinese said, "Could we bother it?" Right. Yeah. Because it's all shoddy and we don't want it. A bit like the way the Chinese look does now. And you know what the Brits did? They sold them heroin. Yeah. Yeah. leading to the opium wars, John. The opium wars were basically the British said, "Well, you don't want to buy our bicycles. You don't want to buy our steam engines." So, here, buy our smack, right? Returned into drug dealers. And they acted cynical move. God. But they did that. And you had the opium wars and they created a massive, massive drug problem in China. Yeah. Which they haven't forgotten either. Well, that's what they call it. It's the 100 years of humiliation. Yeah. Starting in 1840 and ending in 1947 with the arrival of Mao. So, what I'm saying is there is historical examples, but the end of Southern heroin, which I don't believe is the future of the European Union. So, what is the future, Dan Mack? This is when I come back and I'm going to end here. Maybe Trump was right. But the only way you can compete with subsidized, heavily subsidized Chinese products is by protectionism, is by throwing up tariffs. So, about a month ago, all Europeans were clapping Mark Carney at Davos saying, "Fantastic bloke. Great. Because Carney said, don't worry. We don't need to trade with America. We trade with China. But maybe that's very naive in the extreme. That may be open trade with China, given the relative costs, the relative size of each market, the relative organization of both entities, the Chinese entity and the European Union, that we just can't compete with them." And hold your breath, John. But do not discount significant European tariffs on China in the next five years. That's right. I believe the podcast, I'm going back out to the shed now. I'm going to take out the lawnmower. I'm going to take out a couple of our ladders. I'm going to take out my. And all my magazines have stuff to weigh. Exactly. My back and deck are review. My black and deck are drilled. Excellent. All right. We'll talk to you next week.