A European Strategy in the China-Us Trade War

Analyses - 14 May 2019

By François Godement

It’s now been almost two months since the EU finally delivered a series of wake-up calls to China : on March 12, a strategic shift treating China as a competitor and systemic rival as much as a partner, and then a stand before the April 9 annual summit that compelled China to double up on promises with in some cases a fixed end date and a mechanism to track their implementation. Most importantly, the EU has vowed to move on its own, regardless of Chinese actions – from defensive measures to new policies across the EU facing the world as it is, and not as we wish it to be.

Nothing of the sort could have happened if there had not been some unity at the core of the EU – especially between France and Germany, and with a decisive push from Jean-Claude Juncker. The surprise introduction into Xi Jinping’s state visit to France of a meeting including Jean-Claude Juncker – who delivered the main talk – and Angela Merkel is another sign of the change. Those who keep harping on about Macron’s supposed "isolation" and Merkel’s "immobility" neglect this common stance on our biggest economic and value challenge for the future – China. Strikingly, the Commission and EEAS (European External Action Service) March 12 strategic shift has been approved without difficulty (Hungary silent) at a member states COREPER (Committee of Permanent Representatives) meeting (while the EU Council discussion on China was derailed by the Brexit issue). And the Council has vied with the Commission to oversee the EU-China summit of April 9 – an institutional innovation that has in fact bolstered Europe’s position.

But it has all happened – and is still happening – in the shadow of Washington’s own roller coaster relationship with China. China has treated the EU as a variable in what is its main game – overcoming Trump’s challenge to its asymmetric economic system and its refusal of convergence. Beijing first thought a transactional approach with the former real estate developer would solve the conflict: that’s when it papered over issues with Europe by talking up multilateralism, while snubbing Europe at its July 2017 summit. The US insistence on structural changes to the Chinese economy, changes on which Europeans basically agree, made China aware of the danger from a united front. At the 2018 EU-China summit, it therefore made promises – literally all forgotten in the aftermath as China focused on stopping the Trump bulldozer. By early 2019 Europeans were fed up with unkept commitments, and by China’s relentless push inside the EU via smaller or weaker member states and the Balkan accession candidates.

Although the public sentiment, reflected by a Chinese stock market and economic upsurge, had been since last Christmas that a deal would be reached with the US, the Chinese leaders have cautiously avoided to antagonize again Europeans as a whole. While lobbying relentlessly for the Belt & Road, and for Huawei, they have underreacted to the new European strategy, and committed again to long-sought agreements, and to a new one: China is now agreeing to discuss industrial subsidies in the context of WTO reform, a key development if it materializes. At the summit with the EU on April 9, PM Li Keqiang gave his word that the actual signing of two civil aviation agreements was "a matter of days". A compromise on an agreement for geographical indications of origin was a matter of weeks, and a comprehensive agreement on investment (in fact, an expanded bilateral investment treaty) was to make decisive progress in 2019, and to be signed before the end of 2020. Crucially, China agreed to regular follow-up meetings at a high political level on this last issue: this against the sentiment that between yearly summits, China has often let the process sleep or drift at a bureaucratic level.

Europeans must know that hanging together and talking tough is necessary, but not sufficient to move China.

But Europeans must know that hanging together and talking tough is necessary, but not sufficient to move China. Yes, given China’s taste for shaping the language, calling issues by their real names matters. But proving that acts follow warnings if China, once more, does not live up to its commitments, is also essential. Europe’s toolbox is more limited than Washington’s: there is no super 301 or even a 301 itself, for example.

This limits Europe’s autonomy, whether a US-China trade deal is reached or not. If it is, China can afford to ignore less compelling EU pressures, and hope for trade skirmishes between the US and the EU. If it is not, the very real danger of massive US trade sanctions to the Chinese economy implies that China will not give any priority to agreements with Europe.

As of May 5, the wait for answers and any deliverable by China on its April 9 commitments had yielded no results. There was no news about a signing of the civil aviation agreements, no process envisaged before the fall on geographical indications, no action on the investment treaty, no actual commitment to a first meeting at a high political level to check on this, no date set up for a high-level economic dialogue, although September was mentioned. Although the civil aviation issue may sound as a technicality, the fact China had initialed it in 2017 before pulling back and that Juncker extracted a personal commitment from PM Li makes it a weather bell. Of course, the coming European elections and the renewal of the Commission and Council presidency (respectively, on October 31st and November 30 if agreement is found on the nominees) creates a further interrogation. Could China just neglect its pledges to a departing team and start the process all over again with the hope of different politics or at least lesser coherence?

On May 5, Donald Trump upset the negotiation table with China, and next tariff increases have been notified, with the possibility of extending to all imports from China. It is interesting to note that the background factor most often cited by sources is China’s reneging on earlier pledges, whether these were firm or still ambiguous. The credibility of China’s lead negotiator, Liu He, is impaired. What about PM Li Keqiang’s command of EU-China talks? The evidence from the US-China negotiation is that Xi Jinping, like Donald Trump, is in full command, and he does not hesitate to undercut statemùents by his subordinates.

Donald Trump upset the negotiation table with China, and next tariff increases have been notified, with the possibility of extending to all imports from China.

In any case, the decision by Donald Trump to impose even deeper and wider tariffs on imports from China increases the likelihood that China will give even more of a priority to the US. That this serves to prove to all concerned that China only reacts to pressure and sanctions seems lost on China’s leadership.

For the rest of the year, the main interrogation will therefore not be about what China can do for us, but about what we can do for ourselves. Europe has started to fill a new toolbox : investment screening, reinforced anti-dumping and some trade defense instruments (TDIs), envisioning an international procurement instrument (IPI) that would empower reciprocity for public markets. Signing an economic partnership and a free data flow agreement with Japan is also useful. Sharing information on IP theft, tech transfer, and cybersecurity with our main partners does matter. Defensive instruments can again be improved – although dismembering competition law to mirror China’s own distorted economy is not the right approach in the longer term. If it comes down to this, punitive tariffs and full use of reciprocity to deny access to some, while confirming and strengthening Europe’s opening to other like-minded partners, are better ways to serve our future.

What Europe needs in addition to its toolbox is a positive vision, building on our market strength and reliable institutions. The EU is awash with money after years of quantitative easing and bond buy-back. Yet risk capital is scarce, public budgets are tight even in budget surplus member states. Do we really want to live in a low interest trap and the low growth economy that it entails? Europe has deluded itself with the belief that the single market was achieved.One need only to look at the mumbo-jumbo that are railroad standards, the incredible fragmentation of the telecom market, the barriers to banking integration (while new entrants in the web-based economy have fewer obstacles…), and the complete disarray of energy policies to know that the single market is only half done. Funds for innovation, EU financing of infrastructure, joint education and research projects exist, but on a very low scale.

On a high profile issue, Europe is waking up to the battery issue. This might unfortunately be a case of fighting the previous war.

On a high profile issue, Europe is waking up to the battery issue. This might unfortunately be a case of fighting the previous war. What about electric and intelligent roads, what about a hydrogen infrastructure that would leapfrog over the battery situation? Yes, this requires strong and coordinated efforts, both financial and regulatory. But it would reconcile ecology and growth.

What about a first step into the Internet of Things (IoT) by imposing electronic tagging, and scanning, on all flows of goods entering the European Union? Yes, this requires a massive and wide effort, and some strong-arming of our trade partners. But it would suddenly create a level-playing field with e-commerce importers who very often skirt customs and VAT in practice, and this without breaking or reforming WTO…

These are only a few examples. Others, including solutions to the huge European diversity of situations and interests, are answers to competition from China, be it unfair or based on strategic foresight. The soon to leave Commission and Council, faced with rising external challenges, have been far more realistic than their predecessors. Continuity in the defensive stance is the first order of the day. Positive policy innovation and pooling of resources is what must also come from the next team and from the member states that exercise ultimate control.

Decoupling from China? Myth, Reality and Costs

Decoupling from China? Myth, Reality and Costs

A European Strategy in the China-Us Trade War

By François Godement

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Decoupling from China? Myth, Reality and Costs

Decoupling from China? Myth, Reality and Costs

A European Strategy in the China-Us Trade War

By François Godement

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