Escaping China’s Trade and Investment Trap - Pointers from a Franco-German Informal Meeting

Europe is between a rock and a hard place. China’s trade tsunami continues, evidence of its support for Russia leads to an open admission by China’s leaders. Yet Donald Trump’s tough declared policy on China is not followed by actions : the successes of the Bessent/Lutnick/Miran trio (the last of which is not the least in terms of strategy) have essentially been gained at the expense of allies and partners. Even if the EU has so far got a better deal - more accurately, a less bad one - than other partners of the U.S., new threats and a prevailing sense of uncertainty mean that even if the EU wanted to submit to the United States’ China policy, the question would be : which one? yesterday’s, today’s or tomorrow’s ? In many ways, the Trump administration’s negotiation tactics ape China’s own behavior : divide and rule, leverage pure strength.

And so we all spend more time thinking and debating about Washington than about Beijing. Better the devil that we know than the devil which we don’t?

If continued, this pattern will put the EU - and many member states which mistakenly think they might get a better deal by themselves -  in the cross hairs of these two experienced hunters that are today China - and to our dismay the United States. Or, if one prefers the image, in the position of a rabbit caught by headlights in both directions of the road. 

Standing still is the worst response. One has to make a choice : either run for the field, or rally one of the cars. And to choose our options, one must separate the words and deeds from the two empires. The Trump bluster is abhorrent, and his associates have shown all their contempt for any form of multilateralism. They might fail allies, and the digital blackmail is an attack on Europe’s principles. But in deeds, China is far ahead. Democracy is under threat in the U.S., it is inexistent in China. As key insiders of major business circles know, a number of European industry sectors will be dead within five years if the trade tsunami from China continues. And that will be even more true if the U.S.-China trade conflict keeps going. In the space of 4 years, China’s exports to the U.S. went down by 10%, and they went up with the EU by 27%. USD devaluation - and a RMB that is essentially anchored to the USD with only minor deviations - ensure that worse lies ahead.

Furthermore, a European Union of 27 members and many conflicting objectives - welfare, defense, greening, industrial policy… - lacks the means of an authoritarian party state to collect and invest its citizens’ forced savings, or the cornucopia of venture capital that the USD’s unique status and genuinely unified market bring.

Contrary to many popular perceptions, this Commission has done better than any of its predecessors in speeding up processes, turning out new trade defense and industry policies. Without admitting it publicly, it is quietly giving up principled multilateralism in favor of pragmatism in the trade and investment area. Trade multilateralism does not mean much if your principal trade partners do not practice it. And yet, there is only so much that the Commission can achieve if it is not backed by member states - in some cases, this must be unanimous, in others, with a qualified majority. The wishful thinking of relying on a vocally multilateral Global South falls on its face. In practice, emerging and developing nations only practice it when they want to say no to us : meanwhile, both the U.S. (quite openly) and China (sweet talking without any consequence) don’t give a hoot. 

In the previous two decades, one could explain many of the vagaries of European policy towards China with differences of analyses and ideological preferences (mercantilists vs. free traders!) among European member states. Even in 2018 - right before Covid and the start of the trade - it was clearly differences of interests among member states that precluded a stronger response to China’s challenge.

Today, we find that it is mostly the dysfunctioning of political systems and a growing overload of problems that is impeding European governments to act in time. They are overwhelmed by the risk of an identity and populist backlash, and they feel that they must demonstrate that they are national before being European. They know a trade conflict with China will bring inflationary costs on top of our weaker growth. By the day, we resemble poorer developing societies that must rely on Chinese goods to access many consumer goods. The lure of potential bilateral deals with China is of course dangled by Beijing - and there are still newbies in politics, unfamiliar with the hardball play of a Leninist state, which are ready to believe this. Although by now we all sing the song of "strategic autonomy", we know that in key sectors it is at least a medium term goal, which does not save us from having to choose between China and the United States in a shorter span of time. This is true in the defense, digital, finance and even energy sectors. And by supporting Russia diplomatically, militarily (with dual use items, from drones to chips), financially (the ruble’s escape hatch to the world) and trade wise (USD 20 billion yearly receipts for Russia from China), China is a much more urgent and potent threat than Donald Trump. 

We don’t even need to factor space or hybrid threats, or the devastating shock from any hard clash around Taiwan, to know that China will stay the course, and that we don’t have enough leverage by ourselves to prevent this.

By contrast there is a debate in the United States about the wisdom of its policies. Not so much inside the administration, where a mercurial President cows every one into submission. But outside it. A recent Foreign Policy piece, whose two authors are really not suspect of any sympathy for Europe, and singularly for France, argued that the United States cannot withstand China’s pressure without its allies -, and by that they don’t mean only the Asian Quad. There is a phase of unknown length ahead of us - let’s call it the Trump/Vance philosophy - but both sides must know that on many issues, we’ll hang together - or separately.

In the absence of a choice, almost any tough trade, investment and technology denial move by Trump towards China will make Europe a market of last resort. That is the fundamental reason why the Commission finally slapped 100% tariffs on steel. If the Trump administration wants to stick to its tough stances, it will have to tackle the issue of third country transit (by trade or investment) : and that’s not only Vietnam or Mexico, but a fair share of EU economies. And if Trump changes course, perhaps swayed by China’s tough response, it is of course towards the United States that China will make any significant concession. Leaning towards China, "hedging" as again insiders call this, is a lose-lose proposition for the EU.

In a recent important informal meeting run by Institut Montaigne and Merics in Berlin, we did not see major disagreements between French and German officials who spoke there, apart from a few issues. But we heard a huge disconnect between the strong views from experts and private sector, and often weak or outdated responses from officialdom. From quarters where this would have been unthinkable only three years ago, we hear the word "decouple".

Part of the disconnect with governments has to do with the difficulty and cost of a strong response to China. Offhand, we can cite the following must-do actions (not necessarily coming from the meeting above) : siloes between different government departments (defense and foreign affaire vs. some other administrations) that also exist at Commission level ; need for much more frequent coordination among member states to update and move on constantly shifting Chinese evasive tactics ; need to impress China with the real possibility of complete decoupling in some sectors. That also means researching in advance the ways and means of such a move ; need for politicians to admit that for all their immediate concerns, we are economically dead in the water within a few years if we don’t act now ; need for a decisive move towards qualified majority voting in many areas to stop Chinese blackmail or sugarcoating of some member states ; need to stop the nod to populists or to very sectoral interests on trade, investment or tech agreements with third parties (typically, Mercosur, Indonesia, potentially India): delaying these minilateral or bilateral free trade agreements only opens up even more opportunities to China ; need to stop the fratricidal fights of arms industry and aerospace firms among Europeans, including the debate on NATO vs.ITAR free standards : we need both, but we can only achieve this by more defense and aerospace industry cooperations, (preferably led by private initiative rather than through intergovernmental consortiums). It also means that when China escalates a trade conflict, European member states must practice solidarity, by supporting the hardest hit sectors in a given member state. That is what was decided by the EU’s Anti-Coercion Instrument (2023), and this must be implemented.

We should not take the short-term reversal of that trend after Donald Trump’s second inauguration as a free ticket for the future. Furthermore, much American investment in Europe is presently taking the opportunity of buying up choice assets in a weak economy, from real estate to start ups.

All of the above leaves aside what in the insiders’ jargon is "positive policies" : support for education, innovation, industry policies and search for critical resources, really an endless list. Let’s call it the Draghi report list.

But that list has a prerequisite. European member states must first know what they want least, whom they trust least, and then make the worst possible choice except any other, as someone famously said of democracy. That does mean hard bargaining and compromises with the United States, without the double talk that politicians practice to appear as staunch nationalists to their voters ; and a resolve to push the European Union further, as with other preceding crises. Only by these two simultaneous undertakings can we match China.

It is by far not enough to say that the EU now has the requisite instruments, which must simply be implemented. The EU has done considerable work. But events have sped up, geopolitics have hardened to an unprecedented degree since the height of the Cold war. At best, our Union is only half achieved.

The other path - pulling up the drawbridge and retreating to our national identities and sovereignty - will never deliver a stand to withstand the outside pressure. At best, we would become ASEAN, a largely paper entity covering up for an economic submersion by China. At worst, Latin America, an open field of competition between China and the United States.

Copyright image: Manon Cruz / POOL / AFP