The EU Wants No Trade War with China

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

With a bilateral trade volume of €586 billion, China last year edged out the U.S. to become the EU’s largest trade partner.

That trend was significantly amplified in the first seven months of this year. During that period, the EU trade with China was running 7% ahead of its trade business with the U.S.

The EU Chamber of Commerce in China is quite pleased with the volume and profits of its members’ business in China. In spite of that, its German chairman worries that rising tensions between China and the West will make the operating environment difficult in the years ahead.

Germans tend to worry a lot. A few years back, that German businessman was concerned that Europeans would not be able to “participate” while, as he put it, the Chinese were “renovating and modernizing their house.”

The fear, at that time, was that China would not be opening up to world commerce. But China held its word, continued to open its economy, welcomed foreign direct investments and made it possible for EU businesses to grow their sales and net incomes.

The problem now is a bit more complicated. China looks and sounds increasingly concerned that its companies are being squeezed out of some major Western markets, with access denied to inputs and technologies they need to compete and defend their market shares.

China is Germany’s key export and investment market

As a result of that, the EU companies operating in China worry that Beijing could begin to retaliate with reciprocal trade and market access limitations.

More importantly, the Europeans now see that Chinese authorities are inviting their companies to invest in new technologies in order to make the country less dependent on foreign suppliers whose products and services might become unavailable to Chinese corporations.

Back home in Germany, political and business leaders are responding to Chinese concerns. Beijing, apparently, is reassured because it knows that Germany plays a leading role in EU trade and economic policies. China also knows that Berlin pushed through last December a Comprehensive EU-China Investment Agreement fearing, correctly, that the incoming U.S. administration would block that intensely negotiated deal since 2013.

What are the Germans telling China?

As an open economy, where the external sector accounts for an astounding 87.5% of GDP, Germans need no special efforts to convince the Chinese that they are fully committed to their long, well-established and confident economic and political ties.

Germany, therefore, will not be party to any trade restrictions with respect to China for a good reason: On current evidence, China is on course to become Germany’s largest export market, with an estimated sales revenue of well over €100 billion by the end of this year.

China is also a crucially important production base for Germany’s automobile, car parts and machine tool industries. And most of Germany’s Mittelstand (small- and medium-sized companies) – which represent 99% of German firms and generate 68% of German exports -- consider China as their most important foreign direct investment destination.

Beijing appreciates that, because German investments, and associated technology transfers, have played a crucial role in transforming China’s smokestacks to modern, efficient and IT-driven manufacturers. Those trade and investment ties have been so important that China’s Premier Li Keqiang called the two countries a “dream team” partnership.

A strong quest for “sovereign EU”

Will the U.S. pressure scuttle those relations, as Washington steps up its “strategic competition” (i.e., a war by other means) with China?

That’s very unlikely, but let’s say it’s now an open question for two reasons.

First, the results of last Sunday’s (September 26) election have thrown Germany into a state of political instability. The next governing coalition will take months to emerge – if at all. And during that German inter regnum no consensus can be reached at the EU level on any important economic or political issues.

Second, huge uncertainties are raised by French general elections next April. Those elections will be very different from entirely inward-looking, domestic-oriented German elections.

The French have never stopped arguing for a more independent – indeed “sovereign” – EU in matters of economics and geostrategic issues. Those questions are now at the forefront of the French politics as a result of the U.S. withdrawal from Afghanistan, and a sudden appearance of an American, British and Australian Indo-Pacific alliance (AUKUS) that cost France $66 billion as a result of an abruptly cancelled military sale to Australia.

France – across its entire political spectrum -- is seething with anger about what it calls “a stab in the back” on an agreed and signed sale to Australia that went to the U.S. And then, in the French view, the new U.S.-led AUKUS rounds off years of Washington’s systematic marginalization of the EU, and its core geostrategic interests.

So, whoever wins the next French elections will do so – emphatically – on a platform of an independent, “sovereign” EU -- where France will no longer be anybody’s pushover. That policy stance will be difficult to resist to whatever remains of an Atlanticist EU constituency.

It is, therefore, clear that EU’s economic interests are strongly aligned against any Western attempts to contain and isolate China through discriminatory measures of commerce and finance. The corollary is that those interests also exclude the EU participation in political and security actions directed against China.