Based on her prize-winning article in JCER on the Sino-European Solar Panel Dispute, Astrid Pepermans examines how the European Union (EU) risks losing a trade war which China and the US initiated. She argues that the EU must respond by remaining united and sticking to its values of quality and rule-based trade.
Lately, free traders all over the world must be having a hard time when opening their newspapers. Donald Trump is unleashing a trade war with Xi Jinping. Meanwhile, the EU is also increasingly agitated about its imbalanced trade relationship with China. And, while having similar worries about China’s mercantilist economic strategy, the US and the EU find themselves dragged into a tit-for-tat trade conflict which is not so different from the Trans-Pacific trade quarrels.
Nothing new under the sun, you may think. Trade conflicts have existed since the birth of human economic interaction. However, this is the first time that the ‘strategic triangle’ of China, the EU and the US has been so close to reaching deadlock. The EU may well get squeezed between the two superpowers, which know exactly how to play on the EU’s internal divisions. The EU risks losing a trade war which China and the US initiated.
One could argue – and some experts do – for a Sino-European alliance against President Trump’s foolhardy catalogue of requirements for every country with whom the US has a trade deficit. However, as my recent article on the Sino-European solar panel dispute illustrates, existing worries about Chinese overcapacities, dumping practices, mercantilist policies and technological transfers are far from ill-founded.
In fact, these unfair trade practices have been, and are, harmful to the EU. While the European Commission has some trade defence instruments to tackle them, the same case demonstrates how China can bypass the Union with ease by playing member states against each other. In short, while fighting the eagle by joining the panda sounds like a good idea, history has shown that the latter has claws too and that it will use them whenever it feels its interests are endangered.
Others argue for the opposite: a western front forcing China to deliver on all the promises it made when it entered the WTO in 2001. These promises include opening up the Chinese market to foreign goods and investment; transforming the economy from state-directed to market-orientated; making consumption rather than investment the main driver of Chinese growth; and liberalising its monetary system etc. Nevertheless, it is clear that Trump is planning on playing cavalier seul on this one. Even if the US and the EU worked together to press for Chinese concessions, it is highly unlikely (and equally unconducive) that all the EU member states would join the US’s extremely hard stance in the debate.
Whether by means of hard protectionism or offensive mercantilism, both the US and China are laying claim to the top spot of the global economy. The only way for the EU to cope with its position between the hammer and the anvil is to remain united and to set its own course. Such a course does not include closing off its market, nor does it mean that it should make an enemy of China or the US.
It means sticking to what is at the core of the Union: rule-based trade. Trump is wrong on many points, but not on his argument that China should follow trade rules. The prospect of tapping into the huge Chinese consumer market has blinded the 28 EU member states to China’s economic nationalism, which has stood in the way of a level economic playing field since China’s entry into the WTO.
Having arrived at a point where Chinese strategic investments have made clear the enormous competitive pressure unleashed by the ‘opening up’ of the Chinese economy, it is only now dawning on countries like France and Germany that their position in global trade is being challenged. However, their efforts to establish a decent screening mechanism at European level to scrutinise Chinese investments in sensitive industries have been hampered by the desire among many other member states to attract Chinese capital.
Creating a European policy and tackling the challenge mean that the member states must refrain from short-term thinking, which implies not giving in on every financial carrot China dangles before them. As a unified whole, the EU28 still carries serious economic weight and the member states should be less afraid of using it to press for fair competition. In the same vein, quality should remain Europe’s central yardstick. Competition is important for innovation and economic progress, but not when it causes international price wars and a global race to the bottom. Whether for European, Chinese or American goods, quality standards should be agreed upon and upheld.
Fair international competition and a consistent focus on quality will in turn create room for manoeuvre for Europe to increase its productivity and prosper economically. The threefold approach of regaining Europe’s economic competitiveness, sticking to European values such as quality and rule-based trade, and conveying them in a forceful and unanimous way is the only option for Europe to tackle both the China and Trump challenges.
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Free University of Brussels / Vrije Universiteit Brussel
Astrid Pepermans obtained a Masters degree in Political Sciences and started working as a teaching assistant at the Free University of Brussels in 2015. She is currently preparing a PhD thesis on the Sino-European political/economic relationship.