US driving the EU into the arms of another: China
The Trump administration has correctly put a spotlight on unfair Chinese trade and investment practices, namely:
- forced technology transfers and joint venture requirements to invest in China;
- subsidies to state-owned companies that give them an unfair advantage internationally;
- outright theft of technology from the U.S., EU and others; and
- their “Made in China 2025” plan to dominate next-generation 5G and other critical technologies.
But by unilaterally imposing high new tariffs not only on Chinese goods but on steel, aluminum and other products from our closest allies, the administration’s policy is backfiring.
Rather than join the U.S. to confront shared problems with China, the EU has been driven into a closer embrace of China and to a comprehensive new EU-Japan free trade agreement to reinforce the economic partnership.
China clearly is exploiting U.S.-EU divisions sown by the administration. Earlier this month, Chinese and German officials agreed on policies and deals that deepen the economic relationship.
China recently gave German chemical company BASF approval for a $10-billion wholly-owned plant, without the usual requirement for a Chinese joint venture partnership.
At this month’s EU-China summit, the EU was surprisingly positive about China’s Belt and Road Initiative, which it had criticized previously for lacking environmental protections and transparency and for favoring Chinese companies.
The EU also agreed to begin concrete negotiations of a bilateral investment treaty (BIT) with China, which potentially could provide greater protection for European investments in China than those afforded to American companies.
The Obama administration had begun discussing a BIT with China to improve protection for U.S. investments; the Trump administration chose instead to focus on imposing tariffs unilaterally against Chinese imports.
China and the EU also agreed at their July Summit to cooperate on reforming the WTO, something the U.S. has long pushed.
In their joint summit statement, the first in years, both China and the EU strongly supported “the rules-based, transparent, non-discriminatory, open, and inclusive multilateral trading system with the World Trade Organization (WTO) at its center,” making President Xi Jinping appear to be a protector of the global rules-based system that China so greatly undermines.
To rub it in, China and the EU agreed to cooperate in implementing the Paris Agreement, from which President Trump unilaterally withdrew in his first days in office, and together, they warned that Trump’s “America First” policies could hurt global growth.
China is already the EU’s largest source of imports and its second-largest export market. Now their trade relationship will grow and deepen further.
The tragedy is that the Europeans agree with the administration’s complaints against China for its efforts to set conditions on competitors coming into its market and seeking to establish state-led economic dominance in the technologies that will drive the global economy for decades to come — biotech, robotics, aerospace, artificial intelligence, electric and autonomous cars.
In fact, last week, the U.S. filed separate dispute resolution cases in the World Trade Organization (WTO) against the EU and China for tariffs they imposed on U.S. goods in retaliation for unilateral U.S. tariffs.
The president’s trade tactics and tariffs against Japan have also spurred others to actions that disadvantage U.S. products, companies and workers. The remaining members of the Trans-Pacific Partnership (TPP) signed the agreement, with lower standards than agreed to when the U.S. was a party.
U.S. actions also helped to accelerate the recent conclusion of a comprehensive EU-Japan Free Trade Agreement, covering one-third of the global economy. With this agreement, the EU beat President Trump, who discussed such a bilateral free trade agreement with Japanese Prime Minister Abe, to the economic punch.
The Pacific Alliance (Chile, Colombia, Mexico and Peru) is now negotiating a new multilateral trade agreement — launched after the U.S. pulled out of the TPP — with Canada, Australia, New Zealand and Singapore.
Further ratcheting up economic tensions, President Trump recently insisted that both Europe and China are manipulating their currencies to gain an unfair trade advantage. This is palpably incorrect in the EU’s case.
Mario Draghi, president of the European Central Bank, is one of the most admired central bankers in the world and does not manipulate the value of the euro for competitive advantage.
The Chinese yuan has indeed fallen some 15 percent against the dollar since January, cushioning the impact President Trump’s latest threats to impose U.S. tariffs on another $200 billion of Chinese goods. Yet, the decline actually may be due largely to market forces related to the slowdown in China’s economy.
If the yuan’s devaluation picks up steam, capital could flow quickly out of China’s market and its assets, as happened in 2015-16, potentially destabilizing China’s economy and global markets. It is unlikely that China wants that to happen.
Flows of foreign direct investment also appear to have been disrupted by the Trump administration’s aggressive trade stance. Chinese investment into North America in the first quarter of 2018 was down by some 40 percent from the first quarter of 2017, and even more sharply over a 12-month period.
Meanwhile, flows of Chinese investment into Europe are now estimated to be nine times the size of flows into North America.
At the Group of 20 meetings in Buenos Aires last weekend, Treasury Secretary Mnuchin dismissed International Monetary Fund Director Christine LaGarde’s concerns that the tariff wars could hurt U.S. and global growth and again refused to join a common message of the value of the rules-based global trading system, preferring instead references to “fair and reciprocal” trade.
Meanwhile, China used the opportunity to further its credentials as a supporter of open markets and the global trading system and an opponent of protectionism, further aligning with the EU as the supposed protector of the international economic order.
European Commission President Jean Claude Juncker is visiting the United States Wednesday to try to head-off 20-25-percent tariffs of imported autos and auto parts, giving President Trump another opportunity to work cooperatively with the EU on critical trade issues.
We can only hope this will lead to an about-face in which the U.S. works with the EU to counter China’s self-serving economic threats rather than dividing the United States further from its natural allies and driving them closer to China.
Stuart Eizenstat is the former U.S. ambassador to the European Union, undersecretary of commerce and international trade, undersecretary of state for economic, business and agricultural affairs and deputy secretary of Treasury in the Clinton administration (1993-2001). He was also the chief White House domestic policy adviser to former President Jimmy Carter (1977-81). He is the author of the new book, “President Carter: The White House Years.”
Anne Pence is a former international policy adviser to the State Department (1992-2005).
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