Commentary on Political Economy

Wednesday, 5 May 2021


China’s miscalculation on trade deal helps Biden rebuild the Western Front

When, on the final day of 2020, China signed a trade pact with the European Union its leadership would have congratulated themselves on their cleverness in sidelining the EU from the escalating confrontation with the US before the incoming Biden administration had a chance to enter the White House. They don’t look quite so clever now.

China’s eagerness to execute the “Comprehensive Agreement on Investment” was underscored by the 11th-hour concessions it made to the EU, including “sustained efforts” to comply with international conventions on forced labour (an indirect reference to the controversies about the treatment of the Uighurs in Xinjiang province).

The deal that China was desperate to lock in had been given greater urgency because, unlike Donald Trump, who actively sought to damage the multilateral institutions and relationships in the West in pursuit of his “America First” policies, Biden had made it clear he wanted to re-establish those relationships and alliances and present a united, and far more powerful, Western Front to China.

Joe Biden has made it clear he wants to re-establish Western alliances.

Joe Biden has made it clear he wants to re-establish Western alliances.CREDIT:AP

When the EU ignored the pleadings of Biden’s advisers to hold off until the new administration had an opportunity to canvas the common concerns of the US and EU about China’s economic policies and practices it appeared China had succeeded in heading off that threat.

The agreement, however, was conditional on final approval by the European Parliament.

Almost from the moment Biden was inaugurated he dispatched envoys to America’s traditional allies, seeking to re-establish traditional alliances and create common ground and a more unified pushback to China across a range of issues, from its economic policies, its Belt and Road initiative to its human rights abuses in Xinjiang and its treatment of Hong Kong.

In March those efforts bore fruit, with the EU joining the US, UK and Canada in sanctioning Chinese individuals and entities for their treatment of the Uighurs.

Almost reflexively, China retaliated, imposing its own “tit-for-tat” sanctions on a number of EU lawmakers and other individuals and several EU think tanks.

That was a miscalculation. Targeting members of the European Parliament that were being asked to ratify the trade deal infuriated fellow parliamentarians and has played into the hands of those in Europe who want to side with the US in the collision with China.

After seven years of negotiation and despite the last-minute concessions the EU has made it clear that it won’t approve the agreement while the sanctions on its officials remain in place.

Even if China were to lift the sanctions, it might be too late to salvage the deal.

Germany has been the strongest advocate for a formal trade deal with China, which isn’t surprising given that while the EU has become China’s biggest trading partner Germany accounts for roughly 40 per cent of the EU’s exports to China. China is Germany’s second-largest export market behind the US but is growing faster.

Chancellor Angela Merkel has tried to separate economic issues from political issues in the EU relationship with China to protect and promote Germany’s economy.

With Merkel retiring and the Greens now leading her Christian Democrats in the polls, the election in September could bring a far less mercantilist and more China-sceptical set of views to the EU which already has a strong presence of China sceptics.

Indeed, the mood in Europe towards China has been evolving quickly. Apart from the angst about the treatment of the Uighurs and China’s imposition of political control of Hong Kong, the EU unveiled a draft this week of new rules for its treatment of state-subsidised foreign companies; rules that are clearly aimed at China.

There has been unrest in the EU about the extent to which European bidders for companies and public tenders have been undercut by state-owned and/or subsidised entities from China.

There’s also been push-back against China’s Belt and Road initiative.

That’s been sharpened by Montenegro’s pleas for help after taking out a near-$US1 billion loan under that initiative for an extraordinarily expensive new highway to Serbia. Its construction by a Chinese company is years behind schedule.

The tiny Balkan country (with a GDP of about $US5.5 billion) wants EU help to repay that debt and avoid financial capture by China.


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Montenegro is a member of NATO, wants to join the EU and is located in a strategically sensitive part of the world so it isn’t surprising that, while the EU has indicated it won’t help repay the loan, it has said it might be able to help refinance it.

Across Europe individual economies have been toughening up their approach to Chinese investment (although it is usually cloaked in reference to state-subsidised investment), moving to protect companies and intellectual property seen as having significant economic or national security implications and, after their vulnerability was exposed by the pandemic, re-thinking their dependence on China for critical supply chains.

A meeting of the G7 in London this week – the G7 includes Germany, France and Italy along with Canada, Japan, the UK and the US – re-stated their concerns about China’s human rights violations, its Belt and Road program, its aggression towards Taiwan, its actions in the South China Sea and its economic coercion.

Their communique also supported Taiwan’s participation in the World Health Organisation’s forums, which will infuriate China.

G7 foreign ministers meet, in socially distanced fashion, in London. This week they supported Taiwan’s inclusion in WHO meetings.

G7 foreign ministers meet, in socially distanced fashion, in London. This week they supported Taiwan’s inclusion in WHO meetings.CREDIT:AP

Merkel is now promoting the potential of a trade deal between the EU and the US. The US and the EU have suspended the tariffs each had imposed as part of the long-running dispute over subsidies for Airbus and Boeing. Senior US trade officials are now shuttling back and forth across the Atlantic. The US is similarly building common causes on China-related issues with countries in the Asia Pacific.

The frosty relationship between the Europeans and Americans during the Trump presidency is thawing faster than could have been anticipated.

The speed at which the Biden administration has moved and the degree of success it is having in rebuilding the relationships with disgruntled former allies that Trump fractured will have taken China’s leadership aback. In Europe, they haven’t helped themselves.

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