The Missing Partnership: The United States, Europe, and China’s Economic Challenge

Summary

The Trump administration considers China the gravest threat facing the United States. Yet it has largely chosen a go-it-alone approach to address this challenge, mainly because it doubts others—including the European Union—are willing to take the tough measures necessary to force China to change.

This missing partnership is a missed opportunity. The Trump administration ignores that the EU has taken tough steps toward China and must play a leading role in any diplomatic strategy that has a chance of successfully confronting Beijing. Building an effective alliance with Europe will require the two sides to solve their bilateral trade problems, navigate Brussels-member state relations, and work through existing but dormant U.S.-EU channels. All of this can be done with a bit of creativity and respect—two things that are presently missing from the equation.

The Trump administration ignores that the EU has taken tough steps toward China and must play a leading role in any diplomatic strategy that has a chance of successfully confronting Beijing.

While the current U.S. administration trumpets a form of nationalism, China’s leaders have been deeply nationalistic for over a century. They will not be deterred by U.S. blandishments alone from their long-term intention to Make China Great Again. Yet President Xi Jinping and his colleagues in the Chinese Communist Party (CCP) know that, even as the country’s export strategy succeeded in making it the world’s second-largest economy and in bringing hundreds of millions of Chinese out of poverty, it simultaneously pumped so much money into the economy as to dangerously distort it, as demonstrated most clearly by serious overcapacity in industry after industry. The CCP knows reform is needed but, scarred by the turmoil of the Cultural Revolution in the 1960s and 1970s, it seeks draconian control to manage this change (even though this may be detrimental to its goals). External threats emanating from a single “imperialist” power like the United States legitimize and amplify this need for control and the problems it causes. The only way external pressure will nudge China’s leaders toward reform is it if comes from a broad coalition of countries—including developing ones like India, South Africa, and Brazil—that argue that the distortions in China’s economy harm them as well.

The EU is as keenly interested as the United States in China—its third-largest export market—and would like to coordinate its strategy with Washington. While its export interests long moderated the EU’s willingness to speak out against China, that reserve began to loosen in 2007 when the trade commissioner argued China was playing the EU and United States against each other. More recently, China’s increasingly aggressive posture on the coronavirus pandemic and toward Hong Kong and the Uighurs in Xinjiang may have hardened the EU stance, as demonstrated by its refusal to agree a “joint strategy” with China at their June 2020 summit. But it had begun toughening its economic policy toward China much earlier, with its WTO cases on auto parts and rare earths, filed with the United States in 2011–12, as well as its debates over Chinese solar-panel dumping in 2013–14.

In part due to the latter case, the European Commission set out in 2017 why it could and would not treat China as a market economy: the heavy hand of the CCP and the state, the weight of state-owned and -controlled enterprises in the economy, and the rampant use of subsidies and other distortions in the economy all necessitate a firm application of anti-dumping and countervailing duties. Indeed, in June, the EU imposed such duties on two companies in Egypt because of the subsidies their parent firms receive in China—a step that goes further than U.S. practice.

That same thinking is leading the EU to restrict direct and indirect access by Chinese firms to the EU’s government-procurement market, as well as their ability to invest in Europe as the European Commission considers new measures to restrain the anticompetitive effects of acquisitions by foreign firms that are supported by government subsidies. This would significantly strengthen the recently adopted EU measures to screen foreign acquisitions on national-security grounds, taken explicitly with a view to China’s efforts to acquire European technology. The EU, like the United States, opposes such efforts, and has sought to tighten EU export-control laws and to constrain the ability of member states to adopt Huawei 5G technology. The EU has filed a WTO complaint against China for forcing technology transfers as a precondition to foreign investment. It has also cooperated with the United States and Japan to devise new rules against industrial subsidies and other WTO disciplines to level the playing field against China. Sharing U.S. concerns over the spread of Chinese influence, the EU seeks to counter China’s Belt and Road Initiative with its own Connectivity Strategy for Central Asia.

All of this shows that the EU can and should be a partner to the United States in efforts to bring real change to the Chinese economy. With Japan, the EU will be critical to creating the broad coalition required to give weight to foreign pressure on China. But to be true partners, the United States and the EU have to rebuild trust, resolve tensions between them, and reintroduce strategic cooperation into their relationship. The first requires U.S. recommitment to the rule of law. The second requires give-and-take from both sides. The United States must withdraw “national security” tariffs it has (wrongly) levied and threatened upon the EU, while the EU needs to step back from actual and proposed digital taxes and climate tariffs. Both should work on creatively approaching a larger bilateral trade agreement, in particular by agreeing to address food safety and other regulatory issues completely outside the context of trade negotiations. A more strategic approach can begin with the reinvigoration of the Transatlantic Economic Council as originally envisioned during Germany’s presidency of the Council of the EU in 2007.

Europe and the EU are ready to work with the United States, if the latter can work with a constructive vision of China inside the rule of law. Add that to a bit of creativity, mutual respect, and diplomacy, and the missing transatlantic partnership on China may yet be built.

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