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Europe’s Struggle with China on Trade

It’s no secret that China is upending today’s world order that took shape after the dust settled post-Cold War. Rivaling US hegemony, China poses risks as well as opportunities depending on who you talk to: an emerging markets investor, a US politician or an executive of a global company.

Broadly speaking, the US, embroiled in a drawn out trade war with China, looks at the second largest economy in the world with contention. It used to be the same in Europe. Increasingly, however, countries in Europe are starting to extend their hand to China’s tempting propositions. Unfortunately, the EU only recently started to really sweat about China. With hands full with Brexit, EU leaders have allowed China to “sow divisions” on the continent, according to French President Emmanuel Macron. Even way before the 2016 UK referendum however, the EU had already failed to strategically act upon China’s attempts to harness regional power.

A key example of this is China’s blunt “16 plus 1” initiative, made up of China and 16 Central and Eastern European (CEE) countries, of which 11 are EU member states. The “16 plus 1” cooperation kicked off with a Warsaw summit in 2012 with the objective of fostering economic cooperation in infrastructure. The initiative remained relatively quiet with summit comings and goings, while increasingly becoming clear that the cooperation wasn’t simply about making good, win-win deals. For instance, the CEE countries spoke up for China at the United Nations and at the EU, diluting strong Western messages against China’s human rights violations. 

More importantly, the “16 plus 1” became a more than ideal platform for China to push forward the Belt and Road Initiative (BRI). An ambitious $8 trillion modern Silk Road, the BRI is a key driver of China’s foreign policy “to make Eurasia (dominated by China) an economic and trading area to rival the transatlantic one (dominated by America),” according to The Economist.

Also cooperating with China as of late is Italy, which signed onto the BRI during Chinese President Xi Jinping’s promotional tour in Europe late March. As is already happening in Greece and elsewhere in Eastern Europe, Italy will further enable faster and cheaper access for Chinese goods to reach European markets. According to BBC, this new partnership between the two countries has drawn 29 deals totaling $2.8 billion in infrastructure projects mainly centered around Italy’s largest ports, including Triste and Palermo. To note, the state of Italy’s infrastructure came to shock last August when a motorway bridge in Genoa collapsed, sending drivers onto rail tracks and in the water. Moreover, with two straight quarterly contractions, Italy is the “region’s only major economy to slip into recession alone,” according to Bloomberg News.

Unlike with other European countries, Italy and its perceived chumminess with China has caused alarm because Italy is the first of the G7 countries and the largest EU member to accept BRI investments. G7, which includes the US, is defined by the International Monetary Fund as the seven largest advanced economies in the world; combined, G7 economies make up half of the global economy in nominal terms.

Shortly after Italy’s breakaway from the European pack, EU members were called to Brussels in order to coordinate an agreed, unified approach on China in advance of an EU-China Summit on April 9. In convening to solely discuss China, arguably for the first time, the EU had finally acknowledged China’s significant role in Europe. Also for the first time, the EU conducted research detailing foreign company ownership in the region. In brief, the research finds that while still comparatively low to the US, the increase in China’s holdings has grown exponentially. While hovering around zero in terms of the number of EU firms controlled by China between 2007 and 2009, the number shot up to approximately 500 in 2015. Similarly, EU assets owned by the Chinese state increased from 16 to 160 billion euros between 2012 and 2016.

Furthermore, in a very timely decision, the EU approved a new framework to screen foreign direct investment effective this April. The more detailed screening process will act as a hurdle for Chinese investment and particularly, is aimed to deter exactly the kind of issues other countries are currently facing with the BRI and the debt trap.

With increasingly confrontational rhetoric from Washington, Europe may find it difficult to reject China’s advances. Germany, for instance, is already very much influenced by China. Germany’s business cycle follows China’s macro policies; China’s fiscal thrust and credit impulse are both heavily mirrored in the movement of Germany’s industrial production, according to Wall Street Journal The Daily Shot.

The UK also sits in a tough spot as it looks to make its own trade deals outside of the EU. In fact, the UK is the most popular European destination for Chinese investment, summing to 90 billion pounds over the past 15 years and out-pacing second place Germany by half, according to the Financial Times. Furthermore, the UK recently struck a balance with Huawei by permitting just parts of 5G networks to be built by the company. Elsewhere, cybersecurity risks continue to bar Huawei’s entry. It’s apparent that the UK is learning “artful compromise,” as said by The Economist, in order to maintain better China relations.

In addition to what investment figures say about Chinese financial prowess, the dollar’s role as the global reserve currency is beginning to soften. Earlier this month, Saudi Arabia responded to a NOPEC bill that passed the House Judiciary Committee by announcing that the country, if the bill passes, would no longer denominate oil in the dollar (but rather, most likely, in yuan). Various forms of a NOPEC bill, or the No Oil Producing and Exporting Cartels Act, have been historically opposed but recently have come to light given the Trump Administration’s demands to increase the flow of oil. 

China already surpasses the US in gross crude oil imports, and China and India are positioned to be Saudi Arabia’s largest partners in just a couple years as the US becomes more self-sufficient. These shifts in the flow of capital will deteriorate the global importance of the US monetary policy. To note, global trade (in terms of the share of yuan-denominated stocks and bonds) are at about 5.5 percent, according to ICBC International. Over our career however, we will experience the dollar weakening. 

As the world becomes more protectionist, this may result in either stronger regional European integration or the creation of a Eurasian Bloc so desired by China (and Russia). Though recent developments appear to signal what may be the beginnings of an Eurasian connection, for now, China and its BRI continue to raise suspicion in Europe.

Starting on April 25 for three days, 28 countries will convene in Beijing on the second Belt and Road Forum for International Cooperation, where China must ease fears and address criticism about its strategy. Meanwhile in Brussels, all the red flags have been raised and it will be much more difficult for China to win the EU over.

Photo credit: Unsplash by Christian Wiediger

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