The EU -USA- China Contradiction: the Friends Turned Foes and Vice Versa

The European Union (EU) is today facing a major contradiction. Its traditional ally, the USA has in several ways turned its back on Europe and is entering into trade and defence related quarrels. China which is the EU’s ‘systemic rival’ is on the other hand deepening engagement with Europe. This is leading to an assessment within the EU that while it can deal better with the USA, that is predicated by the incumbent of the White House. Many EU members await a change. With China, the members are turning to the view that they have not taken the role of China with adequate seriousness and now the Chinese are swarming all over them.

Where trade in goods is concerned the USA, in 2019, is still EUs largest trading partner. China is the second, but while with the USA, EU has a surplus of Euro 152 billion, with China there is huge deficit of Euro 163 billion (Table 1). The USA has 15.2% of EUs external trade and China 13.8%. With 18% share in EU imports, China is the largest exporter to the EU while the USA has a 12% share. In EU exports, the USA share of 18% is double the Chinese imports at 9.3%. In fact, these two countries are at a special place indeed, as in the top 10 trade partners are other non-EU European countries like the UK, Switzerland, Russia, Turkey and Norway which have a 30% share. Asian countries like Japan, South Korea and India are in the top 10 but together account for 6.7% of trade with EU!
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Where Foreign Direct Investment (FDI) is seen, in 2007 the US and Canadian companies had a 42% share of FDI in the EU but it reduced to 29% by 2016. In the same period China and Hong Kong increased their share from 2.5% to 9.5%. In March 2019, over 30% of EU companies had foreign ownership.² China’s peak investment year into the EU was 2016 when Euro 32 billion flowed in, setting some alarm bells ringing. Since then the FDI has been decreasing. ³ In 2019 Chinese FDI in the EU reduced to Euro 11.7 billion, nearly 70% lower than 2016. China now owns, or has investment in four airports, six marine ports, nine windfarms and 13 professional soccer teams in Europe.⁴ More than 360 EU companies were taken over as 670 Chinese companies invested in the EU.

Since 2000, the UK has been the favoured place with Euro 50.3 billion of Chinese FDI followed by Germany with Euro 22.7 billion. Italy and France had over Euro 15 billion each; in 2019 however, the Nordic countries obtained 53% of Chinese FDI. The Chinese thus are clearly all over Europe.

The reduction was partly due to the reaction in Europe to Chinese intent with their growing FDI leading to closer scrutiny. Even though FDI is tapering, particularly after the Covid 19 impact, R&D partnerships between Chinese and European companies are increasing. These are also now attracting caution.

EU China Strategy

By March 2019, the EU had drawn up new rules to scrutinize FDI mainly to oversee the Chinese involvement which seemed to have crept in unchecked. This empowered the European Commission (EC) to provide a view in case an FDI was seen as a threat to security or public order in any member state or was of concern to EU projects of importance. The same month the EU China strategy was announced.⁵ This was augmented in 2020 by a Strategic Agenda for Cooperation.⁶

The EU and China have a strategic partnership since 2003 and a wide economic engagement. The China outlook recognised that ‘that the balance of challenges and opportunities presented by China has shifted’.⁷ China’s rise was not accompanied by the degree of reform or responsibility that the EU expected. The ‘upholding the rules-based international order, as well as greater reciprocity, non-discrimination, and openness of its system’ did not emerge in China. ⁸ The EU was now looking for a more faceted, pragmatic and confident approach towards China. The entire EU was expected to counter the thrust from the ‘systemic rival promoting alternative models of governance’⁹ The EU has to now defend not only its interest but also its values. A three-pronged approach was prepared: Engage with China deeply to promote common views on global issues; seek reciprocity and balance in the economic partnership; and to face up squarely to changed realities and adapt its own rules and industrial and technological prowess. This requires a complete unity among all EU members including those closely engaged with China in the 17+1 paradigm.¹⁰

The 2020 Cooperation Agenda is a common strategy for implementation through their annual summits and other sectoral meetings. It has elaborate sections beginning with Peace and Security; Prosperity including trade, investment, technology, industry, agriculture, infrastructure and transport. Under sustainable development, science & technology, innovation, energy, space, urbanization, climate change and others are covered in details. People to people exchanges are briefly mentioned. The strategy is full of hope but has many eye brow raising parts as they seem to overlook Chinese intent and seem over trusting of an unpredictable power.

EU- US Issues

Europe’s conventional partnership with the U.S.A. is frayed during the Trump period. The early differences over the Transatlantic Trade and Investment Partnership (TTIP),¹¹ over defence expenditure¹², over trade and investment and the bad interpersonal relations¹³ have all been a part of this fraying.

Trump’s efforts to clearly separate Germany particularly and the EU in general, from their coziness with China have fitfully succeeded. Several EU leaders and Merkel have positive economic engagement with China though the latter’s aggressive policy in Asia and concerns with its human rights record also resonate in some EU members. The success of technology led economic development in China is seen as an attractive model in some EU countries. Trump does not find the EU as an ally in his trade war with China. Similarly, he does not take kindly to the EU banning travellers from the USA due to Covid-19. The USA has recently announced, seemingly unilaterally, the withdrawal of some US troops from Germany to be redeployed in Asia¹⁴.

The foreign policy partnership also stands torn with the EU having different views on engaging Iran, Russia or the WHO and Climate Change. The EU wants a stable world on which rules can still be sought to be implemented. The USA seeks a more unilateral thumping of its interests. The US unpredictability is disconcerting to the Europeans. The inability of the USA and the EU to agree on a common G7 strategy, Merkel’s quick dismissal of Trumps invitation and the like are clear signs that the Atlantic Alliance is ruptured.

Many European interlocutors believe the rupture will not be put together even if a Biden administration comes to be.¹⁵ The current hostility of ideas and the lack of appreciation to traditional Atlantic shared values have been hurtful to Europe. The US approach to NATO is often worse than to the EU. Another Trump term may lead the EU to conclude that the USA was not a reliable ally anymore and the threat to the EU was equally from the USA, Russia and China. A Biden win may reduce the strain on multilateral issues but the problems of defence, trade and China may seem more difficult as EU and US interests become more diverse.¹⁶ The Trump administration’s focus on isolationism, protectionism and burden sharing was a reflection of wider changes in Americans’ view about United States’ role in world.’¹⁷

Fears and Solutions

These problems are recurrent ones between the old Allies but their persistence and the poor negotiating skills at work have given them a bigger deficiency that ever before.

The increasing advancement of Chinese technology and its growing cleavage with the USA is making the EU rethink. Germany for instance, has its business executives often debate whether the time is right to choose between the two Big Powers. The’ balancing act between the U.S. and China has been at the heart of Germany’s economic success for a generation. To hear it written off so breezily, with Europe’s own industrial prowess dismissed to boot, was a wakeup call’ for German industry and MPs.¹⁸

Thus, it is Germany under Merkel which chose to have a wider Summit with China where all 27 EU leaders were to be present in Leipzig in September 2020. This was in addition to the normal EU-China annual Summit with the EC. This was the German solution to engage China more robustly on the issues in the 2020 Cooperation Agenda. The Summit was earlier to be held in China but was also postponed due to the Covid-19. The same reason has been assigned to the new postponement but it is evident that lack of responses from China, on issues of economic equanimity and responsibility, are not reassuring. Similarly, the Chinese approach on Climate issues is also unacceptable to the EU. A Summit with unlikely outcomes is not what Merkel would risk during her Presidency of the EU.¹⁹

The EU for the remainder of the year, under the German Presidency will deal with Covid-19, Brexit and economic recovery.²⁰ It will also have to navigate its way through the US-China war on trade, responsibility for Covid 19 and related issues. It cannot give up its Atlantic ally or its systemic rival, China. China’s assault on the dignity of Hong Kong has further shown EU the limits of trust of China. The vigour with which the USA is now pursuing the issue of human rights of the Uighurs in China will make the EU take sides. The EU will find that building a new partnership with either the USA or China on a more equal basis and seek not to be dominated by either, will call for a vast inner resilience and growth along with a policy to work with likeminded countries like India and Japan. The Alliance for Multilateralism²¹ may stand such countries in good stead to guard the global system from being wrecked by either the USA, or China or both.

Endnotes

1. Client and Supplier Countries of the EU27 in Merchandise Trade (value%)http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530 Accessed 27 June 2020
2. How much of Europe does China own? BBC; 20 April 2019 Accessed at https://www.bbc.com/news/world-47886902on [3] 27 June 2020
3. Agatha Kratz, Mikko Huotari, Thilo Hanemann, and Rebecca Arcesati:Chinese FDI in Europe: 2019 Update; 8 April 2020;Rhodium Group Accessed at https://rhg.com/research/chinese-fdi-in-europe-2019-update/on [4] 27 June 2020
4. Andre Tartar, Mira Rojanasakul and Jeremy Scott Diamond: How China Is Buying Its Way Into Europe; Bloomberg 23 April 2018 Accessed at https://www.bloomberg.com/graphics/2018-china-business-in-europe/on [5] 27 June 2020
5. EU-China – A strategic outlook 12 March 2019:European Commission; Accessed at https://ec.europa.eu/commission/sites/beta-political/files/communication-eu-china-a-strategic-outlook.pdf [6] on 28 June 2020
6. EU-China 2020 Strategic Agenda for Cooperation: EuropeanCommission : Accessed at http://eeas.europa.eu/archives/docs/china/docs/eu-china_2020_strategic_agenda_en.pdf [7] on 28 June 2020
7. Opcit note 5. Page1
8. ibid
9. Ibid.
10. This is formally called the “Cooperation between China and Central and Eastern European Countries”
11. George Monbiot:The transatlantic trade deal TTIP may be dead, but something even worse is coming; The Guardian 6 September 2016, Accessed at https://www.theguardian.com/commentisfree/2016/sep/06/transatlantic-trade-partnership-ttip-canada-euon [8] 28 June 2020
12. Sebastian Sprenger :European Union rejects US claims to internal defense coffers; Defense News 16 May 2019. Accessed at https://www.defensenews.com/global/europe/2019/05/16/european-union-rejects-us-claims-to-internal-defense-coffers/on [9] 28 June 2020
13. Julianne Smith:The EU-US relationship is in crisis: The German Times march 2019 Accessed at http://www.german-times.com/the-eu-us-relationship-is-in-crisis/on [10] 29 June 2020
14. Alexandra Brzozowski:Germany receives formal notice on US troop withdrawal plans; Euractiv 11 June 2020, Accessed at https://www.euractiv.com/section/defence-and-security/news/germany-receives-formal-notice-on-us-troop-withdrawal-plans/on [11] 29 June 2020
15. David Whineray:U.S. Relations with Europe Likely to Remain Strained Regardless Who Wins November Election; 4 April 2020, Carnegie. Accessed at https://carnegieendowment.org/2020/04/04/u.s.-relations-with-europe-likely-to-remain-strained-regardless-who-wins-november-election-pub-81493 [12] on 28 June 2020
16. Ibid.
17. ibid
18. Arne Delfs: China Shapes the Fears and Ambitions for Germany After Merkel; Bloomberg 25 June 2020 Accessed at : https://www.bloombergquint.com/politics/china-shapes-the-fears-and-ambitions-for-germany-after-merkel [13] on 27 June 2020
19. EU-China summit: What really happened? DW, 4 June 2020. Accessed athttps://www.dw.com/en/eu-china-summit-what-really-happened/a-53688837on 28 June 2020
20. Gurjit Singh:Germany’s E.U. ‘COVID-19’ Presidency 2020; Gateway House, 10 June 2020 Accessed at https://www.gatewayhouse.in/germany-e-u-covid/on [14] 29 June 2020
21. Germany launches Alliance for Multilateralism; DW 26 June 2019 Accessed at https://www.dw.com/en/germany-launches-alliance-for-multilateralism/a-50600084 [15] on 29 June 2020

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