The world’s two biggest economies – the United States and China – have been engulfed in a trade war for the last couple of years. Like most Western countries, the United States denounces China for stealing US intellectual property, criticises it for engaging in unfair competition on world markets through subsidies and state-owned enterprises (SOEs) and finally laments insufficient access for US firms to the Chinese economy. In short, the US argues that China takes advantage of the rules-based trade regime to grow and develop but does not assume its responsibility as an economic powerhouse for keeping the world economy open by playing by the rules. China, in contrast, rejects these criticisms and points to its status as a developing economy to justify inter alia its fairly closed economy and the key role of SOEs.
To amplify pressure on China to change its course, the US has increased tariffs on Chinese imports and locked out Chinese firms such as Huawei from key sectors, arguably over security concerns. Recently, US policy-makers floated the idea of limiting the access of Chinese firms to US financial markets. The US furthermore has been pursuing free trade agreements with countries in Asia and Oceania which aim at promoting US interests in China’s wider neighbourhood.
The US rationale is to make China’s trade partners sign up to the US’ vision and rulebook for the world economy in order to limit China’s influence on the Pacific Rim region, which is likely to be the motor of the world economy in the 21st century. China, in turn, has determinedly countered US measures. Most importantly, it imposed retaliatory tariffs on US imports and notably against US agriculture. These developments primarily hurt Chinese and US consumers and firms, but according to the IMF also cast a dark shadow over the world economy and global growth.
The US and Chinese governments have recently started negotiations to resolve their differences. Many policymakers and businesses around the world put high hopes on these talks to resolve the conflict. These hopes are, however, misplaced. First, China can barely satisfy US demands without fundamentally changing its political system and political economy. The US-China trade war is furthermore only at first sight about economics and trade. In reality, it is a geopolitical confrontation.
The US has promoted China’s integration into the world economy since the 1980s assuming that China would slowly transition toward a liberal capitalist democracy and thus become more like itself. This, however, has manifestly not happened. In Washington, policymakers have thus come to reassess China as a geopolitical competitor and review their strategy vis-à-vis the country. The US government now seems determined to disentangle its close relationship with China, notably in strategic sectors such as high tech, in order to delay China’s ascendance as the leading economic and political power in the world. In other words, the US has little interest in deescalating its conflict with Beijing. The US-China trade war is here to stay for the foreseeable future.
What are the risks and opportunities of this new geoeconomic situation for the EU and the United Kingdom? The EU faces three challenges. First, the US-China trade war limits global growth prospects and may push fragile economies notably in the EU into a recession. A recession is quite likely to rekindle economic and political tensions among EU member states and to complicate the various reform projects of the incoming von der Leyen Commission.
Second, the trade war puts considerable stress on the World Trade Organization (WTO) and rules-based global economic governance. US and Chinese actions indeed are hardly compatible with WTO law. Political power plays and bargaining may become more important in global economic governance in the coming years. The EU, however, is accustomed to and highly effective in pursuing its objectives through legalistic and technocratic negotiations within multilateral and regional fora. The EU – and notably the European Commission – may have to adjust and learn how to operate in a different logic and context where geopolitics play a greater role.
Third, the trade war and broader US-China tensions are likely to escalate the geopolitical situation in the Middle East. The US used to import a significant share of its oil and gas from this region and has therefore established a strong military and political presence in this part of the world. Due to the discovery of shale gas and oil, however, the US has turned into a net energy exporter in recent years and is now independent of the Middle East’s energy reserves. China, on the other hand, has grown highly dependent on Middle Eastern energy but plays currently no noteworthy political or military role in the region. The US may use its influence over the Middle East to put further pressure on China. Growing geopolitical tensions in the Middle East, in turn, are likely to have important implications for European politics, notably in terms of security and international migration.
The US-China trade war also creates new opportunities for the EU. China may need the EU even more as an export market and partner for its technological development. The EU may thus find it easier to negotiate an ambitious investment agreement with China to ensure access of European firms to still protected sectors such as financial services, infrastructure or utilities. What is more, the EU may position itself as an intermediary between Beijing and Washington to increase its political influence in the world. The incoming von der Leyen Commission seems indeed determined to strengthen the EU’s profile in world politics.
The risks and opportunities that the United Kingdom faces are similar yet often more pronounced than for the EU. First, the British economy already suffers from the uncertainty tied to Brexit and fragile global growth would undoubtedly put further stress on the UK. Second, a weakening of the WTO and rules-based global economic governance may hit the UK particularly hard after Brexit. As a small open economy, the UK is per se more reliant on multilateralism and an open world economy than large economies such as the US, EU or China.
After Brexit the UK will further cease to be a member of the EU’s approximately seventy free trade agreements with third countries. London reportedly only managed to “roll-over” (i.e. replicate) some fifteen agreements so far. Free trade agreements provide better market access than the WTO Agreements and create an additional insurance policy for governments against protection in times of economic downturns. In the absence of a dense network of free trade agreements and a weakened WTO, the United Kingdom may face a harsh global economic environment in the years to come.
The British government – much like the EU – may clearly attempt to use growing tensions between the US and China to gain better market access in China and to attract Chinese companies and capital to the UK. In case Washington indeed seeks to limit Chinese access to US financial markets and high tech, the City of London and British research institutions may position itself as a substitute and profit from these developments.
Following Brexit, however, the United Kingdom needs to intensify its relationship with the US, which may put pressure on London to align with US policies and carry some of the costs of US policies vis-à-vis China. Washington may insist that the United Kingdom also limits Chinese access to British financial markets and research infrastructure. Hence, it remains to be seen whether the United Kingdom can take advantage or whether it will be pulled into this trade war. An opportunity and indeed vital strategy for the British government then seems to be to position itself as a middleman to mediate and ease tensions between the US and China as far as possible.
In sum, the US-China trade war is ultimately about global economic and political leadership and thus is unlikely to be resolved anytime soon. The EU and the United Kingdom face important challenges and opportunities in this new context. One way to limit potential negative externalities could be for EU and British policymakers to step up their efforts to reform and strengthen as far as possible the WTO and rules-based global governance to mediate current protectionist tendencies and the growing role of power politics in the world economy.
- This blog post appeared first on LSE Europp.
- This blog post gives the views of its author(s), not the position of LSE Business Review or the London School of Economics.
- Featured image by The White House, Public domain
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Robert Basedow is an assistant professor in international political economy at LSE’s European Institute.