A Transatlantic Geoeconomic Alliance against China?

Yixiang Xu

China Fellow; Program Officer, Geoeconomics

Yixiang Xu is the China Fellow and Program Officer, Geoeconomics at AGI, leading the Institute’s work on U.S. and German relations with China. He has written extensively on Sino-EU and Sino-German relations, transatlantic cooperation on China policy, Sino-U.S. great power competition, China's Belt-and-Road Initiative and its implications for Germany and the U.S., Chinese engagement in Central and Eastern Europe, foreign investment screening, EU and U.S. strategies for global infrastructure investment, 5G supply chain and infrastructure security, and the future of Artificial Intelligence. His written contributions have been published by institutes including The Chinese Academy of Social Sciences, The United States Institute of Peace, and The Asia Society's Center for U.S.-China Relations. He has spoken on China's role in transatlantic relations at various seminars and international conferences in China, Germany, and the U.S.

Mr. Xu received his MA in International Political Economy from The Josef Korbel School of International Studies at The University of Denver and his BA in Linguistics and Classics from The University of Pittsburgh. He is an alumnus of the Bucerius Summer School on Global Governance, the Global Bridges European-American Young Leaders Conference, and the Brussels Forum's Young Professionals Summit. Mr. Xu also studied in China, Germany, Israel, Italy, and the UK and speaks Mandarin Chinese, German, and Russian.


yxu@aicgs.org | 202-770-3262

The EU’s impending announcement of an anti-subsidy investigation into Chinese steelmakers at the October EU-U.S. summit is among the latest evidence of the expanding fissure in the global economy along hardening geopolitical lines. Not only have the United States and the European Union firmly established China as a strategic competitor and systemic rival, but U.S. and EU policymakers are also increasingly looking to reshape economic relations with China using national security justifications. Export controls, foreign direct investment screening measures, restrictions on Chinese-made technologies, and industrial policy are being adopted with broad political consensus on both sides of the Atlantic. They are aimed at reducing supply chain reliance on China and Chinese ownership in domestic industrial and infrastructure assets, competing with Chinese products and services in strategically important sectors, and, in cases such as U.S.-led export restrictions on semiconductor equipment, eroding and degrading China’s technological and innovative capacity.

These changes are taking place at a time when the United States is intensifying its efforts to push back against Beijing’s security and diplomatic policies and to do so with the help of allies and partners. The transatlantic relationship has indeed undergone remarkable revitalization amid Russia’s invasion of Ukraine, bringing about a “stronger than ever” NATO. But could we see a transatlantic geoeconomic alliance against China?

To start, while there is significant convergence in transatlantic geoeconomic thinking toward China, especially on the issues of military-civil fusion, critical technologies, and trade defense, the United States is actively seeking to reshape economic dynamics in the Asia-Pacific region in order to counter China’s expanding security footprint. This focus has led Washington to quickly conclude targeted bilateral deals with close regional allies, such as the U.S.-Japan Critical Mineral Agreement (CMA), and push to establish a U.S.-centric regional economic pact under the Biden administration’s Indo-Pacific Economic Framework (IPEF).

In contrast, Brussels’ strict adherence to its comprehensive policy development process as well as its own strategic visions mean that negotiations of bilateral agreements often take longer. The EU announced the inclusion of high labor standards and environmental protection as key elements in its CMA negotiations with the United States, which are currently absent from the U.S.-Japan CMA. At the same time, the lack of a U.S.-EU free trade agreement (FTA) creates frictions for transatlantic cooperation as new industrial policy kicks in. The U.S. Inflation Reduction Act’s (IRA) raw critical materials and electrical vehicle battery components requirement, for example, only grants EV tax credits to products made by countries with FTAs with the United States, frustrating Europeans. If ambitious industrial policies, like the IRA and the EU Net-Zero Industrial Act, continue to focus mainly on domestic capacity building by means of subsidies, they risk wasting fiscal resources in the name of competitiveness and stoking transatlantic tensions.

While the United States and the EU share a clear vision of geoeconomic competition with China, they must work through their differences in approach and coordinate more effectively over implementation.

The EU has also moved more slowly than the United States to “de-risk” from China. Although Brussels has been working toward tightening export control and foreign direct investment oversight, as well as adopting potential outbound investment screening measures, implementation in the bloc leaves much to be desired. FDI screening remains a patchwork with initiatives and decisions at the whim of individual national governments. Absent EU-wide mandates and targeted fiscal support, EU member states are struggling to replace Chinese-made equipment and systems in their critical infrastructure, most notably telecommunications equipment from Huawei and ZTE.

Well-meaning U.S. and EU policies designed to de-risk from and compete with China may also bring additional challenges to a world economy that is already fracturing along geopolitical lines. Developing countries, especially in the Asia-Pacific region, that have profited from trade with the West and aspire to ascend the global value chain like their neighbors in the golden era of global free trade are increasingly negatively impacted by Western sanctions, export control restrictions, and supply chain shifts toward the West. They are being courted by China to establish U.S.-free supply chains and alternative technology platforms as well as parallel tech standards. Evidence suggests that Beijing is making good progress in regionalizing supply chains, and Chinese technologies continue to penetrate countries including Indonesia and Saudi Arabia, important regional partners for the United States and the EU.

These countries’ efforts to position themselves to benefit from evolving global trade patterns illustrate the overlapping and porous nature of geoeconomic alliances and partnerships amid intensifying strategic competition between China and the West. In many cases, hard economic interests, much more than shared values, dictate the contours of geoeconomic partnerships. However, without traditional FTAs, new arrangements for these partnerships may result in agreements not being wholly enforceable, as withdrawal of non-tariff concessions such as joint financing (as proposed in the Action Plan of the IPEF Supply Chain Resilience Agreement) can be slow and messy. Judgment of non-compliance could be opaque and unilateral without formal adjudication processes. It is therefore relevant to ask whether an increase in the use of these new arrangements could further undermine the rules-based global trade order and make the WTO look even more powerless.

Thus, while the United States and the EU share a clear vision of geoeconomic competition with China, they must work through their differences in approach and coordinate more effectively over implementation. The effects of existing and pending Western trade and industrial policy instruments toward China in the global context also necessitate not only more nuanced, localized understanding of geoeconomic partnerships but also a better thought-out, more mature vision for the global trading system.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.