U.S. and EU Trade Relations with China: Increasingly Similar, and Increasingly Conflictual?

Tilman Krueger

Introduction

Trade is a hot topic in international relations again, much more so than in previous years. Still struggling with the negative effects of the most recent global financial crisis, political leaders throughout the world have stepped-up efforts to increase the trading activities of economic operators in their territories. At the same time, developed economies like the United States (U.S.) and the European Union (EU) find it increasingly difficult to cope with what they perceive of as unfair competition from emerging economies.

The rise of China has been particularly drastic—as have the reactions to this rise.[1] Unfair competition as a result of dumped and subsidized products; the manipulation of the Chinese currency; unsafe products and violated intellectual property rights; abuses of human rights and the destruction of the environment—these are only some of the concerns frequently voiced in America and Europe.

Mainly for domestic reasons and different dynamics underlying domestic trade policy-making, the U.S. and the EU reacted differently to Chinese challenges in past years. More recently, however, the EU may be increasingly moving toward a U.S.-type approach regarding its trade policy toward China. While this may help to deepen transatlantic trade relations, it may also cause new tensions in the context of the multilateral trading system and decrease the efficiency of EU trade policy-making.

U.S. and EU Trade and Investment Relations, and Issues, with China

In recent years, the U.S. and the EU found it difficult to dominate international trade governance as they did before. Emerging markets such as Brazil, India, and China (the so-called BICs) coordinated among themselves, engaged with other developing countries, and successfully challenged U.S.-EU dominance in the Doha Round of WTO trade negotiations.[2] They were also increasingly active in challenging the U.S. and EU before WTO dispute settlement.[3] Maybe most importantly, their growing trade shares as major importers and exporters have made the BICs real economic competitors for the previously largely unchallenged powers of the U.S. and EU; the sheer potential of the formers’ markets has made them attractive and challenging for American and European competitors at the same time.

The rise of China has been particularly drastic and a number of challenges arose for the U.S. and EU in their trade and investment relations with China. The U.S. and EU (all member states combined) have a negative trade balance with China and the three of them are among each other’s top importers and exporters.  See slide 3. [4]

Numbers relating to Chinese foreign direct investment (FDI) tell a similar story: while Chinese FDI into the U.S. and EU was only marginal before 2008, both markets have attracted more and more Chinese FDI ever since. The U.S. was the main target country before but Europe attracted around twice as much FDI from China in 2011 and 2012.  See slide 4. [5]

Clearly, these numbers are not specific enough to allow for any detailed conclusions about the driving forces underlying U.S. and EU trade relations with China. They show, however, that the volume of trade and investment flows would suggest similar U.S. and EU approaches toward China. Indeed, similar items came to dominate American and European trade policy agendas toward China: Chinese currency manipulation as well as U.S. and EU trade deficits with China concern many on both sides of the Atlantic, who fear that American and European companies cannot compete with cheap Chinese products and may be forced to go out of business. Chinese violations of intellectual property rights through piracy and counterfeiting make it difficult for American and European companies to protect their trademarks, copyrights, and innovations. Finally, inward investments are greeted with “both excitement and anxiety” in America and Europe, “as the new investors are still unknown and the impacts of their investment unclear.”[6]

Yet, even though the U.S. and the EU increasingly felt the need to defend themselves from similar challenges, they often chose somewhat different paths in the past. In general, the response was much more aggressive in the U.S., where China’s rise provoked much more concern than in Europe; whereas the U.S. engaged in an approach that sought to “escalate to protect,” the EU attempted to “compromise to grow.”

Different Answers to the Chinese Challenge: “Escalate to Protect” vs. “Compromise to Grow”

To understand the dynamics, it makes sense to look at how trade policy is made in the U.S. and in the EU. In the U.S., a number of China-related items feature prominently on trade policy agendas that are virtually non-existent on European priority lists. First, the U.S. has strong geopolitical, military, and foreign policy stakes in Asia and the Pacific. For the U.S., China is not only an economic competitor but also a challenger to its influence in the region.

The geopolitical, military, and other foreign policy concerns that follow from this situation often dominate U.S.-Chinese relations and make U.S. trade policy highly politicized and relatively messy: members of Congress, the administration, and the different departments and agencies all try to influence trade relations, albeit not only for trade-related policy goals. The interdependency of trade and foreign policy toward China is even institutionalized in the form of the “Strategic & Economic Dialogue” the U.S. holds with China.[7]

The recent conflict on cyber-attacks between the U.S. and China illustrates how closely trade and other concerns can be intertwined—and how easily they can lead to a deterioration of trade relations. Presented with information indicating government-sponsored Chinese cyber-attacks against U.S. public and private actors, the U.S. threatened to retaliate, inter alia, with trade restrictions.[8]

As a result, U.S. trade policy is frequently high-jacked for electoral purposes, especially in the case of China. Just note the rhetoric during but also after U.S. elections and the frequent references to losing jobs overseas because of outsourcing, subsidized Chinese competition and currency manipulation, or state-driven inward Chinese takeovers of U.S. companies. To satisfy these internal demands for conflict, U.S. trade policymakers have frequently adopted strategies aimed at protecting U.S. foreign policy and security interests, industries, assets, etc.—and have more or less willingly taken an aggressive stance and further escalating steps.

In the EU, where the member states remain in the driving seat on almost all foreign policy matters but where trade policy is an exclusive competence of the European Commission, a similar degree of politicization can usually not be observed. The separation of national foreign policy-making from European trade matters usually prevents the latter’s politicization and exploitation for electoral purposes within EU member states.

Instead of escalating trade disputes with China, those formulating and executing EU trade policy preferred negotiated settlements in the past. Wary of possible Chinese counteractions, the European Commission refrained from harsh rhetoric, spiraling allegations, or the frivolous imposition of trade defense instruments such as antidumping duties or safeguard measures. Far from enjoying uncomplicated trade relations with China, trade with and investment from China was typically seen more as a chance than a threat. Especially in light of Europe’s own difficult economic situation, the EU’s overall strategy was in many ways “compromise to grow”: it welcomed Chinese investments in Europe and sought to keep Chinese markets open to be continuously able to export European goods.  See slide 8. [9]

The different approaches of the U.S. and the EU toward China caused, among other things, different amounts of trade disputes before WTO dispute settlement. Following China’s accession to the WTO in 2001, the U.S. and China clashed more often and violently than the EU and China. The figure also shows, however, that the EU appears to catch up in terms of its aggressiveness against China; more recently, the EU left behind its previous reluctance and increasingly initiated formal dispute settlement proceedings before the WTO.

A New Trend?

Notwithstanding previous conflict patterns, there are now more tensions also between the EU and China and there are signs that the EU is increasingly moving toward the U.S. approach. At least in certain ways, the EU now acts more U.S.-like in its trade relations with China—sometimes in parallel to U.S. efforts, sometimes even jointly with the U.S., and sometimes on its own.

For once, the EU has stepped up its presence in the region around China. It has agreed on a new generation free trade agreement with South Korea and, in parallel to the U.S.’ negotiations toward a comprehensive Trans-Pacific Partnership (TPP),[10] the EU has, in April 2013, launched its own negotiations for a free trade agreement with Japan.[11] While both types of initiatives are not necessarily directed toward China, they indicate a stronger focus on the region by both the U.S. and the EU.[12]

More relevant are joint actions of the U.S. and the EU against Chinese export restrictions on certain raw materials that are used in several high-tech industries. First, they launched concerted disputes before the WTO’s dispute settlement bodies in 2009. After they won before the WTO’s Appellate Body in 2012, they initiated a new dispute concerning Chinese export quotas on rare earths, tungsten, and molybdenum. Like the one on raw materials, this new dispute focuses again on the accessibility of products that are important for industries in the U.S., the EU, and elsewhere.[13]

Even more pertinent, and just like the U.S. earlier, the European Commission recently investigated and found Chinese dumping on solar panels and imposed relatively high antidumping duties on these products, even against the explicit opposition from within some EU member states. The Commission also announced tariffs on allegedly dumped pipe fittings and ceramic tableware and threatened similar actions on Chinese imports of mobile telecommunications networks and further investigations are pending that are more than likely to result in even more EU-China trade disputes.[14]

Observers now warn that the recent frequency and intensity of EU-China tensions, “confrontation could very easily escalate into a trade war,” with “serious and dire economic and social consequences, not just for the regions involved.”[15] What fuels these concerns further are plans of the European Commission to change the EU’s trade defense instruments to strengthen its might in future trade disputes with China.[16] In essence, it is seeking increased powers to oblige European companies to cooperate whenever it conducts trade investigations. So far, European industries often refrain from close cooperation with the Commission out of fear for Chinese retaliatory measures.

Finally, resulting from a high-level initiative of political leaders on both sides of the Atlantic, the U.S. and the EU have started to negotiate a Transatlantic Trade and Investment Partnership (TTIP) aimed at deepening what is already a highly integrated bilateral trade relationship.[17] Among many other issues on the agenda, the U.S. and the EU aim at setting common rules and standards on subsidies and state-owned enterprises, the protection and enforcement of intellectual property rights, and so on—there can be no doubt that these goals were drafted with China in mind. If successful, the U.S. and EU hope for a global magnetic effect of their initiatives: they argue that, once progress is made among a group of countries, others will see the benefits of the agreements and join, preferably in the multilateral framework of the WTO.

To be sure, major differences between U.S. and EU approaches remain. The EU has no intention to bring foreign policy into its trade policy toward China and the individual European countries remain primarily responsible for dealing with security issues. Also, Europe is still more preoccupied with itself rather than the rest of the world, especially Asia.

Yet, an increasing frustration within Europe over Chinese trade practices appears to have resulted in a new European willingness to engage in conflicts with China. Internally, demands of import- and export-competing industries are, as evidenced by the solar case, currently solved in favor of the former rather than the latter. EU trade policy, especially toward China, has become more politicized and many European trade policymakers and producers now seem to question their previously more lenient response to the Chinese challenge. Instead of “compromising to grow” with China, the EU thus appears increasingly willing to “escalate to protect.” What are some potential implications of this shift (provided, of course, it is sustainable)?

Implications

The more aggressive stance of the EU and increasing reliance on trade defense measures in its relations toward China may be good and bad news at the same time. For U.S.-EU relations, the EU’s more U.S.-like approach may help the two to agree more easily in the TTIP negotiations and foster transatlantic relations more broadly. While they shared the common goal of bringing China toward a true market economy that plays by the rules of the multilateral trading system already before, they now seem to have found a common strategy as well: defending themselves aggressively against what they perceive of as unfair existing competition and setting common and exclusive rules and standards.

At the same time, an increasing reliance on trade defense instruments and the setting of new standards intentionally designed with China (and others) in mind can easily be perceived as protectionist and discriminatory. In line with this, a recent report, published just before the start of the recent G8 summit, highlights “protectionism’s quiet return”; it finds that “EU members top three of the four rankings of most protectionist jurisdictions” and that “China is being harmed by protectionist measures more frequently than any other jurisdiction.”[18] It will be interesting to see then whether TPP and TTIP negotiations result in trade facilitation or, actually, diversion.

Lowering trade and market access barriers in Asia, Europe, and the U.S. only for economic operators in countries participating in the TPP and the TTIP discriminates, at least temporarily, against operators in other jurisdictions.[19] While the U.S. and the EU hope for a global magnetic effect of their bilateral and regional initiatives in the long run, third countries have, at least for the moment, no say in the creation of the new rules. China and others dislike this already for the WTO, which was very much the product of a transatlantic agreement. Thus, for multilateral trade, successful TPP and TTIP negotiations will only be good news if they actually lead to a revitalization of the global system. If not, they may well lead to a further deterioration not only of U.S. and EU bilateral trade relations with China but, just like in the context of the WTO’s Doha Round, push the BICs even further away from the U.S. and the EU.

Finally, a continued politicization of EU trade policy may hamper the EU’s abilities on the global stage. For some time, those responsible within the European Commission dominated the EU’s preference and strategy formation on trade matters. But with a stronger role of the European Parliament, a renewed interest of the member states and harsher and more publicized clashes between different sectoral interests also in the EU, the bloc’s voice is more shattered.[20] The increasing messiness of its policies may thus be another area where European trade becomes increasingly similar to the U.S.