Collateral Damage In Europe?

Trade war can have collateral damage in EuropeTrade war can have collateral damage in Europe

Jens Bastian via Macropolis | Like a deer caught in the headlights of an oncoming truck, EU member states and candidate countries aspiring to join the club in Brussels are watching with growing trepidation the escalating trade conflict between the United States and China. For many countries in Europe the two feuding states are among their largest trading partners after the EU.

Their trepidation is not only informed by the imposition of tariffs on numerous product categories by the Trump administration and tit-for-tat retaliation by the Chinese government. How these will affect countries in Europe, many of which have growing trade volumes and corresponding imbalances with China is anybody’s guess at present. The anxiety in European capitals from Athens to Berlin, Budapest and Belgrade concerns the question of who among the established superpower and the rising one is the more reliable and predictable trading partner in the future?

Over the course of the past decade China has become a formidable investor in and credit provider for major infrastructure projects across the European continent. Flagship initiatives such as the acquisition of a majority stake in the Port of Piraeus in Greece, the building of a “friendship bridge” in Belgrade over the Danube or highway construction in Montenegro underline the growing footprint of China in Southeast Europe.

Contrast this focus on infrastructure connectivity in Southeast Europe with China’s acquisition strategy in Germany, France, the UK and Italy. Flagship investments – at times undertaken in a less than transparent manner – in German car manufacturing, nuclear power plants in the UK, energy companies in France or port infrastructure in Italy underscore the sectoral diversity of Chinese investors and the strategic vision that lurks behind such initiatives. In a word, in different regions of the European continent economies are becoming ever more entwined with China.

Thus, it cannot come as a surprise that governments and business associations across Europe are sounding the alarm about the potential consequences of an escalating trade war between the decision makers in Washington DC and Beijing. The growing integration of Chinese lending and infrastructure initiatives into the political economies of Europe has established linkages and dependencies that have the potential to be disruptive as a consequence of bilateral trade conflicts in other parts of the world.

Put otherwise, negative spillover effects can materialise in certain product categories and services through Sino-European supply chain networks and financial interdependency. But the possible damage extends beyond the material consequences and risks. They translate into a more comprehensive re-think about the nature of trade relations between European countries with the US and China. One way or the other, EU members states and candidate countries are caught in the trade war crossfire.

The possible consequences of this crossfire are also dire because of the manner in which this trade escalation is being formulated, particularly in Washington by the Trump administration. China hawks such as John Bolton, President Trump’s new national security adviser now co-define policy vis-à-vis Beijing. Bolton’s reading of China is primarily informed by national security parameters and then using these to achieve trade concessions. But this narrative of invoking national security in order to create negotiating leverage is not shared by transatlantic partners in European capital cities.

How could they thus minimize collateral damage? Any answer to this challenge depends on two aspects. For one, in Europe the standard operating procedure continues to rest on the separation between commerce and national security. Secondly, a European response is subject to the amount of leverage individual countries or multi-lateral arrangements could muster. Seen from this perspective, it is obvious that Germany and France are in a better point of departure than say Greece and Hungary. Moreover, pooling resources through European institutions in Brussels stand a better chance to be heard in DC and taken seriously in Beijing than going it alone.

In theory such unity of purpose on the continent sounds convincing. But developments of the past 12 months rather point to growing obstacles and greater divergence when seeking to formulate joint reactions through European channels. Confronting the policy of imposing new tariffs and counter-tariffs among EU member states is hampered by centrifugal evidence on the ground.

To illustrate: Hungary under the re-elected Prime Minister Victor Orban considers China a viable alternative to the EU as regards financing options for infrastructure projects. Greece did not support its EU peers in the Human Rights Council in Geneva in July 2017, refusing to condemn China for its human rights record. The 28 EU member states do not speak with one voice as regards the decision of the Court of Arbitration in The Hague on the South China Sea. Various countries in the EU have called for the termination of economic and trade sanctions against Russia because of its annexation of Crimea. In a word, Europe is not a paradigm of brothers and sisters in arms on major foreign policy challenges. Why would it now be otherwise with the Sino-American trade escalation? Faced with a stark choice between trading freely with the US or China, all EU members would not give the same answer.

While it is true that European countries cannot afford to be mere bystanders waiting for the resolution of trade conflicts between the US and China, they exhibit fault lines in a growing number of policy areas that make a common approach ever more difficult. Neither Washington nor Beijing have created any of these fault lines. But both can leverage such divisions for their own strategic benefit in the emerging trade conflict.

As the European economy has started to emerge from a multi-year crisis, export capacity is a key parameter for countries to stabilise their fragile recovery. Thus, the last thing countries in Europe now need is a trade conflict between the two global economic superpowers that reverberates through sectors and businesses on the continent. However, some countries whose economies have started to grow again faster and longer are in a much better state to confront adverse spill over effects of trade conflicts than say Greece, Portugal or Italy.

Finally, we must also take into consideration to what degree the Sino-American trade conflict indirectly contributes to accelerating the rebalancing of the Chinese political economy. In other words, the move to reduce the impact of the secondary sector (predominantly state-driven investment in infrastructure) in favour of domestic consumption – a gradual process underway since 2015 – could receive added political urgency through the tariffs being imposed by the Trump administration on product categories ranging from aluminium to steel, electronics, aerospace and machinery products.

China is in play and won’t go away in Europe. For policymakers in Brussels, Berlin, Athens and Budapest the escalating trade confrontation between the US and China will challenge the prospects for a sustainable economic recovery in 2018. But the collateral damage of this ongoing dispute could hurt German car manufacturers exporting to China, delay lending by Chinese banks for infrastructure projects in Southeast Europe, and ultimately broaden the fault lines emerging within Europe and vis-à-vis Washington DC and Beijing.