[Ferdinando Giugliano] Trump’s trade war pushes Europe toward China

The trade fight between the US and China is posing a dilemma to the European Union: Should the world’s largest trading bloc pick a side? And, if so, which one?

In theory, the US is the more natural ally for Europe: The two have cooperated closely since the end of World War II. And yet, Donald Trump’s slipshod approach to trade diplomacy risks pushing the EU into the arms of China. The EU’s main strategic interest in this fight is to ensure that the multilateral trading framework -- including the World Trade Organization -- survives. At the moment, this concern is most shared by Beijing, not Washington.

In many ways, the US and the EU are in a similar position with regard to China. The two economies are both net importers: Their trade deficit amounted respectively to $351 billion and $178 billion. Of course, to some extent the trade gap reflects the different stages of development of these countries: Large chunks of manufacturing have moved to China, to benefit from lower wages, while domestic consumption has only recently begun to rise. Even accounting for different stages of development, however, Western countries have long complained that Beijing is subsidizing its domestic industries unfairly.

Washington and Brussels also share concerns with regard to China’s technology transfer policy: They accuse Beijing of seeking to misappropriate intellectual property, for example by taking over Western high-tech firms. This was Trump’s justification when he unveiled last week tariffs on around $50 billion worth of annual imports from China. The US also launched a case at the WTO, which the EU and Japan have since joined.

But while the EU and the US are natural partners, Trump’s strategy risks depriving Washington of a strategic ally. The president has repeatedly criticized the EU for its trade policy which, he argued, is “very unfair” to the US. Trump only granted a last-minute exemption to the EU on his tariffs on steel and aluminum. Moreover, this exclusion is temporary, as Trump is seeking to put pressure on European countries to make concessions in other areas of trade.

Most importantly, the US administration is showing disdain for the multilateral trading system which it contributed to building. On Friday, Trump said the WTO was “unfair” to the US. His proposed tariffs have stretched the WTO framework to its limits.

Conversely, China is seeking to stick to the rules of the multilateral trade game. President Xi Jinping has repeatedly presented China as a staunch defender of globalization, including at a historic speech at the World Economic Forum in Davos last year. China is now challenging the US tariffs through the WTO. That stance fits well with the EU’s own opposition to countries going it alone when it comes to trade disputes. Last year, Cecilia Malmstrom, the EU trade commissioner, compared a world without the WTO to the “Wild West.”

Beijing’s courtship of the EU has intensified lately. Zhang Ming, China’s ambassador to the EU, wrote last week that “China and the EU, as major members of the WTO and comprehensive strategic partners, should take a clear stance against protectionism.” This smacks of hypocrisy, but may be all the EU can rely on at this stage.

There are many areas where an EU-China alignment is possible: Beijing is seeking strategic partners for its Belt and Road Initiative, a development strategy aimed at building better infrastructure between Asia, Europe and Africa. Several countries, including France and Germany, have expressed an initial interest in the project, and this could be stepped up.

Similarly, European countries could take a more active role in the Asian Infrastructure Investment Bank, China’s development bank which aims to support the building of infrastructure in the Asia-Pacific region. The US has not joined this initiative, as it sees it as a rival institution to the International Monetary Fund and the World Bank. Most European countries have already chipped in, and could invest more.

We are a long way from seeing the EU pivot away from the US and toward China, of course. The EU still has plenty of reservations about Beijing’s trade policy. From the defense of liberal democracy to broad foreign policy priorities, there is much more to the transatlantic bond.

But Trump risks fast consuming the great reserves of trust and soft power which the US has built toward Europe since the war. That could be just as damaging as the economic costs of Trump’s tariffs on the US and world economy.


Ferdinando Giugliano
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. -- Ed.

(Bloomberg)