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China and Europe have converging interests in upholding the legitimacy of international trade.

By Shi Zhiqin for The Diplomat

July 09, 2018

July 2018 will be an eventful month for international politics. On July 12, NATO allies will converse on the future of the Western alliance amidst U.S. President Donald Trump’s diatribes against the Europeans. Days later, on the 16th, EU leaders will attend the 20th China-EU high summit in Beijing, with the international trade order at stake.

As the trade war has now officially kicked in, the China-EU summit provides an unprecedented opportunity for a unified China-EU front upholding the legitimacy of international trade against the paranoia of unilateralism that could take the world into another great depression. Three key strategic insights should motivate China and the EU to act as natural partners in support of globalization and predictable open markets.

First, China and the EU have no security competition. This is very dissimilar from China-U.S. relations. The ongoing dispute between Washington and Beijing over the size of the trade deficit is just the tip of the iceberg, one manifestation of deepening securitization in the relationship. The U.S. strategic community looks into a crystal ball and sees a rising China being increasingly able to translate its massive economic mass into military capability and hence challenge the United States’ hegemonic posture in East and Southeast Asia. Inspired by fear of a future omnipotent China, the United States is now attempting to prevent China’s growth from a position of strength, and most importantly, slow down China’s innovation capacity by targeting the “Made in China 2025” plan.

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The EU has no similar fear as its security presence in Asia is limited and its diplomatic norms provide ideational support for peaceful resolution of disputes instead of inevitable security dilemmas. The EU, as the saying goes, is “an economic giant but a geopolitical dwarf.” While French President Emanuel Macron has been determined to promote a closer European security union in the form of Permanent Structured Cooperation (PESCO) and an alliance of the willing, the EU’s security construct remains embryonic and will take much time to mature. To be sure, France and the U.K. have declared their keen interest into supporting safe and open navigation across the South China Sea but this issue is not front and center with their bilateral relationship with China. Thus, both China and EU have convergent interests in supporting free trade without projecting economic development into a zero-sum mentality centered on imaginary future potential military capabilities.

Thus Brussels and Beijing have a clear interest to declare their strong support for multilateralism and the World Trade Organization (WTO) as the prime legal vehicle to resolve trade disputes. Making a strong declaration in support for the WTO at the forthcoming China-EU summit could have an immediate stabilizing impact for global markets. The EU and China should stress that no matter how incomplete, the WTO remains a supranational organization able to resolve trade disputes based on rules and principles that form the backbone of international commercial law. China has since its 2001 entry abided all of WTO’s decisions and continues to support its reform in bona fide so that the organization becomes more complete, reflecting the long term economic interests of both developed and developing countries.

Second, the EU and China could have convergent interests in macroeconomic coordination, which is essential for addressing structural trade imbalances. Macroeconomics is about aggregate numbers within national economies. China saves too much and consumes too little; the United States consumes too much and saves too little; the EU is somewhere between the two. If global trade is leading to deficits and surpluses, then macroeconomic conditions are usually the prime cause – and not trade barriers, as most tariffs in recent years have been greatly reduced. This means that Trump’s recent fiscal profligacy expressed both in increased government spending and substantial tax cuts will therefore exacerbate the trade deficit as it will boost U.S. consumption due to higher disposable income.

While sovereignty is crucial, the policy decisions of big economies have repercussions for everyone and could aggravate global imbalances. In that sense, China and the EU have a shared interest to closely monitor the impact on the global economy of domestic fiscal and monetary reforms and work with other partners in harmonizing macroeconomic policies, perhaps through the agenda of G-20.

Third, the EU and China have a prime opportunity to work on the regulatory environment of trade and accelerate a Bilateral Investment Treaty (BIT). During the recent 7th annual EU-China High-Level Economic and Trade Dialogue between the vice president of the European Commission, Jyrki Katainen, and the vice premier of China, Liu He, earlier in June, the two sides declared their willingness to exchange detailed market access offers by mid-July and speed up the negotiations for a BIT. If China and the EU reach a deal to regulate investments, this would add a very significant pillar of stability to the global trade system at a time of nascent protectionism and virulent anti-trade populism.

To be sure, Chinese companies enjoy unencumbered access to capital provided by state owned banks and thus are able to competitively bid for the EU’s crown jewels. European companies lack such ability. In addition, the EU commission is not provided with the capacity to screen Chinese investors. In a successful BIT these issues should be comprehensively and bindingly resolved.

As Vasilis Trigkas, a fellow at the Tsinghua BRI Strategy Center has put it, “a balanced China-EU BIT could serve as a model for a prospective commercial rapprochement between Beijing and Washington. A China-EU BIT which levels the playing field could offer Mr. Trump a smart way out of a trade conflict with China without undermining his image as an artful negotiator and decisive statesman.”

China and the EU account for more than a third of global GDP and almost half of global trade. Even though the two sides have recently clashed over the Eurasian connectivity vision of the Belt and Road Initiative or the impact of the 16+1 platform on EU cohesion, China and the EU have still many times managed to cooperate and produce net welfare benefits not only for each other but also for the community of nations. China EU environmental cooperation, diplomatic engagement in Sudan’s peacekeeping, anti-piracy operations in the Gulf of Aden all serve as clear cases of successful China-EU strategic cooperation. At the forthcoming China-EU summit in Beijing, the stakes for the stability of the global commercial order couldn’t be higher. China and the EU have convergent interests and a clear responsibility to safeguard global peace and prosperity. This pressing challenge provides a momentous opportunity for a much closer and strategic China-EU partnership, which the 20th high China-EU summit should not forgo.

Professor Shi Zhiqin is the director of the Tsinghua Belt & Road Strategy Center and a resident scholar at the Carnegie-Tsinghua center for Global Policy.

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