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Opinion - Trade

Don't blame China for unraveling US-Europe relations

Key Points
  • China has nothing to do with seemingly unbridgeable divisions between the U.S. and Europe.
  • The EU-China economic relations will continue to strengthen on the basis of mutually beneficial business transactions.
  • For many EU countries, trade with China will be an important growth vector.
Italy's Prime Minister Giuseppe Conte (R) and China's President Xi Jinping (L) pose for photographers during a welcoming ceremony upon Xi Jinping's arrival for their meeting at Villa Madama in Rome on March 23, 2019 as part of a two-day visit to Italy.
Christian Minelli | NurPhoto | Getty Images

U.S. President Donald Trump's hostile statements about the European Union and the Atlantic military and political alliance (NATO) are among the many things he disowned — upon reflection, or under pressing advice from his horrified security experts.

But Trump's latter day denials had not been taken seriously in Europe. His withdrawal from the climate change treaty and Iran's nuclear accord have convinced the Europeans of a serious breakdown in allied relations. The ongoing trade disputes and the president's constant hectoring about Europe's failure to meet defense spending targets have ended up sealing the belief that the transatlantic community was in deep trouble.

Nothing, however, exemplifies the schism like the recent visit to Europe by China's President Xi Jinping.

Italy-China trade ties

People with short memory and idiosyncratic agenda take Italy's regal welcome to Xi during his visit Mar 21-23, and Rome's acceptance to participate in China's Belt and Road project, as a seminal event marking an irreparable breach of transatlantic union and solidarity.

That is mean nonsense. Similar breaches are legion.

What should one say, for example, of the beaming Chinese Premier Li Keqiang standing next to Chancellor Angela Merkel in May 2013 to celebrate a China-Germany "dream team," as he was getting the technology for intelligent manufacturing to replace his smokestack factories?

That was nearly six years before Italy took up the promises of future business deals with China.

During that time, Germany kept selling to China its top technologies and companies, including one of its leading suppliers of robotics and system manufacturing. In the process, German exports to China over the last five years came to a total of 380.9 billion euro.

And well before China began talking to Italy about using the port of Trieste, Greece sold in April 2016 a controlling 67 percent stake to China in the port of Piraeus.

China's cooperation with Central and East European countries — the 16+1 format — has been expanding rapidly since 2012 in areas of large infrastructure projects and investments in industrial machinery, chemical industries, energy and telecoms. The East Europeans have in large part embraced those new development opportunities because they found no takers among their EU partners.

All those examples are just fragments of a vast China-EU trade. According to the China Railway Corporation, freight trains, running along the Belt and Road itineraries, are now connecting 59 cities in China to 49 cities in 15 European countries. Last year, 6,363 freight train trips were made between China and Europe, a 73 percent increase from 2017.

In view of all that, how fair and reasonable is it to accuse Italy of breaking the EU ranks on China trade?

And it is equally wrong to blame China of driving a wedge among the EU countries. China is just diligently and smartly pursuing its business interests. Last year, China was the EU's second-largest (after the U.S.) trade partner, with a surplus of 184 billion euro on a bilateral goods trade of 603.9 billion euro.

Widening US-EU divisions

China will continue to deal on trade and investments with individual EU countries, partly because it will take time to put in place the new leadership of the EU Commission. Apart from that, nobody knows what the Commission will look like after the parliamentary elections in late May, much less what its trade mandate will be.

Busy with its own trade negotiations with China, Washington is probably watching the EU-China trade with a distracted eye. Trade problems with the EU also show that the U.S. was unable to forge a unified transatlantic stand on trade and investments with China.

As a result, trade policy differences among the allies are now so big that the EU seems closer to China than to the U.S. During the meeting in Paris last week, the leaders of China, France, Germany and the EU Commission emphasized their commitment to the multilateral trading system. They also highlighted the importance they attach to the role of the World Trade Commission and the International Monetary Fund.

All that is sharply at odds with Washington's espousal of reciprocal trade deals.

The three EU representatives went even so far as accepting last week to cooperate with Beijing on Belt and Road projects — on conditions of an equal partnership with China. What that means remains to be seen because China is the main source of funds, technical expertise and qualified manpower.

That is also a world apart from Washington's position, where the Belt and Road is considered to be China's design of expanding its global economic and political influence to challenge America's world order.

It is not clear how Washington intends to deal with such a fundamental policy difference in its key political and military alliance.

Particularly troubling is the view shared by EU representatives at the Paris meeting last week that they needed to resist being consigned to a sideshow by U.S. and China. As always, France seemed determined to prevent that from happening, although its position is too weak for a decisive leadership in a largely failed European political union.

One can, therefore, easily dismiss the call for EU sovereignty, and the ambition to play on equal footing with the world's two largest economies. But one cannot ignore the view that the EU apparently no longer sees itself as an ally and partner in the transatlantic community.

Investment thoughts

The White House statement last Friday that Trump was "eager" to cut a trade deal with the post-Brexit UK shows that he remains hostile to the EU trading bloc.

That is the latest proof that China has nothing to do with the seemingly unbridgeable divisions within the transatlantic community. Increasingly closer EU-China economic relations will continue as a result of mutually beneficial business transactions.

The parliamentary elections in late May are the EU's watershed event. The union will survive and continue to deal with China as a much looser community of nation states bound together by a single market and a common currency in the euro area and beyond.

For most EU countries, the China business will be an important vector of economic growth.

Meanwhile, the European Central Bank will be providing the main support to the region's economic activity, because Germany refuses to loosen up its fiscal policy to stimulate demand and employment in the euro area and the rest of the EU.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.