Europe has a China problem too, but the last thing it wants is a trade war

The US push to “decouple” its economy from China’s is causing ripples in Europe. The Federation of German Industries, the most influential industrial lobby group, has proposed a vision for keeping Europe’s important economic relationship with China alive and prevent the country’s state-owned and state-supported firms from competing unfairly.

As President Donald Trump has intensified his war against the established rules of global trade, the European Union has increasingly found itself on the same side as China, defending the World Trade Organization and the benefits of globalization and market openness. But Europe and China make strange bedfellows: The EU is based on values, including economic ones that China, under President Xi Jinping, increasingly doesn’t share. Besides, European companies and governments are worried about some of the same practices as Trump: asymmetrical restrictions on their operations in China, forced technology transfer, dumping and takeovers by subsidized and state-controlled entities.

Still, the last thing European businesses, especially those in Germany, the bloc’s leading export power, want is a trade war with China. Chinese direct investment in Europe now is multiples of that in the US ($12 billion vs. $2 billion in the first half of 2018), but accumulated German investment in China stood at 76 billion euros ($87 billion) in 2016, the latest year for which data are available. Last year, the 30 companies included in the DAX stock index derived a record 15 per cent of their revenue, or 200 billion euros, from China. Perhaps more importantly, 5,200 German companies with a total of 1 million employees are active in China, the Federation of German Industries, known as BDI, said in its report.

In addition, BDI says China is a valuable location for German and European research and development. For artificial intelligence applications, for example, China provides more data than any other country, as well as the scale to test technological solutions.

“German industry continues to be interested in close economic exchange with China and rejects targeted and politically forced economic decoupling,” BDI says.

The federation also suggests China doesn’t have to be approached with hostility, both as a “systemic competitor” and a valued partner. All of these methods require more assertiveness and coordination at the EU level, though: China has grown so big that no single European country, even Germany, can vie for more favourable terms of trade with it.

Although BDI accepts that the state’s huge interference in the Chinese economy creates inefficiencies, it points out that even those shortcomings can be dangerous to European companies. “State influence on factor prices (land, energy, capital, labour) and indirect or direct subsidies for individual companies or entire industries have repeatedly led to overcapacities and market distortions in China,” the report says. “Due to the high presence of Chinese manufacturers on the world market, these distortions and overcapacities in China are increasingly being transferred to other markets, for example, steel. In future, however, overcapacities from China can also be expected in other areas, such as robotics or battery cells.”

To counteract Chinese dumping, BDI suggests applying Europe’s tough state-aid rules, letting European companies provide less documentary evidence when they seek redress for unfair competition and tightening rules against the dumping of services. 

In the German industrial lobby’s view, China’s policy of creating national champions in key industries isn’t an inefficiency of Chinese central planning. BDI calls on the EU to breed its own national champions, for example, by pooling resources in AI; this echoes the idea of creating an “Airbus for AI,” a cross-border company along the lines of the globally competitive aircraft producer.

BDI calls for tighter takeover controls to prevent China from snapping up the gems of European business and technology — a policy Germany and France are already implementing. It also recommends making it easier for European companies to merge: The global market, not just Europe’s, should be considered during antitrust reviews. Europe, according to the BDI, should also try to counter Chinese initiatives like the Belt and Road, especially in its immediate neighbourhood; if non-EU countries become too dependent on China, they bloc may lose out.

At the same time, the industry lobby presses for more European involvement in international organizations — for example, to strip China of its advantageous but obsolete developing-nation status in the World Trade Organization. 

While the US takes a harsh approach, BDI points to craftier tactics. That involves the gradual tightening of rules to obtain more leverage over China to gain greater access to its market and limit the damage of its state-driven expansion. The German federation also calls for engaging China in talks that won’t always be adversarial.

The problem with BDI’s proposals is, as always, that it would require EU countries to agree on a set of common policies. Eastern European nations, which need Chinese investment, will be opposed to some of these ideas, such as a dramatic boost to the EU’s research budget and raising barriers to cheap Chinese goods. It’s unfortunate that China’s size demands coordinated action from countries with widely diverging interests. The EU may not be equipped even for a much softer version of the relationship readjustment that’s going on between the US and China.

Bloomberg