China-US trade war and the EU: risks, but also opportunities

ESSAY Jairo Císcar Ruiz [Spanish version]

In recent months, the open commercial hostilities between the United States of America and the People's Republic of China have taken over the main generalist headlines and specialized economic publications of the entire world. The so-called "commercial war" between these two superpowers is nothing but the successive escalation of the imposition of tariffs and special taxes on products and original manufacturing of the countries in conflict. This, in economic numbers, assumes that the US imposed in 2018 special tariffs on US $ 250 billion of imported Chinese products (of a total of US $ 539 billion), while China for its part imposed tariffs on 110 of the US $ 120 billion of North American import products. [1] These tariffs supposed for the American consumer and companies an increase of US $ 3 billion in additional taxes. This analysis wants, therefore, to explain and show the position and future of the European Union in this commercial war in a general way.

This small reminder of numbers illustrates the magnitude of the challenge to the world economy posed by this clash between the two economic locomotives of the world. It is not China who is paying the tariffs, as Trump said literally on May 9 during a meeting with journalists, [2] but the reality is much more complex, and obviously, as in the case of the inclusion of Huawei in the commercial blacklist ( and therefore the prohibition to acquire any item on American soil, neither hardware nor software, without prior agreement with the Administration), which may affect more than 1,200 North American companies and hundreds of millions of customers globally, according to BBC, [3] the economic war may soon begin to be a great drag on the global economy. On June 2, Pierre Moscovici, European Commissioner for Economic Affairs, predicted that if the confrontation continues, both China and the US could lose between 5 and 6 tenths of GDP, underlining in a special way that "protectionism is the main threat to growth worldwide”. [4]

As can be inferred from the words of Moscovici, the commercial war does not concern only the countries directly involved in it, but is closely followed by other actors in international politics, especially the European Union. The European Union is the largest single market in the world, this being one of the fundamental premises and pillars of the very existence of the EU. But it is not already focused on domestic trade, but is one of the major commercial powers of export and import, being one of the main voices that advocate healthy trade relations that are mutually beneficial for the different economic actors at a global level. regional. This opening to business means that 30% of EU GDP comes from foreign trade and makes it the main actor when doing import and export business. To illustrate briefly, according to the data of the European Commission [5] in the last year (May 2018-April 2019), the EU made imports worth € 2,022 billion (a growth of 7%) and exported 4% more, with a total of € 1,987 billion. The balance of trade is, therefore, in a negative balance of € 35 billion, which, due to the large volume of imports and exports and the nominal GDP of the EU (taking 18'8 trillion euros as data) is only 0.18% of the total GDP of the EU. The USA was the main place of export from the EU, while China was the first place of import. These data are revealing and interesting: an important part of the EU economy depends on the business with these two countries and a bad performance of its economy could weigh on the own of the member countries of the EU. Another fact that illustrates the importance of the EU in commercial matters is that of Foreign Direct Investment (FDI). In 2018, 52% of global FDI came from countries within the European Union and this received 38.5% of the total investment worldwide, being a leader in both indicators. Therefore, it can be said that the current trade war can pose a serious problem for the future European economy, but, as we will see later, the Union can emerge strengthened and even benefit from this situation if it manages to thrive between the difficulties, businesses and strategies. of the two countries. But let's see, first, the EU's relations with both the US and China.

The US-EU relationship has traditionally been (though with ups and downs) the strongest in the international sphere. The United States is the main ally in defense, politics, economy and diplomacy of the European Union and vice versa. The economic, political, cultural model is shared; as well as the main collective defense organization at world level, NATO. However, in the so-called transatlantic relationship, there have always been clashes, accentuated in recent times by the Obama Administration and habitual with Trump. With the current administration, not only have the EU been reproached within NATO (regarding the failure of member countries to invest the required budget, shared the criticism with the United Kingdom), but an outbreak of tariff warfare has started in all rule.

In barely two years it has gone from the negotiations of the TTIP (Transatlantic Trade and Investment Partnership), the announced 21st century trading base that finally failed in the last few bars of Obama in the White House, to the current situation of extreme protectionism in USA and EU response. Especially illustrative is the succession of events that have taken place in the last year: at the stroke of Twitter, in March 2018 the US unilaterally imposed global tariffs on steel (25%) and aluminum (10%) to protect American industry. [6] These tariffs not only affected China, they also inflicted great damage on companies in European countries such as Germany. It was also in the air to apply tariffs of 25% to vehicles of European origin. After a harsh climate of mutual reproach, on July 25, Jean Claude Juncker, president of the European Commission, announced with Trump an agreement to lower tariffs on agricultural products and services, and committing the US to review the imposition of metallurgical tariffs to the EU, as well as to support within the World Trade Organization the European proclamations for a reform of Intellectual Property laws, which China does not respect. [7] However, after the reiteration of the transatlantic friendship and Trump's announcement of "we are going towards zero tariffs”, [8] Europe was slapped with a dose of reality. On April 9 of this current year, Trump announced on Twitter the imposition of tariffs on the EU worth US $ 11,000 million for the support of the EU to Airbus (competition from the North American Boeing, Lockheed Martin ... ), completely burning the beginning of agreement stablished July of last year. The EU for its part threatened to impose tariffs of € 19 billion for US state support for Boeing. As can be seen, the EU, despite its traditional conciliatory role and many times subjugated to the US, has decided to counterattack and not allow more menaces by the American side. The last threat, in mid-July, goes against French wine (and due to the European mechanism, against all stocks of European origin, including Spanish). This threat has been described as "ridiculous", [9] since the US consumes more wine than it produces (it is the world's largest consumer) and therefore, the available supply could be quite diminished.

It is still early to see the real impact that the commercial war is having in the US, beyond the 7.4% drop in exports from the US to China [10] and the damage that consumers are suffering, but the Nobel Prize in Economics Robert Schiller, in an interview for CNBC [11] and the President of the World Trade Organization, Roberto Azevedo, for the BBC; They have already expressed their fears that if the situation and protectionist policies continue that way, we could face the biggest economic crisis since the end of the Second World War. It is difficult to elucidate what the future relationship between Europe and its main exporting partner, the United States, will be like. Everything indicates that the friction and elevation of the tone will continue if the American Administration does not decide to lower its rhetoric and acts against free trade with Europe. Finally, it must be clear (and with the intention of reducing the sometimes overly alarmist tone of the news) that between the threats (either by Twitter or spokespersons) on both sides and the effective imposition of tariffs (in the US after the announcement) of the Office of the US Trade Representative, in the EU through the approval of the 28) is a long way off, and do not confuse potential acts and facts. It is evident that despite the hardness of the tone, the negotiating teams from both sides of the Atlantic are still in contact and try to avoid as much as possible damaging actions for both.

On the other hand, the relationship between China and Europe is frankly different from the relationship with the US. The Belt and Road Initiative (BRI) (to which Italy has formally adhered) is the confirmation of China's commitment to be the next leader in the world economy. Through this initiative, President Xi Jinping aims to redistribute and streamline trade flows to and from China by land and sea. For this, the stability of South Asian countries such as Pakistan and Afghanistan is vital, as well as being able to control vital points of maritime traffic such as the Strait of Malacca or the South China Sea. The Asian "dragon" has an internal situation that favors its growth (6.6% of its GDP in 2018, being the worst data for 30 years is an overwhelming figure), since the relative efficiency of its authoritarian system and , especially, the great support of the State to companies boost their growth, as well as also have the largest reserves of foreign currency, especially dollars and euros, which allow great stability of the country's economy. The Chinese currency, the Renminbi, has been declared by the IMF as a world reserve currency, which is another indicator of the good health that is predicted for the Chinese economy in the future.

For the EU, China is a competitor, but also a strategic partner and a negotiating partner. [12] China is for the EU its main importing partner, totaling 20.2% of imports (€ 395 billion), and 10.5% of exports (€ 210 billion). The volume of imports is such that, although the vast majority arrive at the European continent by sea, there is a railway connection that, covered by the BRI, unites the entire Eurasian continent, from the manufacturing capital of China, Yiwu , and the last stop at the southern tip of Europe, Madrid. Despite the fact that part of what is imported continues to be "low- end" goods, that is, products of basic manufacture and cheap unit price, since the entry of China into the WTO, in December 2001, the concept of material produced in China has changed radically: the great abundance of rare earths in Chinese territory, together with the advance in its industrialization and investment in new technologies (in which China is a leader) have meant that we no longer think of China only as a producer of bazaars in China. dough; On the contrary, the majority of imports into the EU from China were high-end machinery and products, of high technology (especially telecommunications equipment and data processing).

In the aforementioned press release from the European Commission, China is warned to face the commitments made in the Kyoto Protocols and Paris Agreements regarding greenhouse gas emissions; and urges the Asian country to respect the dictates of the WTO, especially in terms of technology transfer, state subsidies and illicit practices such as dumping.

These aspects are vital for economic relations with China. At a time when most of the countries in the world signed or are part of the Paris Agreements for the reduction of greenhouse gas emissions, while the EU is making efforts to reduce its pollution (closing coal plants and mines; putting special taxes on energy obtained from non-renewable sources ...), China, which accounts for 30% of global emissions, increased its emissions by 3% in 2018. This, beyond the harmful effects for the climate, has industrial and economic benefits: while in Europe the industries are narrowing their profit margins due to the increase in energy prices; China, which feeds on coal, provides cheaper energy to its companies, which, without active restrictions, can produce more at a cheaper price. An example of how the climate affects economic relations with China is the recent announcement [13] of AcerlorMittal to reduce its total steel production in Europe by 3 million tons (over 44 million usual production) due to the high costs of electricity and to the increase in the importation of countries from outside the EU (especially China) that with excess production are lowering prices worldwide. This practice, named dumping, which is especially used in China, is to flood the market with an overproduction of a certain product (overproduction is paid with government subsidies) to lower prices. Until December 2018, in the last 3 years, the EU has had to impose more than 116 sanctions and anti-dumping measures against Chinese products. [14] This shows that, despite the attempts of the EU to negotiate in terms satisfactory to both, China does not comply with the stipulations of the agreements with the EU and the WTO. Especially thorny is the problem with the companies controlled by the government (the ban of 5G networks in Europe, controlled by Chinese suppliers, for security reasons), which have practically monopoly in the interior of the country, is being studied; and above all, the distorted reading of legality by the Chinese authorities, which try to use all possible mechanisms in their favor, making difficult or impeding the direct investment of foreign capital in their country, as well as imposing requirements (need to have Chinese partners, etc.) that hinder the international expansion of small and medium enterprises.

The greatest friction with the EU, however, is the forced transfer of technology to the Government, especially by strategic product companies such as hydrocarbons, pharmaceuticals and the automotive industry, [15] imposed by laws and as a conditio sine qua non companies can not land in the country. This creates a climate of unfair competition and direct attack on international trade laws. The direct investment of Chinese capital in critical industries and producers in the EU has provoked voices calling for greater control and even vetoes on these investments in certain areas for Defense and Security issues within the EU. The lack of protection of intellectual rights or patents are also important points of complaint by the EU, which aims to create through diplomacy and international organizations a favorable climate for the promotion of equal commercial relations between the two countries, as it is reflected in the various European guidelines and plans on the subject.

As we have seen, the commercial war is not limited only to the US and China, but third parties are suffering and even actively participating in it. Here the question arises. Can the EU benefit in any way and avoid a new crisis? Despite the pessimistic environment, the EU can obtain multiple benefits from this trade war if it manages to adequately maneuver and avoid as far as possible more tariff impositions against its products and keeps the market open. If the trade war continues and the positions of the US and China harden, the EU, as the main partner of both, could receive benefits thanks to a redistribution of the flow of trade. So, to avoid the loss due to tariffs, both China and the US could sell products with heavy taxes in the other country to the European market, but, especially, import products from Europe, as they have not imposed huge tariffs against EU products. If an agreement is reached with the US to eliminate or minimize tariffs, the EU would be faced with a huge niche market left by Chinese products banned or taxed in the US. The same in China, especially in the automotive sector, from which the EU could benefit by selling to the Chinese market. Alicia García-Herrero, of the Belgian think tank Bruegel), affirms that the benefit for Europe will only be possible if it does not lean towards any of the contenders and remains neutral on the economic level. [16] It also highlights, as the European Commission, that China must adopt measures to guarantee its reciprocity and market access, since the European Union continues to have greater volume of business and investments with the US, so the Chinese offer should be highly attractive to European producers as considering directing products to China instead of the US. The UN itself figures in US $ 70 billion the benefits that the EU could absorb thanks to the trade war. [17] Definitely, if the right measures are taken and the 28 draw an appropriate road map, the EU could benefit from this war, without forgetting that, as the EU itself advocates, coercive measures are not the solution to the trade problem, and hopes that, due to its ineffectiveness and damage to both consumers and producers, the tariff war will come to an end and, if differences persist, they will be elucidated in the WTO Appellate Body, or in the Permanent Court of Arbitration of the United Nations.

This commercial war is a highly complex and with different views issue. This analysis has tried to address a large part of the aspects, data and problems that the European Union faces in this commercial war. It has been analyzed generally in what the commercial war consists, as well as the relations between the EU, China and the USA. We are facing a gray future, with the possibility of multiple and rapid turns (especially from the US, as could be seen after Osaka's G20 summit, when Trump accept to sell some key components to Huawei, but not to remove the company from their blacklist) and from which, if the requirements and conditions set out above are met, the EU will definitely benefit, not only in the economic plan, but by staying together and making a common front, it will be an example of negotiation and economic freedom for the whole world.



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