The European Union remains one of the world’s three largest concentrations of economic activity, along with the US and China. Decisions taken by the EU — and Germany in particular — will have major ripple effects on much of the rest of the world (Getty Images)
The European Union remains one of the world’s three largest concentrations of economic activity, along with the US and China. Decisions taken by the EU — and Germany in particular — will have major ripple effects on much of the rest of the world (Getty Images)

EU’s China dilemma is a sign of things to come

The shift from a one-world economy to a two-world system will force States to make hard choices. Europe is the testing ground
By Dhruva Jaishankar
UPDATED ON FEB 19, 2021 06:19 AM IST

After the end of the Cold War, the world grew accustomed to the notion of a single global economy, one in which political barriers were a secondary concern or applicable only to those countries adopting a deliberate policy of isolation.

Such one-world globalism was not a novel consideration. A similar idealism was a feature towards the end of World War II — at the Yalta Conference, the establishment of the United Nations, and even the Bretton Woods Conference — that persisted until early 1947. As historian Benn Steil has written, events came to a head that year. Leaders in the United States (US) concluded that the post-War European recovery could no longer rely on the free flow of commerce with a Soviet sphere of influence. The result was the division of the European — and world — economy, and the creation of the Marshall Plan, General Agreement on Tariffs and Trade (GATT), and the European Coal and Steel Community.

Europe is once again the primary testing ground for the future cohesion of the international economy. The European Union (EU) remains one of the world’s three largest concentrations of economic activity, along with the US and China. Decisions taken by the EU — and Germany in particular — will have major ripple effects on much of the rest of the world.

The persistent assumption among elites in both North America and Europe was that, despite its many differences, the North Atlantic economy would remain something of a cohesive whole. It reflected shared values and history and was characterised by dense networks of exchange and institutions. Recent attempts at advancing European strategic autonomy, led by French President Emmanuel Macron, might rankle with Americans, much as Gaullism and Ostpolitik once did. But concerns in Washington are growing that transatlantic divides on global economic issues go beyond a quest for autonomy.

Such concerns were apparently realised after the finalisation, in principle, of a Comprehensive Agreement on Investment (CAI) between EU and China in December. The CAI’s supporters argue that the agreement had long been under negotiation; that it did not mark a capitulation on such matters as foreign direct investment screening, export controls, or disinformation; and that it ensures better market access, a level-playing field, and sustainability objectives in China.

But the voices of criticism within Europe — particularly among the strategic community — have been overwhelming. The criticism has less to do with the economic implications — there are devils in the details and China’s commitments are questionable. But the agreement was nonetheless an unambiguous political victory for Beijing, which may explain why Xi Jinping himself reportedly intervened to ensure a favourable outcome. At the same time, the brunt of criticism has been directed less at Brussels and more at Berlin, which is accused of having pushed through the deal for the narrow benefit of German manufacturing and telecommunications corporations.

Less than two weeks before CAI was agreed upon, US national security adviser-designate Jake Sullivan rather unusually took to Twitter to voice concern and suggest a delay before concluding the deal. “The Biden-Harris administration would welcome early consultations with our European partners on our common concerns about China’s economic practices,” he wrote. While European leaders had previously indicated that their troubles with the US were a consequence of former President Donald Trump’s contemptuous attitude, the failure to work with a new US administration — despite such public entreaties — suggests deeper discontent.

There are some important countervailing trends to suggest that Europe’s present rift with Washington is not irreparable and that its relationship with Beijing is not without its own challenges. The first is an unanticipated consequence of Brexit. The Biden administration’s frustration with Brussels has resulted in unexpected cooperation with the Boris Johnson government in London, which has independently reached its own conclusions about Beijing. The second is an impending leadership transition in Berlin, given the outsized role that Germany played in CAI. Third, Chinese efforts in Europe have also struggled. The recent 17+1 summit — a format once perceived as undermining European cohesion — saw some participating countries downgrading their involvement. Other matters, such as the detention of two Canadians by China and developments in Hong Kong and Xinjiang have contributed to unified positions staked by European governments with their American counterparts.

Amid these turbulent undercurrents, the European private sector recognises the dilemma it now faces. The ability to integrate supply chains, innovation streams, data, critical components, and finance with both the US and China appears increasingly untenable. This will, over time, prove costly, hampering efficiency, knowledge, and economies of scale. The dilemma is not unique.

In both the US and India, the political consensus has shifted gradually away from economic over-dependence on China. In India’s case, it has resulted in specific outcomes — a drop in Chinese imports, greater investment scrutiny, and restrictions on digital apps and public procurement.

The evolution from a one-world economy to a two-world system with its many redundancies will, unlike the post-World War II era, be long-drawn-out and costly. The differences between States, even close allies, are real but not necessarily insurmountable. Instead, greater engagement between national security communities and the private sector may be the need of the hour.

Dhruva Jaishankar is executive director, ORF America

The views expressed are personal

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