COMMENTARY: China Tries to Make a Pivot to Europe

Dealing with U.S. trade war has slowed progress and EU has reservations, but the two are finding common economic ground.

Mark Melnicoe
    Nov 30, 2019 5:05 AM  PT
COMMENTARY: China Tries to Make a Pivot to Europe
author: Mark Melnicoe   

Throughout the 18 years since China joined the World Trade Organization, U.S. and European businesses have mostly been of one mind when it comes to Beijing's trade practices. They see an unfair playing field due to four main factors: rules that are too opaque, market openings occurring at a snail's pace, theft and coerced transfer of intellectual property, and massive subsidies to state-owned companies.

Now, a year and a half into a bitter trade war started by the U.S. under President Trump, tensions have grown steadily worse between the U.S. and China. Though the two countries may be on the verge of a small trade deal that would remove some tariffs, by all appearances China is now seen as a rival to American global supremacy. The tech war will go on, and relations will not improve significantly.

That is providing Beijing with an opening in its relationship with the European Union. China looks poised to take advantage, although feelings in Europe are mixed. The EU already is China's largest overall trading partner, and the Chinese have been on an investment spree in Europe.

Earlier this month, President Emmanuel Macron of France spent three days in China, meeting with President Xi Jinping and other leaders. The visit resulted in the signing of a long-awaited "geographical indication" agreement aimed at improving protection for 100 regional products. The EU signed the deal despite American pressure not to.

The Trump administration continues to squeeze allies and rivals alike with rough and ever-shifting tactics on trade. Lately, the U.S. has been pushing allies in Europe and elsewhere to resist Chinese telecom provider Huawei Technologies as their 5G provider, saying it will withhold security cooperation from allies who use Huawei.

"When they get Huawei into Canada or other Western countries, they're going to know every health record, every banking record, every social media post; they're going to know everything about every single Canadian," Trump national security adviser Robert O'Brien warned the Canadians last weekend at the Halifax International Security Forum, according to CBS News.

These kinds of scare tactics are the norm for the Trump administration, and allies from Canada to Germany don't appreciate the hysteria. They are still deciding about Huawei, which is trying to take the global lead in 5G technology.

While tied up in the trade war with the U.S., China has been less focused on Europe this year. But that is changing, perhaps turbocharged by Macron's visit.

"China needs to expand its room to maneuver in international relations, such as through ties with the EU, Russia and India. We will not have our arms twisted by tensions with the U.S.," Feng Zhongping, vice-director of the China Institute of Contemporary International Relations, said at a forum in Beijing a week ago, the South China Morning Post reported.

Expanding EU Presence

On November 5, China issued $4.4 billion in sovereign bonds in Paris, its first such move in 15 years and the largest single issue in a foreign currency it has ever made, the SCMP reported.

China and the EU are working on an investment treaty that could be signed in less than a year. Also waiting in the wings: Possible talks on a free-trade agreement after the investment deal is signed.

"Next year will the year of Europe for China," the SCMP quoted Feng as saying. "The investment deal is crucial for stable China-EU relations, and we need to respond to the EU on the investment reciprocity."

In another sign of cooperation, the China Europe International Exchange (CEINEX) is reported to be gearing up to launch a stock link between Shanghai and Frankfurt to be called the Shanghai-Deutsche Stock Connect. The program likely is inspired by the success of the Shanghai-London Stock Connect that launched earlier this year, the Trivium research group said in a client note.

The link would allow reciprocal stock trading, where some German blue chips would be available on the Shanghai Stock Exchange while Chinese shares could be bought on the Frankfurt Stock Exchange.

"China is looking for areas of economic common ground with Europe in a bid to mend fences," Trivium noted. "Programs like this are a step in the right direction."

Indeed, there is some fence mending needed because many in Europe view China warily. They see Beijing's investment as helpful but also a sign of competition. In 2008, amid the global financial crisis, China became a key investor in some of the most indebted EU countries, such as Italy, Greece and Portugal.

China made a big splash when state-owned China Ocean Shipping Co. (HKEX: 1919) bought a majority stake in Athens' harbor at Piraeus, which it intends to use as a logistical hub for Chinese goods in the region.

The Carnegie Endowment for International Peace said in a report this week that European heavyweights France and Germany also need China "in the face of their declining economies."

"Germany is close to a recession and its corporate sector is split between two factions," it said. "Some large companies such as Siemens and Volkswagen believe in China as an export market. The other faction is led by the influential BDI, a confederation of German industries comprised of smaller technology-driven companies. The BDI's January 2019 report called for a strengthening of the European Union's commitments to compete with China."

Perhaps the best illustration of Europe's ambivalence toward China is a document the EU published last March called the "EU-China Strategic Outlook." It called China ‘a negotiating partner with whom the European Union needs to find a balance of interests, an economic competitor in the pursuit of technological leadership and a systemic rival promoting alternative models of governance."

That's a lot to chew on but it simply reflects China's complexity and how the Western world is dealing with its economic rise. Carnegie urges Europeans to "regroup and offer China alternatives to U.S. President Donald Trump's zero-sum approach to economic relations."

"Instead of playing Beijing's game, the European Union should take advantage of the situation," it wrote. "It should demand reciprocity with China, stick with European values and the rule of law while leaving an open door for cooperation with China on global issues outside EU borders."