Consequences of political shifts in the United States for European-Chinese relations



On November 23 and 24, 2016, economic leaders and senior politicians will gather in Hamburg to attend the leading Sino-European business conference, “Hamburg Summit. China meets Europe“. The panel discussions and keynote speeches will focus on China´s economic development and its impact on European companies engaged in business with China. Beijing‘s continental and maritime “Belt and Road” initiatives, the internationalisation of the Renminbi, bilateral investments between the EU and China, and the impact of a digital economy on manufacturing and services will be on the agenda. The consequences of the U.S. presidential elections with regard to global trade and investment will certainly be an important part of the discussions.

MERICS President Sebastian Heilmann explains what is at stake.

Before his election victory, Donald Trump heavily criticised China. What does his election mean for the relationship between these two trade and economic powers?

We will likely see more open frictions and conflicts in the already tense relations between China and the U.S. One of Trump‘s main campaign topics was his view that U.S.-trade policy has failed to protect jobs in his own country from “unfair competition”. His target was mainly China. If Trump follows through on parts of his campaign statements, punitive tariffs and investment restrictions could seriously affect the economic exchange between China and the United States. Even if large-scale trade conflicts do not occur, China and Europe will have to brace themselves for much more uncertainty and unpredictability in U.S. trade and economic policy.

What does this mean for Germany and the European Union and their economic relations with China? After all, the German Minister of Economic Affairs and Energy, Sigmar Gabriel, openly criticised China’s state-led acquisitions of European high-tech enterprises recently, which has put pressure on the Sino-German relationship.

We need reliable partners in global trade, and in this respect China is now gaining an even more important position. The cooperation with Beijing has become even more urgent since Trump won the presidential election. What will happen to U.S. business has now become quite unpredictable. In consequence, China and Germany will more than ever rely on their markets being open to each other.  I assume that the shock of Trump‘s victory will make the Chinese side more willing to negotiate market access issues with the Europeans. Europe should be open for such opportunities, while standing its ground on the contentious issues. China now has the chance to demonstrate that it acts as a reliable and constructive trade partner. Clearly, decision-makers in Europe and China should move forward and act now. We cannot passively wait for the fallout of the U.S. election to unfold.

What kind of initiatives by Germany and the EU could constructively change economic relations with China?

Both sides should aim for implementing feasible measures that may produce swift positive effects, for instance when it comes to removing obstacles to bilateral trade and investment or technical customs procedures. The EU and China have been consulting on these issues, but it is high time for concrete improvements. Embracing new and joint European-Chinese investment platforms, and strengthening confidence in economic relations must be top priorities on the agendas of European and Chinese decision-makers. Europe needs to take a more active and constructive stance on China’s Belt and Road Initiative, which is set to open up new economic spaces and markets in Eurasia.

Germany and China should prioritise pursuing joint investment projects in third countries located along the emerging European-Chinese economic corridor in Eurasia, effectively combining Chinese capacity for realising large scale infrastructure projects with German technical expertise. Opening up new economic spaces in Eurasia and creating wealth and stability in the region is a shared priority of Beijing and Berlin as well as other European capitals and is also feasible without a visible U.S. contribution. Berlin should use its influence in Brussels to promote expanding the remits of the EU-China connectivity platform to also include projects in third countries.

What is it that China would have to change about its foreign trade policy in order to accommodate European expectations?

China would need to rethink its approach to foreign investment in many restricted sectors of the Chinese economy. Foreign companies and investors need to be treated in the same way as Chinese companies to deepen and expand economic exchanges in a forceful manner. To achieve this, Germany and China should expand existing economic consultation mechanisms to explicitly cover discussions on strengthening reciprocity in European-Chinese economic relations.

Moreover, Europe and China must swiftly pursue a range of measures to bolster trade relations, including technical issues such as standardising and digitalising trade documents and customs procedures. Europe and China also need to make further progress on creating mutual confidence on cyber and data security matters as a vital prerequisite for deepening economic cooperation. This would help advance the economic cooperation between Europe and China tremendously – a vital step in these difficult times for international trade and investment.

What can Germany do to help improve the framework for Chinese-European economic relations?

Germany has an active role to play in making sure that any future revisions of the EU’s neighbourhood policy instruments account for an active Chinese investment role. The EU and China should approach each other more openly and strive for a better coordination of their respective incentive measures.

For example, European neighbourhood policy lists for priority infrastructure projects should become the basis for more actively seeking Chinese co-financing, thus taking China up on its announcements that it is eager to align Belt and Road Initiative activities with existing regional institutions and programmes. Given the shared interest in strengthening transport links across Eurasia, Germany and China should consider establishing a “steering group” on Eurasian supply chain management and logistics, composed of both government and industry representatives.

In recent years, Chinese investments in Europe have reached a record level, but the German public is increasingly worried about Chinese investments. Do you think these concerns are justified?

With respect to state-coordinated investments in European high-tech industries I suggest caution and vigilance. In contrast to investments in hotels or real estate, there is a clearly stated political master plan behind Chinese high-tech investments. China wants to leapfrog from a barely automated industrial landscape to smart manufacturing by identifying and buying technologies they currently lack. If such a strategy is pushed forward with government funding and coordination, it brings severe distortions to the open investment regimes and technological capacities of European market economies.

How should the German government deal with this matter?

The German government should aim to reduce China‘s state-led acquisitions of German high-tech enterprises. The speed of technology transfer to China has to slow down, to give the German economy more time to adjust.

What kind of problems are German businesses presently facing on the Chinese market?

The most important example is the recent announcement by China‘s government to require by 2018 an 8-percent share for electric cars of an automaker’s total. This is a very aggressive industrial policy move, since two years is clearly not enough time for foreign carmakers to adapt. But I see possibilities for extending this deadline and give a bit more adjustment time. That’s why the German government and the automobile industry must pull together and present unified positions in their negotiations with Chinese partners. In the past, this did not work well due to competition among the German automobile makers. Confronted with an aggressive industrial policy, they should now work on a unified response.

How would you assess the stance of German business in not wanting to scare their Chinese partners?

With a view to short-term business opportunities, many enterprises do not want to jeopardise their chances on the Chinese market. But in the medium term, the discussion about broadening market access in China and about Chinese state-led investments is inevitable. Individual companies are not in the position to respond to state-coordinated programs. This requires negotiations between governments.

If the German government intervenes and increases pressure in negotiations but still remains open to solutions that satisfy both Chinese and German interests, this will also help German companies. The Chinese side respects strong negotiating partners who say what they want. China itself is always very clear in its demands. Please note that all this is about conflicts of interests and competition. For this type of frictions, shared interests can regularly be identified in negotiations and can guide the way to compromises.

The chances to make progress in European-Chinese trade and investment negotiations have improved with the Trump shock that might actually affect China more intensely than the Europeans but will bring out the shared interests more clearly.