Home Featured The EU’s Trade Agreement with China Spells Trouble for the Transatlantic Alliance

The EU’s Trade Agreement with China Spells Trouble for the Transatlantic Alliance

by Keerat

By Ben Brittain, Policy and Data Analyst – City-REDI, University of Birmingham

 

Sixty-three emerging markets and developing economies borrow more from Chinese banks than from any other nation. The figure for the US is just nine.

Chinese banks lend to 135 out of 143 emerging markets and developing economies (EMDEs). Many nations, from Pakistan to Djibouti are already indebted by the expansive (and expensive) Belt and Road Initiative (BRI). The two main Chinese policy banks granted more than £20 billion in loans to BRI-related projects in 2019. The economic corridor that the initiative encompasses, whilst involving infrastructure, is not about railway lines or gas pipes, it’s about China’s economic power: economic, financial, trade and then finally cultural integration with China. The growth markets of tomorrow are already bankrolled by China, and as with America in the 20th century, where money leads, culture follows.

This means there is an ongoing transition from liberal universalism to the global politics of competing spheres of influence, of which major powers are the defining actors. This is more akin to the 19th century than the benign late 20th century, where global liberalism was defined as so successful that it had ended history. Russia and Turkey are now autocratic societies, with Erdogan and Putin unassailable leaders, whilst Europe has largely given up on ideology and instead retreated into a system of technocracy, governed by Brussels regulation, returning to its political tradition of Habsburg court diktat.

The EU is a major actor and is playing hard realpolitik. This is vividly expressed by its adoption of the Comprehensive Agreement on Investment (CAI) with China. The focus of the deal does not appear to be security, but rather geoeconomics.

The announcement of the CAI is perplexing for some, especially as it comes on the birth of a new US administration. The EU’s urgency to embrace Beijing, despite the human rights abuses, especially reports of genocide in Xinjiang, has suggested something coarse. The CAI strongly signals that the EU is a cooperative partner for China. Thus, it is now a defining milestone in the long process of the creation of Eurasia, where European economies are entwined with Asian economies.

Whilst the EU suffers from not having the capacity to project power via a collective military, and is unlikely to have the resource to meaningfully do so in any way soon, it is also substantially handicapped by not having its own financial centre. Paris and Frankfurt will be incapable, in the immediate and medium term, to compete with other global financial capitals like New York, Tokyo, London, or Hong Kong.

The recent CAI and the withdrawal of London from Brussels regulation will ensure that EU services are increasingly reliant on London and at the behest of Hong Kong or Shanghai. The EU is reliant on London. More than half the volume in London is in shares of European Union companies, with 27 companies based in the EU contributing more than half the stock, totalling 7.2 billion euros ($8.5 billion), or rather 60% of the 12.5 billion euros of equities that are exchanged on a daily basis.

The shift from China being a strategic rival to strategic partner will command tough question from the new US administration. President Biden and the Democratic Party as a whole is no less hawkish on China than the GOP. Domestic political pressure may even ensure that the Democrats toughen-up some of its trade policy. To this end, expect the CAI to be challenged by incoming US Secretary of State, Anthony Blinken.

The Biden administration will turn the needle of US foreign policy and the pull of systemic rivalry between the USA and China will continue.

Blinken has already encouraged the creation of new institutions between Europe and Asia as a means of effectively dealing with China’s growing assertiveness whilst keeping channels open for cooperation on collective challenges, such as Covid-19 and climate change. The expectation from Washington will be that policy by the EU is consulted on and effectively signed off by the US. The CAI is a signal that the EU does not want its strategic autonomy challenged, something Washington will not permit unchallenged.

 

What This Means For The UK

For London, the ‘D10 club’ is the formal institution that could challenge China. No 10 see it as an expanse of the G7, which will involve democracies that can effectively coordinate policy on human rights, digital infrastructure and fair trade, with the aim of counterbalancing Beijing. In practice the D10 will ensure that Washington will have a final say on collective policy, but Paris and Berlin no longer have an appetite to see its homework marked by Washington, least of all London, so a more independent and muddled approach from the EU is likely.

The UK is setting its own course on ‘Chinese containment’. Recent measures, such as restricting British goods or technology to China that could be used for repression, reveal a clear divide between Brussels and London on how to tackle China’s rise.

Huawei signalled the first change in direction from No 10, with the ban on Huawei equipment. Providers are now required stop installing Huawei equipment in the UK’s 5G mobile network, a measure implemented since September 2020. The UK is strengthening its Modern Slavery Act to force firms to identify goods that have been made in China using slavery or in labour camps.

Since Beijing’s encroachment on Hong Kong autonomy, London has demonstrated a capacity to lead forceful condemnation alongside international policy responses, ensuring Canada, Australia and at times New Zealand, are implementing the same response. The first international response came not from DC, but from the capitals of London, Canberra, Ottawa and Auckland.

The gravitational pull of these collective nations working more closely on foreign and trade policy, propelled by the necessity of Brexit and China’s rise, is inevitable and made so by shared culture, history and similar economies.

The new ‘bloc’ will only be hastened by the signing of FTA’s that encompass services and labour market rights, with Australia, New Zealand and then likely extended to Canada through a revision of the Comprehensive Economic and Trade Agreement (CETA). London will increasingly announce economic and foreign policy measures with its ‘Anglo’ partners rather than with the EU.

 

The EU CAI makes it appear that U.S. President Joe Biden is now left alone in his efforts to contain China. The new administration will try to bring the EU along with it on containment and cooperation polices, but the EU, as evidenced, is keen to flex its own sovereignty. US policy on China will not be alone though. Reliably, it will have the UK and its ‘Anglo’ allies. The new anti-Xinjiang slave labour package announced by London is likely to be adopted by Canada, and Australia and perhaps New Zealand. However, Jacinda Arden’s decision to drop out of a ‘Five Eyes’ condemnation of Beijing’s recent mass arrests in Hong Kong under the National Security Law, show that New Zealand is perhaps a vulnerable underbelly of a new geoeconomic Anglo bloc, one that Beijing will exploit if left unchecked.

As a result of its history the British see the world through various alliances and shared partners, even though it has continuously switched between them to serve its interests. There are common references to the EU in the UK media as a ‘bloc’. After 1945 Moscow’s sphere of influence was that of a ‘Soviet Bloc’. This century there are emerging new spheres of influences – or rather – new blocs, driven by national interests and common threats. The ‘Anglo bloc’ sees China as a threat to US and liberal hegemony, whereas the EU has retreated to national economic interests and seems willing to partner with China on beneficial trade issues. China is extending its own influence through the BRI, unable to immediately extend regional hegemony due to difficult geography and peer-rivals in their own neighbourhood like India and Australia.

This new century, a century of competing regional powers and blocs, is shaping up to be much like centuries before.

 

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