As Trade Wars Broaden, Europe Is the Key to Future

July 10, 2018

By Dan Steinbock

As the Trump White House has started the “biggest trade war” in history, diplomatic activity is escalating from the transatlantic axis to China and the EU – America’s next tariff target.

After the meeting of China and Central and East European (CEE) countries in Sofia, Bulgaria, Chinese Premier Li Keqiang rushed to the fifth round of intergovernmental consultations between China and Germany.

These visits have been overshadowed by the specter of the U.S. trade wars that are about to broaden over Europe. In few days, Trump will start his own European visit to attend the NATO summit in Brussels, meet with Queen Elizabeth and Prime Minister May in the UK, and to sit down with Vladimir Putin in Helsinki in mid-July.

The White House will seek to push US NATO allies to finance a greater share of the joint military expenditures, strengthen Anglo-Saxon ties against Brussels and to warm its relationship with Russia amid the new U.S.-led Cold War. Behind the façade, the Trump administration seeks to deflect attention from the impending U.S.-EU trade war.


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CEE-China 16+1 cooperation will broaden

Established in 2012, the talks between China and CEE countries have supported faster development as trade volumes have soared to $68 billion last year, which translates to 16 percent growth on a year-to-year basis.

After the CEE economies were harmed by the global financial crisis and the subsequent European debt crisis, China’s economic contribution has been vital. From Beijing’s perspective, the CEE countries, along with key Mediterranean economies, have served as China’s foothold to Europe and the early development of the One Road One Belt (OBOR) initiatives, particularly in Eastern Europe.

From the standpoint of the CEE countries, the 16+1 Framework has been economically important by boosting Eastern Europe’s role and leverage within the EU.

As Brussels’ focus has been on European sovereign debt, massive bailouts, the UK Brexit and new disintegration pressures, the CEE economies, which used to be EU priorities in the early ‘90s, have been effectively ignored.

China’s strong contribution to global economic prospects, which amounts to 30 percent of global economic growth, has supported the resilience of the CEE economies, even amid Washington’s unilateral trade wars.

Joint interests in peace and stability, trade and investment provide a deepening basis for 16+1 cooperation in the future.

Converging Chinese-German interests

If CEE is China’s door to Eastern Europe, Germany remains the key to advanced Europe. Following the establishment of strategic partnership in 2014, Chinese-German relations have steadily broadened not just in trade and investment, but in technology and innovation.

While joint interests in the bilateral ties are increasing, the underlying environment is growing more challenging. As Chancellor Merkel seeks to sustain integrated EU, she has been under fire from Bavarian conservatives in her government, due to a challenge by Interior Minister Horst Seehofer about immigration policy.

For 60 years, Merkel’s Christian Democratic Union (CDU) has relied on its junior partner, the conservative Christian Social Union (CSU). The dispute about immigration has eroded the ties, even though Merkel contained the friction by agreeing to more hawkish immigration policy.

As German growth is slowing and German exporters have been harmed by U.S. trade friction, the political support of CDU and CSU has eroded, while the ratings social Democrats (SDP) have sunk to below 20 percent. The beneficiary of these trends is the radical right’s Alternative for Germany (AfD).

For now, Merkel’s cautious diplomacy does prevail in Berlin and Brussels, yet Trump’s trade stance will mean more headwinds in the fall.

China-EU cooperation

While China is US tariffs’ first target; the next ones will include some of the largest trading economies in Europe, East Asia and Americas. In the process, the joint economic (trade and investment), political (international cooperation), even strategic interests (Iran, climate change) between China and the EU, and Germany, are converging.

Last week, Merkel explicitly warned President Trump not to unleash an all-out trade war after U.S. president threatened to impose steep tariffs against the EU. The White House is mulling import taxes of 20 percent on EU cars. The EU has already slapped tariffs on US products including bourbon, jeans and Harley-Davidson motorcycles, as a symbolic tit-for-tat response to the metals duties.

But that’s just a warning shot. Merkel has targeted Trump over his complaint that the EU, in particular Germany, is running a massive trade surplus against the US. These calculations are flawed because they are only based only on goods, not services in which US has a surplus against the EU. Accordingly, Merkel backs a “digital tax” that would target multinationals like Amazon, Facebook or Google, which have come under fire for shifting earnings around Europe to pay lower taxes.

Both Berlin and Brussels are beginning to face the inconvenient truth. Without a coordinated response, Trump’s “America First” doctrine will foster the risk of an all-out trade war, which would hurt global confidence, economic growth and credit.

About the Author:

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/