The danger of a US-China deal

03.02.19 Publication:

The trade war between the United States and China risks getting nastier, lasting for years and damaging all our economies. Negotiations in Washington, DC, on January 31stbetween Chinese and American officials failed to make progress. Italy’s new recession can be traced back to a slowdown in Chinese demand for imports resulting from the trade war. Yet we in Europe need to wake up to an even bigger worry. It is that the US and China might actually come to a deal, and then marginalise us for ever.


            A clue that this could happen should be seen in President Donald Trump’s response to the lack of progress in the January 31 negotiations. Immediately he called for a summit between him and “his friend” President Xi Jinping of China. Only through such high-level, personal talks could a deal be done, he said.


            This reflects Trump’s narcissism and his liking for dealing with powerful, authoritarian leaders, much as Silvio Berlusconi in his Palazzo Chigi years was never happier than meeting Russia’s Vladimir Putin and Libya’s Colonel Muammar Qadhaffi. But it also reflects something deeper: the imminent arrival of a world dominated by two superpowers.


            That is why, from the point of view of smaller nations as well as a big bloc such as the European Union, the key strategic risk of the US-China confrontation is not failure but success, not conflict but resolution. In principle, today’s complex world should be run by a multiplicity of nations, negotiating together to agree common rules for trade and security. In practice, those rules might in future become set by just two nations, representing together about 40% of global economic output and an even greater share of its political and military power.


            Within the European Union, small nations have long had mixed feelings about collaboration between France and Germany: without it, the EU tends not to make progress; with it, any progress that does occur risks trampling over the interests of all the others. The same could soon happen with the US and China, if the world were to move away from being led by the Group of Seven rich countries amid a wider Group of 20, which has prevailed since the 2008 financial crisis, and instead find itself dominated by  a Gang of Two.


            Right now, a G2 might seem a distant prospect. America and China have imposed heavy tariffs on each other’s goods and are trading bitter accusations about the arrest in Canada, at America’s request, of the chief financial officer of the giant Chinese telecoms company Huawei, who not coincidentally is daughter of the firm’s founder. The US and China also have deep differences about Chinese military operations in the South China Sea, and an awkward relationship over efforts to force North Korea to abandon its nuclear weapons.


            Yet the intensity of the differences also argues for the management of those issues on a bilateral basis, one that President Trump would like to become personal. The bilateral instinct makes some sense, but it poses dangers to the rest of the world and to the multilateral system of decision-making and rule-setting that we have become used to.


            China has, for several decades now, been a big backer of multilateral forums such as the World Trade Organisation, the IMF and the many United Nations bodies. They provided a welcome sense of legitimacy as well as protection against American domination. But now that China has become much more powerful in its own right and is being bullied by the Trump Administration on a bilateral basis, it could change its mind, feeling in a better position to stand up for itself and even dominate.


            The basic strategy of the European Union and of other major powers that stand to lose influence in a G2 world – such as Japan, Canada, Australia and Brexit Britain – should be to work to persuade China to stick with multilateralism. They could do this by showing that more acceptable formulas for managing sensitive issues such as intellectual property theft and technology development can be achieved through the WTO, IMF and UN than in US-China talks, and that firms such as Huawei will also be better protected by international law than a battle of two countries’ domestic laws.


            Meanwhile, European governments should be lobbying other branches of American government, such as Congress and state governors, to convince them that long-term US interests are also better served by wide international partnerships than by Trump’s personal diplomacy.


            Everyone wants the US and China to cease fire in their trade and technology battles, and to avoid even a glimmer of military confrontation. But at the same time the longer-term need is to avoid collateral damage to the multilateral rule-making system in which we all participate and in which our voices can all be heard.