China-EU investment deal shows a Joe Biden united front on trade will not be easy

The EU’s decision to proceed with the deal and ignore Biden’s requests to slow down shows the extent to which US and EU China strategies are not always in sync
Some type of US-EU coalition on China is likely to materialise, but it will be more limited in scope and more complicated to manage than originally thought

Stephen Olson

Published: 4:00am, 19 Jan 2021

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As President-elect Joe Biden’s administration gets up and running, perhaps the sharpest policy difference with its predecessor will be the new president’s desire to repair global alliances, build coalitions and work constructively with like-minded countries. This is particularly true on trade policy, where Biden has expressed a desire to establish a united front with the European Union on trade grievances with China.

Biden’s desire to reverse President Donald Trump’s go-it-alone strategy is prudent. However, caution is in order. While there is broad alignment between the United States and the EU on China trade issues, there are differences which could complicate the establishment of an effective coalition.

These are already evident. The EU’s decision to move forward with an investment agreement with China, ignoring requests by the Biden team to slow down, demonstrates the extent to which US and EU China strategies are not always in sync.

Although it has been overshadowed by the US-China trade war, the US-EU trade relationship is also on rocky ground. The EU was broadsided by the Trump administration’s imposing steel and aluminium tariffs on national security grounds, and it responded with US$3 billion in retaliatory tariffs.

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The Boeing-Airbus subsidies dispute continues to drag on. The World Trade Organisation has authorised the US to apply US$7.5 billion in tariffs to the EU, while it allowed the EU to enact US$4 billion in tariffs on the US.

Despite the recent suspension of tariffs on France, clouds loom over European moves to implement digital taxes the US believes unfairly target US tech companies. With both sides attacking each other across the Atlantic, it is reasonable to wonder how cohesive a US-EU united front can be.

Although the US has a diverse list of trade complaints with China, a common theme is the role the Chinese government plays in the economy.

The US feels the Chinese government uses its predominant position to tilt the playing field to the advantage of Chinese companies and interests. The example the US often presents is China’s “Made in China 2025” plan, in which the Chinese government funnels support to strategic industries, undermining the competitiveness of foreign companies.

While the EU shares these concerns to some degree, its members are generally more comfortable with government involvement in the economy. Many of the interventionist Chinese policies criticised by the US have approximate parallels in the EU.

Germany’s Industry 4.0 programme, for instance, shares much in common with Made in China 2025. Clearly, there will be limitations to how much common ground the US and EU can find in challenging China on the government’s role in business and the economy.

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The US and EU will have to contend with differences on policy objectives as well as tactics. For better or worse, one of Trump’s enduring legacies appears to be greater comfort in the US with using tariffs as negotiating leverage.

It is instructive to note that despite widespread criticism of this approach, the Biden team has made no commitments about ratcheting down the tariff strategy. To the contrary, Biden’s policy statements indicate a willingness to use the same laws Trump used to apply tariffs.

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The EU, on the other hand, has been among the staunchest critics of US tariffs and has not demonstrated the same level of willingness to employ tariffs.

This means that even on issues where the US and EU are broadly in agreement on substantive policy objectives – such as addressing forced technology transfers – their ability to work together will be compromised by differences on when to use the carrot versus the stick.

Given these complications, what is the best way forward? A couple of principles should guide Washington and Brussels. First, do not waste time trying to forge watered-down consensus positions and strategies on issues where strong alignment does not exist. That would degenerate into a quagmire, which would be to China’s advantage.

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Instead, move quickly to identify areas where both sides are in lockstep or close to it. Concentrate joint efforts in these areas and agree to disagree about the rest, allowing each side to engage China as they see fit. This means the coalition will be less broad than initially envisioned but will ultimately be more nimble and effective.

Second, clear the deck of the unnecessary friction which undermines efforts to work together. As soon as is practical, Biden should drop the tariffs on steel and aluminium and the EU should rescind its retaliatory tariffs.

A Gulf Air Boeing 787-9 Dreamliner aircraft flies by as an Emirates Airlines Airbus A380-800 plane is seen parked, during an airshow at at Sakhir Air Base in Bahrain, in November 2018. The US and EU should work on ending the Boeing-Airbus dispute, which has dragged on for years. Photo: Reuters

After 15 years, end the Boeing-Airbus dispute. Both sides have broken the rules. Acknowledge reality and cut a deal which at least avoids compounding the original sin by applying billions of dollars in punitive tariffs.

Other irritants – such as digital taxes – will be more difficult to resolve in the short term, but these flare-ups will be more manageable if the other dumpster fires have been extinguished.

The basic rationale for a US-EU coalition on China trade grievances is sound, and some type of a united front is likely to materialise. It will, however, be more limited in scope and more complicated to manage than originally thought.

Stephen Olson is a research fellow at the Hinrich Foundation