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US President Donald Trump has repeatedly criticized the European Union for its trade policy which is ‘very unfair’ to his country. Photo: AP
US President Donald Trump has repeatedly criticized the European Union for its trade policy which is ‘very unfair’ to his country. Photo: AP

US-triggered trade war pushes Europe towards China

Donald Trump risks fast consuming the great reserves of trust and soft power which the US has built towards Europe

The trade fight between the US and China is posing a dilemma to the European Union (EU): Should the world’s largest trading bloc pick a side? And, if so, which one?

In theory, the US is the more natural ally for Europe: The two have cooperated closely since the end of World War II, building the multilateral institutions which are now under threat. And yet, US President Donald Trump’s slipshod approach to trade diplomacy risks pushing the EU into the arms of China. The EU’s main strategic interest in this fight is to ensure that the multilateral trading framework—including the World Trade Organization (WTO)—survives. At the moment, this concern is most shared by Beijing, not Washington.

In many ways, the US and the EU are in a similar position with regard to China. The two economies are both net importers: Their trade deficit amounted, respectively, to $351 billion and $178 billion, according to Bloomberg data. Of course, to some extent the trade gap reflects the different stages of development of these countries: Large chunks of manufacturing have moved to China, to benefit from lower wages, while domestic consumption has only recently begun to rise. Even accounting for different stages of development, however, Western countries have long complained that Beijing is subsidizing its domestic industries unfairly. For example, large conglomerates enjoy subsidized loans from China’s state-owned banks, giving them an unfair advantage, or even keeping some of them artificially alive. On steel, the subject of some of the Trump tariffs, the US and the EU both believe that China should do more to reduce overcapacity.

Washington and Brussels also share concerns with regard to China’s technology transfer policy: They accuse Beijing of seeking to misappropriate intellectual property, for example by taking over Western high-tech firms. This was Trump’s justification when he unveiled last week tariffs on around $50 billion worth of annual imports from China. The US also launched a case at the WTO, which the EU and Japan have since joined.

But while the EU and the US are natural partners in rewriting the rules of world trade with China, Trump’s strategy risks depriving Washington of a strategic ally. The president has repeatedly criticized the EU for its trade policy which, he argued, is “very unfair" to the US. Trump only granted a last-minute exemption to the EU on his tariffs on steel and aluminium. Moreover, this exclusion is temporary, as Trump is seeking to put pressure on European countries to make concessions in other areas of trade; not exactly the kind of treatment the EU expects from a friend.

Most importantly, the US administration is showing disdain for the multilateral trading system which it contributed to building. On Friday, Trump said the WTO was “unfair" to the US. His proposed tariffs have stretched the WTO framework to its limits—the levies on steel and aluminium were justified on a rarely used exemption for the defence of national security.

Conversely, China is seeking to stick to the rules of the multilateral trade game. President Xi Jinping has repeatedly presented China as a staunch defender of globalization, including at a historic speech at the World Economic Forum in Davos last year. China is now challenging the US tariffs through the WTO—a sign that Beijing is keen to preserve the existing dispute settlement mechanism. That stance fits well with the EU’s own opposition to countries going it alone when it comes to trade disputes. Last year, Cecilia Malmstrom, the EU trade commissioner, compared a world without the WTO to the “Wild West."

Beijing’s courtship of the EU has intensified lately. Zhang Ming, China’s ambassador to the EU, wrote last week that “China and the EU, as major members of the WTO and comprehensive strategic partners, should take a clear stance against protectionism." This smacks of hypocrisy, but may be all the EU can rely on at this stage.

There are many areas where an EU-China alignment is possible: Beijing is seeking strategic partners for its Belt and Road Initiative, a development strategy aimed at building better infrastructure between Asia, Europe and Africa. Several countries, including France and Germany, have expressed an initial interest in the project, and this could be stepped up.

Similarly, European countries could take a more active role in the Asian Infrastructure Investment Bank, China’s development bank which aims to support the building of infrastructure in the Asia-Pacific region. The US has not joined this initiative, as it sees it as a rival institution to the International Monetary Fund and the World Bank. Most European countries have already chipped in, and could invest more.

We are a long way from seeing the EU pivot away from the US and towards China, of course. The EU still has plenty of reservations about Beijing’s trade policy—and there is little sign these will disappear. From the defence of liberal democracy to broad foreign policy priorities, there is much more to the transatlantic bond.

But Trump risks fast consuming the great reserves of trust and soft power which the US has built towards Europe since the war. That could be just as damaging as the economic costs of Trump’s tariffs on the US and world economy.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View.

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