Different Economic Views on China Set EU, U.S. Apart

U.S. President Joe Biden’s administration has been inaugurated. The new administration is eager to mend relations with European countries, but there are some differences between the two sides over policies on China. Keio University Prof. Shumpei Takemori, an expert in international economics, shares his views.

Change of course

For the time being, the Biden administration will focus on COVID-19 control and economic stimulus with a big relief package of $1.9 trillion (¥200 trillion).

The previous administration led by President Donald Trump was so eager to win popularity that it didn’t take any serious actions against the novel coronavirus. Former President Barack Obama’s administration, which was inaugurated in 2009 with Biden serving as vice president, was blessed with favorable conditions in which Democrats dominated both the Senate and the House of Representatives. But it made a poor political choice by focusing on medical insurance reform, which was a point of dispute nationally, instead of economic recovery following the collapse of Lehman Brothers, and eventually lost control of Congress. As a result, Obama’s performance over his two terms in office disappointed the public.

The Biden administration came into power at a good time with the start of COVID-19 vaccinations in the United States. The key to success is whether the government can achieve economic recovery by combining this timing with effective economic measures.

Unlike the previous administration’s “America First” policy, the new administration is trying to restore international cooperation and has reversed Trump’s course by returning to the Paris Agreement committed to decarbonization and canceling its withdrawal from the World Health Organization.

The United States abandoning its international role caused confusion in the trade system and expanded China’s political influence. China’s influence is reflected in the recent coup in Myanmar.

Can the international order led by the United States be rebuilt through Biden? A comprehensive investment agreement concluded between the EU and China at the end of last year serves as a good source for the answer.

Search for coexistence

The purpose of this agreement is to reform the system so that the EU and China can expand mutual investment. The Chinese government is notorious for coercing multinational companies that are highly capable in terms of technology to form joint ventures with local firms if they want to enter China, for the purpose of taking their technology. The concessions acquired by the EU this time include the abolition of this rule. China also obtained a concession whereby Chinese companies can enter part of the EU’s renewable energy market.

Notably, Jake Sullivan, who is national security adviser under the Biden administration, sent a message just before Brussels and Beijing signed the deal that they should wait until Biden’s inauguration to conclude the agreement as that would clarify U.S. foreign policy. This suggests an idea that the United States and Europe ought to adopt a monolithic policy toward China.

How should the free world handle China?

In the past, the Soviet Union was the rival of the free world for having radically different perceptions of human rights and political freedoms and for its military expansionism. It had a planned economy that was so rigid it could easily be guessed that the Soviet Union would collapse when its expanding influence over other countries was contained. In fact, the free world led by the United States won the Cold War in the early 1990s.

Today’s China is also a threat in terms of its different perceptions of human rights and freedoms as well as the threat of military expansion. However, the Chinese economic system has the flexibility to allow free corporate activities. This has combined with the advantages of having a huge domestic market and strong public support for industry to make the Chinese economy lead the world in growth rates.

The free world took a different approach to China than to the Soviet Union. Instead of containing it and waiting for self-destruction, it explored the possibility of expanding trade opportunities and coexisting with China as partners. If the free world’s markets become indispensable for China’s growth, these nations can use their markets as a bargaining chip and force China to change its system. As the income level of the Chinese people increases, their desire for political freedom also increases. Based on these factors, it was hoped that the Chinese system would soon converge into a free world system.

Threat remains

Thus, in 2001 China joined the World Trade Organization (see clip) and began to benefit from free trade, thereby achieving a quantum leap in its economy. But the expected convergence of systems did not happen.

Certain events underscore China’s continued threat. China and Australia signed a free trade agreement in 2015, making China Australia’s largest trading partner. However, when the Australian government excluded the entry of Chinese companies into the business of 5G high-speed, large-capacity communications, China imposed unilateral restrictions on imports of Australian agricultural products and coal.

A country as large as Australia loses in a single trade dispute with superpower China. If the countries of the free world are expecting China to change not only in economics but also politics, society and environment, they must join forces and negotiate with China using their huge markets as weapons. To this end, Sullivan’s view that the United States and Europe must cooperate is basically correct.

However, the EU has its own reasons for making a bold decision to conclude an investment deal with China. First, unlike the United States, where manufacturing is already in decline and which seeks a future in digital and information technology, the European economy — and the German economy in particular — holds manufacturing as its mainstay, and the Chinese market is the key to keeping the German economy strong. It is said that German Chancellor Angela Merkel played a major role in the EU’s decision to conclude the agreement at a dash.

World order

Second, to be frank, Europe sees little chance of the Biden administration successfully restoring a world order centered on the United States. In last year’s presidential election, many votes were cast for Trump, too, and the election ended up highlighting the division in the United States. In this situation in which the vice-president’s vote helped it barely win a majority in the Senate, the Democratic Party is likely to lose control of the Senate in a midterm election in two years time. More than anything, there is strong opposition to free trade even among Biden supporters, which prevents him from launching any new trade-related policies, such as re-joining the Trans-Pacific Partnership (see below) or concluding a free trade agreement with Britain.

The future development of the world depends on whether the Biden administration’s achievements in domestic affairs will gain enough public support to exercise leadership in foreign policy.


World Trade Organization

An international body responsible for setting and enforcing rules that promote free trade. The WTO arbitrates when trade disputes occur between member nations. Launched in January 1995, the WTO is based in Geneva and has 164 member nations and regions.

Trans-Pacific Partnership

A multilateral agreement that abolished or reduced tariffs and set rules on investment. The deal initially was signed in December 2018 by 12 member nations including Japan, United States and Australia. But, the U.S. withdrawal under then President Donald Trump’s administration has made it with 11 members. Britain announced its participation this year. China, South Korea, Taiwan among others show interest in participation.

Shumpei Takemori

Professor at Keio University. Studied at Keio and University of Rochester in the United States before taking up his current post in 1997. He has also been serving as a private-sector member of the government’s Council on Economic and Fiscal Policy since January 2019. He is 64.