China Research

What are the consequences of the changes for the European Union?

Globalization characterized the second part of the 20st century.

Discussion by Professor Gerhard Stahl, Peking University, HSBC Business School

Rapidly growing international trade with goods and services and an increase in the flow of international finances characterized the second part of the 20st century, at least until the big financial and economic crisis of 2008.

Two major developments contributed in the Post-World War II period to the creation of a global economy, integrating more and more countries.

First, the European Integration starting with 6 countries in 1950 and ending up with 28 (before Brexit) with the creation of an internal market, by abolishing barriers for goods and services between EU-countries. Second, the opening-up of China by Deng Xiaoping in 1979 and its step-by-step integration into the international economy. China joined the World Trade Organization in 2001 and became the factory of the world attracting foreign direct investment from multinational companies of developed economies, enabling the creation of sophisticated supply chains based on subcontracting and outsourcing of industrial activities. The rise of China and the shift of the economic center of the world economy from Europe and the US towards Asia, the most populated continent, was for a long time seen as a positive development lifting millions of people out of poverty.

But recently the focus has shifted from the economy to geopolitics. Judgments about the international consequences of China’s successful economic development became more critical. Furthermore, Chinas economic model is changing from an investment-led, export-oriented economy towards more domestic consumption, services and green growth.

Will deglobalization characterize the first part of the 21st century?

The international political mainstream of the eighties and nineties promoted a policy of deregulation, reduction of trade barriers and free flow of capital.

Already the financial and economic crisis of 2008 has shown the vulnerability of the interconnected global economy and created doubts about mainstream policies.  The Trump administration since its start in 2017 is openly questioning the benefits of the globalized economy, based on WTO rules and multilateral institutions and policies.

Looking at some recent events, it seems that we reached a tipping point from globalization to deglobalization:

• In Europe, Brexit will create new barriers and difficulties for the free flow of goods and services and the mobility of the workforce between the EU27 and the UK.
• The US government blocked the normal functioning of the WTO by not nominating judges for the dispute settlement mechanism. This follows the logic of an American policy focused on national interests and bilateral negotiations at the detriment of multilateral solutions.
• The US and China reached a temporary truce in their trade conflict by agreeing on a commitment of China to by $ 200 billion more of American made goods over two years. This agreement is in complete contradiction to the idea of free international trade. It must have as consequences that China has to buy less industrial and agricultural products from countries in Europe, Latin American and East Asia.
• The biggest danger for the globalized economy is the conflict about technology and innovation. If the “nationality” of a company becomes the criteria to exclude it from markets, as it is the line of the US government in the case of Huawei than protectionism is back.
• The Chinese government gives priority in its “made in China 2025” strategy to develop Chinese innovations and technologies, to make China less dependent on high tech imports and foreign technologies. Already some services like Google research and “what’s up” are blocked for customers in Mainland China. The technology and innovation race between the US and China might lead to “techno-nationalism” that curtails the international flow of goods, services, and ideas.
• The American political elite sees China more and more as a strategic rival undermining the dominant position that the US has achieved in the Post-World War II international order. If geopolitics dominates economic reasoning an open international economy will not survive.

The European Union and its member states are interested to work with Chinese partners and to continue the successful economic cooperation of the last decades. The EU became Chinas biggest trading partner. Nevertheless, conflicts increased over the years related to market access, state subsidies and unequal treatment of European companies. The EU-Commission summarized the state of play by regarding China as a partner and strategic rival.

Reacting to trade tensions, increased protectionist measures but also to new production technologies (e.g. robotics, 3 D printing) numerous Companies start to reduce their international exposure by cutting supply chains and repatriating production. But there is also a reverse development. Electronic platforms offered by companies like Amazon, Ali Baba, and e-Bay enable especially small companies to access foreign customers at lower costs.  Looking at empirical data the situation is as follows:  Global flows of goods, services, and finance peaked in 2007, before the financial crisis, reaching more than 50 percent of global GDP. With the financial crisis, this rapid expansion has been stopped. Growth in global goods trade has flattened, financial flows have fallen sharply, and trade in services growth modestly.

How should the European Union react to the changes of the international economy and the geopolitical challenges?

The EU defends in its political statements the multilateral rule-based international system and supports international institutions (like the WTO) responsible for promoting an open international economy.

Nevertheless, there are good reasons to demand an equal playing field in international competition. It cannot be accepted that companies, whether state-owned or private, receive government support in a way that undermines fair competition.  This issue is especially complicated regarding China’s socialist market economy.  The ongoing negotiations about a comprehensive investment agreement between China and the EU (that should be concluded this year) will show in which areas a common understanding and common rules can be agreed upon.

Numerous modern innovations and technologies have a dual-use element for military purposes and private needs. Dual-use elements can be seen e.g. in aircraft construction, drones, space activities, nuclear energy, electronic chips, artificial intelligence, and the digital economy. This dual-use element makes it so difficult to separate economic reasoning from political consideration. Both China and the US support research and some national companies in line with military objectives. This might lead to non-market based disadvantages for European companies in international competition.

How can European policy react to these challenges?

The EU is at a crossroads:

• It can develop new protectionist measures to protect European companies and to close its markets against unfair competition.
• The second option is to develop policy instruments similar to its main competitors to strengthen European competitiveness. This approach would allow the EU to stay one of the most open economies in the world.

If the EU wants to defend an open international economy it is incompatible to distinguish companies based on their “nationality”.

An interesting example is the Huawei discussion: the European Commission has not proposed in its toolbox on 5G cybersecurity – in contrary to US demands – the exclusion of Huawei in the built-up of the new telecommunication infrastructure. But it has recommended measures to mitigate the main cybersecurity risks and it demands a diverse and sustainable 5G supply chain, not depending on one dominant company. To achieve the objective of a diverse supply chain it might be necessary to give specific support in tendering procedures or via research financing to companies like Ericson or Nokia.

To be able to stay an open economy in a period of increased protectionism and deglobalization the EU must develop appropriate policies. Especially trade policy, competition policy, industrial policy and research policy must be further developed with the objective to assure an equal playing field for EU companies in the international competition. Furthermore, the new multi-annual financial framework (MFF) has to foresee an increased financial envelope for related research and industrial policy measures. It is important that in the ongoing MFF negotiation the financing of the European defence fund is agreed. This would allow supporting military research and coordinating better national plans. Even if the proposed amount of 13 billion Euros for the fund for the 2021-2027 period is limited, it shows that the EU is aware of the dual-use problem and industrial policy consequences of military expenditure.

 

 

 

 

 

 

 

Professor Gerhard Stahl
Peking University, HSBC Business School