US-China trade war: Europe’s ‘de-risking’ approach is sensible amid American insanity

The trade war against China that Donald Trump initiated in 2018 is self-defeating, and it defies reason that US President Joe Biden has continued it
Given the realities of global trade, it is understandable that Europe’s leaders focus on ‘de-risking’ rather than decoupling

David Dodwell

Published: 3:30am, 8 Apr 2023

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Adam Posen, president of the Peterson Institute for International Economics, identifies “four profound analytic fallacies” underpinning US trade policies in his recent Foreign Policy article “America’s Zero-Sum Economics Doesn’t Add Up”.

He notes the false idea that “self-dealing” is smart; the belief that self-sufficiency is attainable or even desirable; the idea that subsidies are helpful; and that “on-shoring” is good. Posen says these fallacies are “contradicted by more than two centuries of well-researched histories of foreign economic policies and their effects”.

In less polite terms, the trade war against China initiated in 2018 by Donald Trump was crazy, and it is equally crazy today that US President Joe Biden has continued it. Their deafness to the poverty-alleviating value of trade in recent decades and the harmfulness of protectionism is both tragic and deeply damaging.

Trading partners worldwide are praying they will not be forced to take sides and assessing how to cope if they end up with no choice.

This reality provides an important part of the backdrop to the recent visit to China of European Commission President Ursula von der Leyen and French President Emmanuel Macron. If the overriding commercial imperative is not clear, note that the delegation included representatives from Airbus and nuclear energy producer EDF, focused on potentially massive deals in the power and aviation sectors respectively.

There was pressure on President Xi Jinping to give firm assurances that China will not provide arms to Russia, and that it will find a way to exert pressure on Russian President Vladimir Putin to lay down arms in Ukraine. But more than anything else, these European leaders are making it clear that “decoupling” from China is not part of Europe’s foreign policy lexicon.

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French and EU leaders visit China to discuss trade and the Russia-Ukraine war

The objective instead is to “de-risk” the China relationship. Europe’s leaders have yet to clarify the details of their de-risking strategy, but some components should be obvious to China, and not unreasonable either.

In the wake of massive supply chain disruptions during the Covid-19 pandemic and Russia’s invasion of Ukraine, there is logic in simplifying supply chains where possible and diversifying sources of supply in “critical” industries to improve “just-in-case” resilience.

For example, surely even Beijing must acknowledge Europeans’ concerns around renewable energy. At a time of massive and urgent transition, they are anxious that almost 98 per cent of the rare earth metals needed in wind power generation, hydrogen storage or batteries come from China, along with 80 per cent of Europe’s solar panels, 97 per cent of the lithium needed in electric vehicle batteries and 93 per cent of its magnesium, one of the EU’s 34 “critical raw materials”.

There is mounting evidence that the US trade war – expanded to throttle Chinese access to the most sophisticated semiconductors – is inflicting harm on the US, China and dozens of trading partners. Exact numbers remain elusive as global trade has been massively disrupted first by the pandemic, Russia’s invasion of Ukraine and an inflation-driven recession.

At a global level, trade has flatlined since 2019, with no clear recovery in the year ahead. The World Trade Organization’s latest Global Trade Outlook noted a sharp trade downturn in the final quarter of last year, and is forecasting a fragile 1.7 per cent growth in trade this year. Ralph Ossa, the WTO’s chief economist, pointed to many ongoing uncertainties surrounding monetary policy, financial market volatility and geopolitical tensions.

At the same time, UNCTAD forecasts “continuing trade stagnation”.

In a dissection of US-China trade, economist Chad Bown of the Peterson Institute asks whether there has been a decoupling after four years of trade war. “Yes and no,” he hedges. “On the one hand, US imports of certain products from China – including semiconductors, some IT hardware and consumer electronics – have fallen dramatically. Even clothing, footwear and furniture imports are down.

“But on the other, imports from China of laptops and computer monitors, phones, video game consoles and toys are higher than ever.”

Don’t believe the data. US-China trade ‘becoming less directly interdependent’

Even though there is evidence of some decoupling, trade between the US and China remains high. China’s dependence on US farm products has fallen, with imports down to 18 per cent last year from 26 per cent in 2012. Its import of soybeans has fallen to 31 per cent last year from more than 40 per cent before the trade war.

The US has diversified manufactured imports to countries such as Vietnam, for example, but it is still unclear whether those Vietnamese exports are coming from Chinese companies that have relocated subsidiaries to Vietnam.

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Inflation in the West forces Vietnam factory lay-offs

Some remain sceptical about the scope for decoupling, given China’s size, infrastructure and workforce. A recent Drewry study showed that China has a lead in port capacity, especially for the latest generation of container ships. It has 76 terminals able to berth ships carrying 14,000 20-foot containers, compared with 31 across the rest of Asia. This logistics lead is a product of more than US$40 billion investment and would take years to erode.

With these realities clearly in mind, it is perhaps not surprising that Europe’s leaders – whatever their anxieties be about the future direction of China as a global economic power – prefer to focus on de-risking rather than decoupling.

In the meanwhile, the US might need to prepare to pay a high price for its trade war. Posen might be right about “profound analytic fallacies”, but it seems no one in the US is listening.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades