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The Real Strategic End Game in Decoupling From China

Going all-in on the transatlantic economy is the only serious option for Western democracies seeking to counter China.

By Valbona Zeneli and Joseph Vann for
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The Real Strategic End Game in Decoupling From China
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In the shadow of the global COVID-19 disaster, governments around the world are rethinking trade practices with China. That effort requires some much-needed reflection about what a real economic partnership should look like. A near perfect example of that kind of partnership is the transatlantic economy. Built on foundations of the Industrial Revolution and then purposefully redesigned for greater success in the aftermath of World War II, the transatlantic economy has produced the largest and most successful trading bloc in the world, remaining the most dominant and interconnected force in the global economy.

In spite of the transatlantic economy’s successes, the argument could be made that the transatlantic community has overlooked the importance of this partnership. The evidence lies in the fact that we are not seriously maximizing investment opportunities within the partnership and thus limiting its potential. For too long our attention has shifted toward China, hoping to strike it rich quick.

Over the last decade, the Chinese Communist Party (CCP) has been clearly messaging that China has returned to the world stage and plans to be a formidable player. Its stated vision is to re-establish the global rules-based order according to its view of the world, in which China will be a (if not the) dominant power. No longer an economic backwater, China has prospered from the rules-based order, while being allowed to systematically flaunt those rules. Now an economically and militarily powerful country, the CCP seeks to become the new “rule-maker” in order to fulfill its global ambitions.

For good reasons, China was invited to enter into the world trading schemes by Western countries. This allowed China incredible market access, serving to advance its economic development. At the same time, the West has overlooked countless Chinese transgressions that demonstrated their disregard for international law and business norms. The tipping point will likely be events surrounding the COVID-19 crisis and the CCP’s non-transparent actions, which have cost the global community dearly. The CCP avoided information sharing when it was most crucially needed by governments and promoted vibrant propaganda stories to confuse and misdirect attention when the global community needed unity most.

As a result, the topic of decoupling with China has become the subject of much discussion. Some may be dismissive of decoupling talk as fear mongering or hype, but the challenge is clear. The decades-long freewheeling establishment of Chinese supply chains and the “get it on the cheap” model made China the go-to global manufacturing hub, producing almost 30 percent of world’s manufacturing output. Unexpectedly, the urgent need for medical supplies during the pandemic proved to be a sobering wakeup call about the West’s dependency on and vulnerability to Chinese companies that operate under the control of the CCP.

Challenges sometimes present opportunities. As we reflect about what we have learned and begin to design what we want for our new post pandemic normal, we have a perfect opportunity to advance the future of Western democracies to the next higher level. The path to accomplish this is through doubling down on strengthening the transatlantic economy.

The Transatlantic Economy Outshines All Others

Although not perfect and seasoned with growing pains, the transatlantic economy has produced the largest and most successful trading bloc in the world. China’s real GDP in current prices in comparison is approximately 35 percent of the transatlantic economy.

The trade between the United States and the European Union (EU) makes all other trade volumes pale in comparison — including trade with China. Transatlantic trade levels (in goods and services) totaled more than $1.3 trillion. This dwarfs by far trade activity between the United States and China ($636 billion) and between EU and China ($718 billion). Counting exports and imports of goods and services, the U.S.-EU bilateral trade is as big as the sum of U.S.-China and EU-China activities.

Meanwhile, the United States and EU have in common huge trade deficits with China. These deficits, $307 billion for the U.S., and $146 billion for the EU are not healthy. When it comes to transatlantic trade, however, we have seen sustainable growth. Volumes have more than doubled since 2000 ($566 billion) and grown by over 50 percent since 2009 ($834 billion). In 2019, there was a positive trade balance for Europe on products that amounted to $178 billion, and a positive American trade balance on services of $60 billion.

Often the discussion on U.S.-EU trade is sidelined by tactical trade disputes; we tend to overlook the aggregate successes of the transatlantic economy. Overall, and with the exception of few highly regulated sectors such as textiles, agriculture, and the automotive, trade tariffs are on average only 3.5 percent.

However, focusing on tariffs only misses the bigger picture. There are constantly ongoing and mutually beneficial negotiations aimed at improving the transatlantic regulatory process to further increase trade and investments. Given the size of the transatlantic economy, even small successes result in positive benefits for both sides. In the end, regulatory harmonization and following the rules-based order is the name of the game.

In addition, the transatlantic partnership is ideally suited to focus on services, a sector where trade has increased almost three times, from $117 billion in 2000 to $487 billion in 2019. Services is the fastest growing segment of global trade, as the WTO is forecasting that services could account for up to one-third of world trade by 2040, a 50 percent increase in just two decades.

It’s Not Only About Trade, It’s Also About Investment

Mutual investment is the often overlooked backbone of the transatlantic economy. At $6.2 trillion in mutual investment, the United States and the EU are each other’s primary source and destination of foreign direct investment (FDI), employing directly more than 16 million workers. Mutual investment in the North Atlantic region is significant and actually dwarfs trade, while proving essential to U.S. and European jobs and prosperity. Meanwhile, the United States and Europe together accounted for 58 percent of inward stock of FDI and 63 percent of outward stock of FDI, compared to China’s 5 percent of inward stock of FDI and 6.2 percent of outward stock.

To put it into perspective, U.S. investment in Europe makes up roughly 60 percent of the total stock of U.S. outward investment globally. U.S. investment in Europe is four times U.S. investment in the Asia-Pacific region, and 31 times higher than U.S. investment in China. As a symbol of deepest economic integration, the stock of U.S. investment in Europe has increased much faster than trade levels, increasing 5 times since 2000. That trend continued even after the 2008-2009 economic crisis and was one of the drivers of the economic recovery on both sides of the Atlantic. In fact, since 2009 investment has doubled, reaching $3.6 trillion in 2019.

European investment makes up 68 percent of the total stock of foreign investment in the United States, compared to investment coming from Asia-Pacific region, which accounts for only 16 percent of the total investment. Chinese FDI in the United States is only 0.9 percent of the total stock. The stock of German FDI in America alone is more than eight times bigger than Chinese investment.

When we examine Chinese investments in Europe, although they only make up less than 3 percent of the total stock of FDI in the EU, interests are clearly focused on strategic investment in the core EU countries and infrastructure development projects on its periphery. The goal is to shape the European economic landscape and its politics. The CCP has a well-structured and diversified strategy when it comes to Europe. The various projects are ultimately intended to support Beijing’s Belt and Road Initiative by establishing an economic and foreign policy foothold in the region.  The “17+1” platform focusing on the countries of Eastern and South Eastern Europe is the clearest example of this strategy.

As a result of these economic and security developments, the EU is seeking to determine the right balance with China as an “economic competitor.” China, on the other hand is in pursuit of technological dominance, and a promoter of alternative models of governance. In the context of great power competition, the CCP is playing the multilateralism card in Europe — not from any adherence to grand ideological values but simply to prevent the EU and the United States from fully energizing the transatlantic economy in response to China’s questionable behavior.

It is clear that the CCP is intent on employing all elements of national power to achieve its goals. Benefitting from the rules-based international norms is completely different from following them. Beijing excels in information warfare and in wielding propaganda to confuse and misdirect the attention of the global community. The recent virtual EU-China Summit revealed the CCP’s contempt for Europe. Fair investment opportunities, market access, and obligations to recognize basic fundamental human rights remain issues of divergence in the Sino-European relations.

The evidence is unmistakably clear — the transatlantic economy is where values, supported by the rule of law, contribute to true long-term wealth creation. The most fundamental economic enablers are mature and supportive for continued economic successes. Its vibrancy outshines the rest of the global economy and this is where we should be intensifying our investments and doing business.

Valbona Zeneli is the chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies.

Joseph Vann is a professor of national security studies at the George C. Marshall European Center for Security Studies.

The views presented are those of the authors and do not necessarily represent the views and opinions of the Marshall Center and the Department of Defense or its Components.