March 23, 2021 | EU-China Retaliatory Sanctions
EU-China reciprocal sanctions signal a rise in tensions, but the economic incentives for cooperation are still overwhelming
EU-China Retaliatory Sanctions
Relations between the United States, China, and European Union are evolving rapidly. In the final weeks of the Trump administration, the European Union and China agreed in principle to the Comprehensive Agreement on Investment (CAI). We’ve touched on the agreement's clauses in previous notes. In theory, the agreement would solidify reciprocal access to European and Chinese markets once ratified.
Although not ratified, the tentative CAI reached in December represented the conclusion of seven years of negotiations between China and the European Union. The deal itself wasn't surprising. However, the timing of the agreement raised eyebrows within American foreign policy circles.
It was pretty clear the European Union and China rushed to reach the tentative agreement before the Biden administration could take office. Additionally, China agreed to many surprising concessions, particularly regarding International Labor Organization conventions concerning forced labor conditions in China’s Xinjiang Uygur Autonomous Region, home to China’s Uyghur Muslims.
Many interpreted China's perceived concessions as urgency to secure access to European markets while still open. Moreover, the December agreement revealed many Europeans' discontentment with the United States’ influence in EU foreign and domestic affairs. We witnessed this discontentment play out in February at the Munich Security Conference.
US President Biden addressed attendees virtually with the firm declaration, "America is back." European leaders' response was tepid, as German Chancellor Merkel emphasized her view that US and European interests "may not always converge." Additionally, French President Macron articulated Europe's intent to pursue a trajectory of "strategic autonomy."
Fast forward to yesterday, the European Union and China imposed retaliatory sanctions centered around forced labor abuses in China’s Xinjiang Uygur Autonomous Region. The European Union’s decision to sanction China at this stage reveals a divide amongst Europeans over the EU’s approach to China.
Ultimately EU-China retaliatory sanctions amount to a slap on the wrist for both sides. There’s still a fairly strong consensus among global foreign policy experts that the European Union and China can still finalize the bilateral Comprehensive Agreement on Investment (CAI).
Although China holds immense leverage over whether or not to allow European businesses and financial institutions to expand in-country operations, China also has enormous incentives to attract foreign investment and capital.
China’s economy has traditionally depended heavily on maintaining a trade surplus to build up its foreign exchange reserves. Chinese authorities then use its built-up foreign exchange reserves (~ USD 3 trillion) to suppress the value of its currency, the Yuan, thus perpetuating the cycle of supporting its exports and thereby increasing its trade surplus and foreign exchange reserves.
The United States and other developed countries have viewed China’s economic practices as undermining the global economy’s stability. China has engaged in these practices for several years, arguing that the US-led rules-based order is inherently unfair to China and that it must leverage asymmetrical advantages to compete.
Although the United States had several decades to address what it perceived to be China’s unfair trade practices, it wasn’t until Donald Trump took office in 2017 that the United States began to ratchet up the pressure by levying tariffs on Chinese goods in the spring of 2018. It’s reasonable to assert that March 2018 marked the beginning of the current US-China security dilemma, as the United States, China, and the European Union have engaged in an escalating cycle of trade-oriented retaliatory actions ever since.
The problem for both the United States and European Union is that it’s already way too late for tariffs, sanctions, and other economic punitive measures to make any impact. US, European, and Chinese sanctions are likely entirely symbolic.
It’s too late for the United States and the European to apply economic pressure on China through sanctions. The United States missed its chance to do so while China’s economy was still heavily dependent on exports to the United States. In recent years China has started to pivot away from its dependence on exports and investment-led growth towards a model rooted in domestic consumption and expanding its services sector.
Although China is still deeply dependent on foreign capital inflows to maintain its currency's stability, it’s adjusting its model so that it doesn’t need to rely on exporting physical goods to bolster its foreign currency reserves. Instead, China is working to attract foreign financial institutions by eliminating or easing foreign ownership restrictions in its wealth management and financial services sectors.
Throughout 2020’s spike in global anti-China and anti-CCP sentiment, western financial institutions ramped up investment and efforts to expand China's business operations. Although China-centered geopolitical tensions continue to escalate, we must continue to be mindful of the reality that China, the United States, and European Union are still economically integrated on a deep level. Political rhetoric and diplomatic theater can’t change this.
Related Notes:
Additional Reading and Current Events
EU-China Relations
EU-China Comprehensive Agreement on Investment: Milestones and documents (European Commission)
In view of the Commission’s transparency policy, the Commission is publishing the text of the EU-China Investment Agreement following the agreement in principle announced on 30 December 2020. The text is published for information purposes only and may undergo further modifications as a result of the process of legal and technical revision, including of the final structure (such as numbering, sequencing, or titles of articles, or any duplication). However, in view of the growing public interest in the negotiations, the text is published at this stage of the negotiations for information purposes. This text is without prejudice to the final outcome of the agreement between the EU and China. The text will be final upon signature. The agreement will become binding on the Parties under international law only after completion by each Party of its internal legal procedures necessary for the entry into force of the Agreement.
US-China Relations
China Lashes Out at U.S. Allies in Bid to Thwart Biden Strategy (Bloomberg)
This week Joe Biden made good on his campaign promise to work more with allies to pressure China, coordinating with U.S. partners to impose sanctions over alleged human-rights abuses in Xinjiang.
Beijing’s response: Hit back at the allies as hard as possible.
China wasted no time Monday night immediately retaliating with reciprocal sanctions against European Union officials while summoning the bloc’s ambassador to China. Those hit included politicians in a range of countries, one of the main EU bodies formulating foreign policy and Europe’s largest research institute focused on China.
Joint Statement on Xinjiang (US Department of State)
Today, we have taken coordinated action on measures, in parallel to measures by the European Union, that send a clear message about the human rights violations and abuses in Xinjiang. We are united in calling for China to end its repressive practices against Uyghur Muslims and members of other ethnic and religious minority groups in Xinjiang, and to release those arbitrarily detained.
China Monetary and Digital Currency (DCEP)
Yuan Internationalization Is Not Aimed at Challenging U.S. Dollar, PBOC Research Head Says (Caixin)
China’s push for the greater international use of its currency is not an attempt to have the yuan challenge or supplant the U.S. dollar as the world’s major reserve currency, a People’s Bank of China (PBOC) official said.
The internationalization of the yuan, also known as the renminbi, is a natural result of China’s economic development and integration into global supply and industrial chains, Zhou Chengjun, director of the PBOC’s finance research institute, said (link in Chinese) Saturday at the annual China Development Forum in Beijing.
As a manufacturing and trade powerhouse, China is seeking to play a bigger role on the global stage as its leaders have pledged to continue opening up to the rest of the world. It has played a leading role in the signing of the 15-country Regional Comprehensive Economic Partnership free trade agreement and has been exploring the possibility of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, another free trade pact, which involves 11 countries including Japan and Canada.
China’s Central Bank Digital Currency Will Offer Greatest Privacy Protection, Official Says (Caixin)
China’s central bank digital currency will offer users greater privacy protection than any other digital payment tool, a People’s Bank of China (PBOC) official said.
The digital yuan’s “controllable anonymity” can satisfy individuals’ reasonable needs for anonymous transactions and personal information protection, while helping to maintain financial stability by contributing to the fight against money laundering, terrorist financing and tax evasion, Mu Changchun, head of the PBOC’s digital currency research institute, said Saturday at the annual China Development Forum in Beijing.
China’s Belt and Road Initiative
China’s Belt and Road: Implications for the United States (Council on Foreign Relations)
The Belt and Road Initiative (BRI), Chinese President Xi Jinping’s signature foreign policy undertaking and the world’s largest infrastructure program, poses a significant challenge to U.S. economic, political, climate change, security, and global health interests. Since BRI’s launch in 2013, Chinese banks and companies have financed and built everything from power plants, railways, highways, and ports to telecommunications infrastructure, fiber-optic cables, and smart cities around the world. If implemented sustainably and responsibly, BRI has the potential to meet long-standing developing country needs and spur global economic growth. To date, however, the risks for both the United States and recipient countries raised by BRI’s implementation considerably outweigh its benefits.
China Trade
Will China and Taiwan join the Comprehensive & Progressive Agreement for Trans-Pacific Partnership?
On trade, Canada’s best path forward in Asia is expansion of the TPP*, the more the better. With the Biden administration putting trade on the back burner to protect its domestic agenda and mid-term election prospects Canada’s best chances of expanding the agreement lie elsewhere. The UK has already begun to apply and the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu is prepared to apply as well. China has also floated hints of being interested. What are pros and cons for Canada of Chinese Taipei and mainland China joining? What are the likelihood of having either enter?
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