Enter the Dragon: The new global economic order and what it means for Europe

Trade wars, sanctions, hostile company takeovers, currency manipulations — a new economic order is emerging. To paraphrase Clausewitz: the economy is the continuation of war by other means. The world economy has become the key battleground for geopolitical hegemony between the US and China. And Europe is stuck in the middle. It better find a strategic orientation in this new economic landscape, before it turns from being an economic player into an economic playground for great powers.

The international economic order is in the midst of a tectonic shift. Having built and dominated the global economic landscape for centuries, the West is steadily losing influence. The economic centre of gravity is moving to the East. China is the main force behind this development. In three core economic areas, China is making a run for economic hegemony.

First up: trade. Back in the 1980s China’s share of world trade amounted to a meagre one percent. Fast forward to today that one percent has grown into double-digits (12%). China has become the world’s eminent trade power and is displacing the United States. For more than 130 countries in the world it is the most important trading partner. By next year, it is expected that China will even supersede the United States as the European Union’s most important trading partner. The People’s Republic is the world’s workshop. It is the biggest producer of hundreds of industrial products and a key exporter of important natural resources. In this context, the Middle Kingdom is the engine of global economic growth. In 2016, this one country alone was responsible for a third of worldwide growth. China has penetrated every country on earth economically.

And this trend is continuing because, secondly, China is pursuing an active foreign economic strategy. Its foreign direct investment has dramatically increased over the years. 2016 over 180 billion euros was invested abroad, a rise of 40 per cent compared to the previous year. Europe in particular saw many of these investments. Over 35 billion euros — a 77 per cent increase — flowed into European companies back then. And the vast majority of all of these Chinese investments was undertaken by state-owned enterprises that enjoy cheap access to Chinese capital to fund company takeovers. This chequebook diplomacy abated in the last two years, as Chinese investment came under increasing scrutiny and China tightened capital controls but economic interdependence is increasing.

Its grand infrastructure plan — the Belt and Road Initiative (also known as the new Silk Road) — is similarly about expanding its economic influence. This Chinese investment offensive is a geoeconomic bear hug strategy. It aims to ultimately connect more than 60 countries across three continents to China. It will bring together more than 60 per cent of the world’s population, the majority of the world’s energy resources, and a substantial share of the world’s gross domestic product. This flagship project intensifies China’s economic reach into Eurasia and Africa, deepening economic ties and economic dependencies, thereby carving out a new Chinese-dominated economic space. With this initiative all roads will literally lead to Beijing. Joe Kaeser, CEO of Europe’s largest industrial manufacturing company Siemens, has warned that “China’s One Belt, One Road, is going to be the new WTO — like it or not”.

Thirdly, China is gunning for technological superiority. The days that China used to be belittled as the workshop of the world that produces cheap, low quality products are over. The world’s workshop is becoming the world’s research centre. The era of Western technological supremacy seems to be coming to an end. China is returning to the technological world stage. While Europe’s R&D spending was still on an equal footing with China in 2014, the Middle Kingdom has now overtaken Europe; China is now responsible for 20 per cent of global spending on research. Huge amounts are invested in key technologies such as artificial intelligence, quantum computing and biotech. And unlike in Europe, the venture capital market is also booming. Start-ups are popping up like mushrooms, with one third of all ‘unicorns’ based in China.

By 2035, China wants to become the world’s most important force for innovation, and the ‘Made in China 2025’ strategy sets the course for this. China wants to be an international leader in ten key sectors — from biomedicine and robotics to artificial intelligence and alternative car technologies. And this isn’t just about surpassing the West. China wants technological self-sufficiency. As stated by Chinese premier Xi Jinping, “In order to become an internet superpower, we need our own technology. And we have to master it completely”. As early as 2020, the share of domestic components in technologically important key sectors is mandated to be between 50% and 70% of the national market. China is striving for technological autarky, because it knows that’s its Achilles heel. The country is now importing more semiconductors for its digital industry than oil. But it is also exporting its digital technologies to strengthen authoritarian regimes abroad. Beijing is hosting numerous capacity-building workshops for countries in Africa, teaching them how to regulate their digital space, many of which have gone onwards to enact Chinese-style internet controls and cybersecurity laws. And its tech companies are a dictator’s wet dream. Guangzhou-based Cloudwalk Technology, for example, has inked a deal with Zimbabwe to provide the country with a massive facial recognition infrastructure. China’s big brother is coming to Africa.

These three developments are rocking the world economy. That’s tough for the West. China is escaping the traditional division of labor, where the West is responsible for high added value products and China for the rest. Beijing knows that if it wants to keep its economic dynamism going (and thereby keep its population content and autocratic political system stable), it must secure export markets and escape the middle-income trap by becoming a technology leader.

Its economic expansion is changing the international economic order. And in the end, it is also a power play. Firstly because economic dependencies translate into political influence and secondly, because China’s increasing economic penetration abroad is creating an economic sphere of influence that is marginalizing the US in the broader struggle for geopolitical hegemony. It is no wonder that North America is the only continent that is not included in China’s One Belt One Road initiative. China is following Sun Tzu’s Art of War: avoid the main power, penetrate the open spaces. It is playing Wei Qi, the strategy board game better known as Go, in which it is important to encircle territory and control empty spaces, rather than attack your opponent head-on as in chess.

America’s answer to China’s economic expansion

The geopolitical struggle between the US and China is being played out in the economic sphere. That’s why the US-China trade war, isn’t just a trade war. It’s one theatre in the grander competition over who will be the world’s economic hegemon. The United States doesn’t just want to address its trade deficit with China, it wants to halt China’s economic and technological expansion, reverse China’s economic interconnections and isolate it.

To provide some examples: In the NAFTA re-negotiations, Trump included a caveat that would allow the US to terminate NAFTA, if Canada or Mexico would sign trade agreements with non-market economies, read: China. Second, the United States is pursuing a policy of decoupling. It aims to reorient supply chains away from the Middle Kingdom and promote foreign companies leaving China due to the extra tariff costs. Some export-oriented manufacturers are already leaving. A UBS survey showed that a third of manufacturing respondents in China had already moved some production out of the country last year and that another third intended to do so this year. Third, it wants to halt China’s technological rise by tightening restrictions on technology exports, limiting Chinese takeovers of high-tech companies, restricting visas for Chinese students studying in high-tech areas, and increasing funding for strategic technologies such as artificial intelligence.

Europe stuck in the US-China competition

Former Treasury Secretary Hank Paulson warned that an “economic iron curtain” is descending. The question is: on which side of that economic iron curtain will the European Union end up? The EU is stuck in the middle of the US-Chinese economic competition.

China is offering economic carrots — foreign direct investment and access to its massive market. Prior to the EU-China Summit, China inked investments deals with France and Italy, and it’s now allowing foreign companies to take majority ownership of joint ventures in China, which German firms are particularly making use of.

The US is carrying an economic stick. Washington sees the danger of the EU slipping ever more into Chinese economic dependence. It is no wonder that on the very same day the EU held its EU-China Summit, Trump announced tariffs on French, Italian and EU goods — namely cheese, wine and Airbus planes. And he continues to threaten to put tariffs on the EU car industry. Beijing pays, Washington punishes. Trump, in his grander competition with China, is demanding EU fealty, wishing to circle the Western wagons against China.

The EU has already toughened its stance on China. Macron announced that the era of a naivety towards China is over. The EU has strengthened its foreign direct investment screening mechanisms and in a recent strategy paper, the EU has labelled China a “systemic rival”. It also signalled to China that it was willing to walk away from the EU-China Summit without a declaration, if it didn’t get Chinese assurances on key issues such as reciprocity in market openness, the end of technology transfer, and the reform of the WTO.

The EU is facing a tough balancing act. Both markets — the American and the Chinese — are crucial to the EU economy. And in countless scenarios the EU could lose out economically. If the US-China trade war escalates, European industry could suffer. Likewise, if there is a trade deal. Economists at Barclays estimated that a trade deal could cost the EU 50 billion euro in exports.

Europe shaping the new economic order

Europe’s challenge lies in finding a strategic orientation in this new economic order; an order determined more by realpolitik than rules, power politics than partnership, and where economics and foreign security policy are inseparable. It must face up to the new economic reality and define its economic place in the world.

First and foremost, it needs to be self-confident, promote its interest and be willing to take the necessary measures. It is one of the largest markets in the world — that gives Europe economic weight. It doesn’t need to be swayed by the siren song of China’s market and should be more confident when dealing with China. China has copied products, stolen trade secrets, forced companies to engage in technology transfer and conducted cybertheft. It’s great that Europe got China to commit to ending such practices but actions speak louder than words. Europe should be ready to take economic measures, if China doesn’t follow-up on the commitments it made in the EU-China Summit declaration. Otherwise Europe would be nothing less than a sheep in wolf’s clothing. Economic relations are a two-way street. Without the EU, China would have not enjoyed its massive growth rates and technological development over these last years. The EU shouldn’t forget that.

Second, the EU needs to open up alternative markets. Africa is a high-growth potential partner right on the EU’s doorstep. An economic perspective for Africa together with the EU, would open up massive mutual benefits. India, likewise, is a sleeping giant. A democratic country waiting for an economic break-out moment, which could also be a geopolitical bulwark against China.

Third, Europe needs to stay a technological leader, which means investing in groundbreaking technologies such as artificial intelligence, quantum computing and biotechnology. If Europe fails to invest in the technologies and innovations of the future, if it no longer plays in the technological ‘premier league’, then what will be left for it? “Once we have been excluded, there is no second chance”, says Germany’s former Green Foreign Minister Joschka Fischer.

Europe should also consider tightening its regime for high-tech exports to ensure that strategically important technologies don’t flow to countries where they are used to suppress human rights or advance a digital authoritarianism. And it must seriously consider a policy advancing technological sovereignty. Europe shouldn’t let its 5G network, the nerve center of the future digitally-connected world, be built by China’s Huawei but let it be built by the European alternatives available. This is also about our democratic and social model. If we don’t invest and develop the groundbreaking technologies, regulate and standardize them according to our moral values and democratic principles, others will. That’s why we need to develop an ethical framework for such technologies, but it also means actually developing the technologies itself and use them in a way where they solve grand societal challenges such as climate change.

Fourth, Europe must be at the forefront of reforming the emerging economic order into a multilateral, rules-based one. It must find partners, such as Japan, Canada, South Korea and others for such an endeavour.

The world is undergoing an economic upheaval. Long-held rules and institutions are losing strength. Economies are being weaponized and economic spheres-of-influence established. Europe needs an answer to this new world — and it better come up with one fast, if it wants to continue being an economic player rather than playground for great powers.