Tensions between Great Powers: Challenges for Europe

The first part of our newsletter “Tensions between Great Powers” considered the economic rise of China and its consequences. Read the second part today:

Tensions between Great Powers: Challenges for Europe

Those who set the standards command the market - Western dominance is dwindling

In the last few years, issues of economic dominance and the regulation of new technologies have become crucial. For example, China operates with different premises when it comes to regulating data, and the country lends differing weight to individual versus state interests. In the global economy, there is often little point in applying different standards in different jurisdictions to technologies on which internationally traded goods depend. Countries are therefore trying to establish their own standards as internationally as possible …. This gives national companies clear advantages in international competition … If China sets a global standard, then the EU or the USA cannot do so at the same time.

China is increasingly defining its own norms and standards, which it then incorporates into international standards-setting, for example in the area of the Internet and the “Internet of Things”, as well as in conventional industries where China is strong. Such a conflict with Western-style regulations and standards is already taking place in international standards-setting organizations, for example in the International Telecommunication Union.

Is decoupling an alternative?

P. Wittig: There has been much talk recently of “decoupling,” the deliberate disentangling of ties between the American and Chinese economies. On the US side, we can see clear strategic trends towards isolating China in the high-tech sector … By contrast, the manufacturing sector has so far been less affected by US measures. On the capital markets and in the financial industry, however, isolation is almost non-existent—on the contrary. The flow of private US capital to China has increased significantly in recent years and Chinese capital is heavily invested in the USA. However, the strong inflow of American capital into the Chinese high-tech and financial sectors has recently weakened after Beijing intervened massively to rein in its own large tech corporations. As a result, confidence on Wall Street has suffered.

 

In sum: On the US side, we cannot currently talk about widespread decoupling, but rather a partial decoupling that is limited to the tech sector.

 

China too has shown tendencies towards decoupling: 

 

G. Felbermayr: China’s openness has declined significantly, while China’s proportion of world trade has increased. So in addition to the country becoming stronger compared with others, there has also been a reduction in dependency on foreign countries, both developments taking place in a short period of time and on a quantitatively considerable scale.

Decoupling, i.e. reducing economic interdependence, would entail high costs. The price would be:
  • a lower level of prosperity
  • a reduced ability to innovate
  • reduced ability to deal with common global threats such as climate change

Ideological effects

G. Felbermayr: China’s success is curtailing the reach of the Western liberal system. Its system of authoritarian state capitalism offers an alternative … And as China’s global economic power grows, so does the likelihood that the country will be able to expand its concept of statehood. 

Today the ideological battle is no longer between communism and capitalism, but between constitutional, value-based democracies on the one hand and emerging authoritarian models of society on the other. The latter appear attractive, as they are ostensibly stable, militarily strong, and often also economically very successful, especially since decisions, be they political or economic in nature are made ruthlessly and implemented quickly without any supposedly annoying procedures or lengthy debates to hold them up. In these models, social freedoms are regarded with disdain and replaced by other priorities, namely economic prosperity, nationalism, or religion.

What's the situation for Europe?

P. Wittig: The European Union is not a major geopolitical superpower, but it is a “global trade power.” 

The EU is beginning to equip itself against the superpowers’ economic coercive measures that are incompatible with the WTO. For example, the EU is in the process of developing a legal basis to deter third-party sanctions (Anti-Coercion Instrument). The US sanctions that have an extraterritorial effect, i.e. that force European companies to follow US legislation, are also being targeted. As a rule, however, the Europeans are not the first to resort to pressure and threats, relying instead on negotiations to avoid economic coercive measures. 

 

The EU would do well to set up a joint China agenda with the USA that describes a differentiated relationship with China in European terms. From a mainly European point of view, China is three things at once:

  • partner (on global issues such as climate change, nuclear non-proliferation, the fight against terrorism)
  • competitor (on issues of economy and technology
  • an adversary (in the arenas of military security and in cases of China’s expansion in violation of international law).

It is therefore crucial to calibrate the relationship with China wisely and not rely solely on confrontation, while at the same time not endangering the transatlantic alliance. 

The first part of this newsletter, “The rise of China and its consequences”, is available on our website.

If you want to know more, stay tuned for the new CONVOCO! Edition “How much freedom must we forgo to be free?” (April/May 2022).

Previous Tensions between Great Powers: The Rise of China and its Consequences

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