How US and allies can find common ground on China, Reuters, Apr. 18, 2023.
By Hugo Dixon
Emmanuel Macron’s recent warning that European countries could become “vassals” of the United States in a confrontation with China was unwise. But the French president is not the only U.S. ally wary about being drawn into a crisis over Taiwan driven by what he called "the American rhythm and a Chinese overreaction."
The possibility of conflict between two nuclear-armed superpowers is not just terrifying. The economic turmoil of an all-out Cold War with China, an economy 10 times as big as Russia’s, would make the damage unleashed by Vladimir Putin’s invasion of Ukraine look mild.
Many U.S. allies, from Europe to Canada and India, are also irritated when Washington develops policies without considering the impact on its supposed friends. The protectionist aspects of the Inflation Reduction Act, which is in part designed to wean America off dependence on Chinese green technology, is the most contentious recent example.
That said, the U.S. and its allies have many common values and interests with regards to China. The more they can agree, the stronger they will be.
The United States is not nearly as strong as it was at the height of the Cold War with the Soviet Union. American GDP accounts for 24% globally, down from 39% in 1960, while China’s share has risen from 4% to 18%. So the U.S. needs its friends.
Japan, Australia and other Asian countries also need American support to counter the challenge from a more assertive China. Meanwhile European allies know that, without U.S. muscle, Ukraine would have lost to Russia. Moscow’s close relationship with Beijing has made European leaders increasingly worried about Chinese power.
DE-RISK, DON’T DECOUPLE
One of the lessons from the Ukraine crisis is that European countries should have de-risked their exposure to Russia many years ago by finding alternative sources of energy. Yet they’re in danger of making the same mistake with China, which has a dominant position in key technologies such as solar panels and batteries for electric vehicles.
America and its allies don’t want Beijing to be able to blackmail them. The answer is to de-risk their exposure to China by diversifying supply chains for strategic goods, but avoid broader decoupling from the People’s Republic.
Bruno Le Maire, France’s finance minister, was pushing this line on the margins of the International Monetary Fund and World Bank meetings in Washington last week. He listed a series of areas that he considered strategic: green hydrogen, batteries, artificial intelligence, semiconductors and solar panels. Another finance minister from a Group of Seven country mentioned chemicals and critical minerals such as lithium.
An IMF staff paper said decoupling could reduce global economic output by between 0.2% and 7%. This extremely wide range suggests that a targeted approach could be quite manageable while a blunderbuss approach would pile another challenge onto the current “polycrisis.”
The good news is that financial leaders increasingly see de-risking as the right way to go. Kristalina Georgieva, the IMF’s managing director, said she thought it should be possible to enhance security of supply in key goods while avoiding a second Cold War.
Meanwhile, the G7 finance ministers said“enhancing supply chain resilience while preserving economic efficiency” were both of “paramount importance.”
MAKE “FRIENDSHORING” WORK
It will be much harder to manage this simultaneous juggling act if countries resort to protectionism. After all, free trade has delivered global economies of scale and allowed countries to specialize in what they do best.
The answer is therefore to create a big market for strategic goods among allied countries. This is, indeed, the purpose of the U.S. “friendshoring” initiative, which aims to reorient supply chains to friendly countries. The snag is that the IRA undercuts that effort by channeling subsidies primarily towards goods made in the U.S.
The G7 finance ministers last week took a step to address this concern. They promised the “transparent, efficient, and predictable” use of subsidies, tax incentives and similar tools. That doesn’t unwind the protectionism of the IRA. But it might make it harder for a multinational company, for example, to play off one country against another to ensure the maximum subsidies for building a new factory.
The finance ministers also said they wanted low and middle-income countries to take a bigger role in new supply chains – dangling the prospect of a partnership in this area. This makes sense as rich countries lack a comparative advantage in raw materials and low-cost manufacturing. But it is unclear how much headway the G7 will make as China has already invested heavily in many poorer countries.
BUILD UP THE G7
America and its allies have used the G7 as one of the most important forums for coordinating their response to Russia’s invasion of Ukraine. They may now be extending this role to the challenge from China.
It is not just the group’s finance ministers who are seeking to coordinate their approach. G7 trade ministers this month pledged to work together on several areas: using export controls to stop “malicious actors” getting access to technology; preventing a country using economic threats to “coerce” other governments; and fighting state-owned enterprises distorting the global market.
Even though their statement didn’t mention China, the People’s Republic was their main target. The trade ministers also promised to work on this agenda with other “willing partners” beyond the G7.
If the G7 really does coordinate its approach across these areas, it will make a welcome change from the United States’ old approach of announcing a policy and then arm-twisting allies to fall into line, as it did recently with export controls on sales of advanced semiconductor kit to China. Genuine consultation might even lessen Macron’s fear of being turned into a vassal.
But it will still be presidents and prime ministers of the G7 who set the overall policy on China – including on how to handle any aggression towards Taiwan. Without agreement on grand strategy, progress on the nitty-gritty economic issues will be sub-optimal.
Editing by Peter Thal Larsen and Amanda Gomez