Why Europe must clarify its systemic rivalry with China
This column was first published in Les Echos on may 6th 2024.
China has never needed Europe as much as it does today: this should incite Europe to hold discussions that mark a total break with its past naivety.
On 7th October 2022, the United States paid homage to Henry Kissinger by specifying, exactly as he had recommended, the red lines not to be crossed in its relations with China. This systemic rivalry includes the US denial of China access to American high-tech: 21st century tech is for the US, whilst China gets 20th century mature technology. Nevertheless, the new Cold War is still compatible with a “ChinAmerica” still trading $700 billion every year. The US blows hot and cold, from “Containment” to “Engagement”, in order to best avoid the Thucydides’ Trap. The 10-year interest rates of the US and China, running respectively at 4.7% and 2.3%, show that investors now believe that, over time, growth in the US will be twice as high as in China.
Although Europe has also mentioned systemic rivalry with China since 2019, it has bothered neither to specify nor to act on it. China, however, has clarified its strategy so as to avoid the middle-income trap, the second one threatening its economic development: no shift from manufacturing to B2C services, no rebalancing through the acceleration of domestic consumption, but an unprecedented choice: the technological upgrade of a few key strategic industries. Rather than having recourse to disruptive technologies, those sectors, benefiting from economies of scale, are to be upscaled with a view to become dominant world champions. Boosted by state subsidies, excess industrial capacity is now estimated on average to be four times greater than domestic demand: best illustration that China has now definitely entered a new “war economy”.
Together with Japan, Europe — whose sectors of leadership mostly involve 20th century industries — is the main target of this strategy, having lost ten percentage points of its share of global wealth over the last forty years, entirely to the benefit of Beijing. Europe therefore has now to redefine its relationship with China by specifying the two red lines that are not to be crossed.
In creating a precedent, the electric vehicle market will decide the fate of European industry as a whole.
The first is “Containment” of the “neo-Marxist-Leninists” who have been at the helm since the 20th Party Congress of October 2022. To combat the control imposed by the Communist Party on private capital, Brussels must implement the rules governing European capitalism and make adjustments to the cost of Chinese imports in order to take account of any excess state subsidies received. The second refers to decarbonization: CO2 taxing must be applied systematically to all Chinese products entering Europe, initially at a rate of $60 per ton, to be reviewed over time. In creating a precedent, the electric vehicle market will decide the fate of European industry as a whole. Although Chinese imports are low in terms of absolute volume, they already account for 25% of this segment which, over the next decade, is expected to become the whole of the market. It is therefore vital to balance out the impact that both subsidies and CO2 consumption might have on the production of any imported vehicle.
These discussions — marking a total break from the European naivety of the past — should be facilitated by the fact that China has never, in fact, had a greater need of Europe. Its rivalry with the US is bound to become even more acute given the growing technology gap expected in the future between the two powers. Moreover, because of the strength of the dollar, the “Global South” will unfortunately be deprived of the funding it needs for its economic development.
The recent threat from Beijing of a potential tax on a presumed dumping of French cognac, whose gross margins are ten times higher than those of Chinese electric vehicles, is very revealing in this respect. It shows not only the bad faith of Beijing, but also its embarrassment. Clarifying our basic rivalry with China should therefore aim at serving the interests of both sides, beginning with the interests of Chinese young people and private entrepreneurs.
