In cooperation with Public Policy Forum International, University of Beijing
There is broad consensus in both Europe and China that global economic slowdown is a serious threat, which is complicated by current monetary policy responses to inflation as a result of both the Russia/Ukraine war and the end of the pandemic recession. Given the enormous challenges this poses for economic policies, a multilateral framework for managing problems of such proportions would be to the advantage all countries – advanced, emerging and developing. In reality, however, many of the most recent national choices have gone in the opposite direction, with scarce coordination and unilateral action – starting with the US Fed, whose interest rate adjustments have been especially impactful given the international role of the dollar.
In the absence of multilateral trade agreements aimed at gradual regulatory harmonization – that would necessarily have to include China – it will be nearly impossible to manage the volatility in various key sectors of the global economy. In the final analysis, market fragmentation is accelerated in this phase by decisions taken by both Washington and Beijing in a vicious circle that is going to damage everyone. According to some participants, a “new Bretton Woods” is indispensable, which would include trade as well as monetary and financial sectors. Others underscored with equal urgency the goal of sustainability as a vital component of a comprehensive accord of this sort.
The growing importance of trade and technologies is precisely what has given increased centrality to strategic considerations and, therefore, to a resetting of some of free market barriers. The rapid succession of the pandemic and the Russian invasion of Ukraine has dramatically highlighted Europe’s dependence on a few raw materials and absolutely essential products – from medicines to energy to food production chains – that has accelerated an overall reconsideration of economic interlinkages. Then there is the “political risk” factor that directly concerns China, associated with business even more than with government. Indeed, assessments of the Chinese market’s prospects as compared with the recent past are much more cautious.
Internal political dynamics are decisive in the context of such a widespread phenomenon, and cannot be entirely ignored by any political regime. Europe is weighing this also in terms of environmental and human rights standards, which creates friction with countries like China – and not only. Some participants were more optimistic than others regarding the short- to medium-term prospects for global economic resilience, which seems to have been able to absorb the shock – at least from 2008 onward – better than was predicted, despite the high costs to some of the more vulnerable segments of the society.
Bilateral US/China relations are undeniably pivotal to the global picture as well; yet there are some tentative signs of a possible “selective rapprochement” thanks to direct relations between the two leaders despite underlying tensions. The definition of China as a “systemic challenger” by both NATO and the EU obviously remains problematic for Beijing; but specific areas of technical cooperation, as in the case of some scientific programs, could be explored with both Washington and Brussels. Beijing is also increasingly aware of the problem of China’s international image, which is going to have to be managed more skillfully in the near future, starting with a greater willingness to clarify basic interests and concrete objectives. China is very sensitive to Europe’s lack of autonomy vis à vis America in terms of security; a criticism that the majority of Europeans reject, underscoring the EU’s pursuit of a partially different approach to that of the US, as well as the very candid ongoing debate within the context of NATO.
Looking more specifically at the energy crisis, it was noted how this is truly not only a European but a global crisis, as confirmed by the data on the pressure being exerted by inflation in practically every nation of the world. Diversification, an almost immediate follow-on effect, is characterized by a massive and growing increase in investments in renewable energy sources being led by the EU and China. Europe, however, is focused on diversification of a different sort involving suppliers of components and essential materials for the entire sector. Over the short-term, the EU will have to assure itself especially of adequate gas inflows not only for 2023 but also 2024; and this in a highly competitive global market context, particularly for LNG, where China has decisive heft – and this will be even truer in the eventual scenario of a net growth recovery. The Chinese economy is still heavily dependent on coal, but investments in sustainable transformation are considerable. This calls for the adoption of a new growth model involving the active participation of local authorities and citizens and the more extensive use of market mechanisms for steering investments and consumption.
As in other sectors, here too the “USA factor” is going to be fundamental, thanks not least to the Inflation Reduction Act (August 2022) with which the Biden administration is now subsidizing the energy transition, among other things. In any case, owing to the very nature of the environmental challenge, it is going to be essential to channel national level undertakings toward coordinated objectives and commitments. And it is in the EU’s and China’s common interests to support the efforts of less advanced nations still being forced to confront the economic development/carbon neutrality dilemma – an issue that emerged in stark clarity at the COP27 – and cultivate broad coalitions with countries such as India and Brazil. These forms of cooperation, moreover, have the potential to reduce the risks associated with the international system’s fragmentation, resolving at least in part legitimate and inevitable political counter positions, as signaled by some recent trade agreements signed in Asia under US or Japanese guidance or that of China.