Berlin takes a risky bet on Beijing


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Happy New Year from Brussels. It used to be that trade issues wound down over Christmas, as the world’s negotiators and lawyers toddled off home to think of something other than antidumping margins for a week or two. This festive season saw more action than some whole decades in the past: a Christmas Eve Brexit deal — which we interrupted our seasonal break to comment on here — and then a “political agreement” on the EU-China investment treaty, which squeaked in ahead of the self-imposed year-end deadline (we’re resentful about the timing here, as it’s a very narrow miss in our otherwise largely accurate predictions for 2020).

Today’s main piece examines the overarching question of what the treaty means for the politics of internal EU determination, let alone transatlantic co-operation, to rein in China: we’ll get into policy detail across the spectrum in future newsletters. Today’s Tit for tat is Elvire Fabry at the Institut Jacques Delors think-tank in Paris, answering questions on the view of Brexit from the EU.

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Has Brussels allowed China to divide and rule?

It might all come good, of course. This might be the moment when the Xi Jinping regime, hitherto headed unerringly towards economic nationalism, decides on a major influx of foreign involvement in its economy and uses an investment treaty with the EU as a pole around which to pivot.

It might be the moment when an increasingly oppressive government that has put 1m people in re-education camps and used inmates for forced labour decides that this is the time to improve human rights and sign and enforce international conventions on labour standards. It might well be that China’s government decides not to use its new national security powers, let alone its endless inventiveness with bureaucratic obstructionism, to block investment and renege on promises to Brussels about market access.

It’s not exactly a given, though, is it?

The arguments against the EU-China investment treaty — only at broad political declaration stage — are well-rehearsed. For the moment, it’s hard to make a judgment on the content. Such deals are often oversold at the initial signing stage, though to be fair we haven’t seen a text yet. 

Politically, though, agreeing a deal just before incoming US President Joe Biden’s administration takes office is a bad look for the prospects of transatlantic co-operation to address China’s trade-distorting growth model. As it happens, American policymakers have been constructively restrained in responding: a somewhat tart Twitter message from Biden’s incoming national security adviser was followed by a more emollient response from the Republican chairman of the Senate foreign relations committee.

The EU says it has set down a marker for liberalisation and transparency with China that other countries can follow, and in any case it is partly only catching up with the “phase 1” deal that the Trump administration signed back in January. But a closer look at that deal underlines the big risks of relying on China to make meaningful changes — not just to international solidarity but also internal political credibility.

Ursula von der Leyen, European Commission president, attends the EU-China leaders’ meeting © Lukasz Kobus/EU Commission/dpa

The moment that Donald Trump signed that deal, he was beholden to China’s fidelity to implementing it. It was an election year: accepting that Beijing was reneging on the deal would have been an admission of weakness and naivety. The US trade representative Robert Lighthizer, normally bracingly suspicious of the good faith of trading partners, has been forced unconvincingly to insist that China being way behind its purchase commitments for US exports is just unfortunate timing. Remarkably, given his consistent strategy of China-bashing, Trump’s deal left him open to attacks from Biden in the election for being soft on Beijing.

A similar phenomenon is quite possible in the EU, given the political divisions here. This is not a universally admired deal. Voices in the European Parliament are objecting loudly. Ministers from Poland and Italy publicly expressed misgivings, though did not actually block the deal. The agreement was driven through in the dying days of Germany’s six-month presidency of the council of member states, with France’s eventual support.

The internal politics of the EU regarding China have rearranged themselves somewhat. A few years ago, western European governments complained that central and eastern European (CEE) states, organised into the 16 + 1 grouping (later joined by Greece, with Italy also signing an agreement with China), were getting too close to Beijing. But disillusionment set in among CEE and southern governments after the promised investment failed to materialise. Now it’s Berlin and Paris claiming it can make gains through engaging with China amid scepticism elsewhere.

By doing so, they have potentially handed China one of its favourite things, a tool to divide and rule — not just between the EU and the US but within the EU. One of the old truths of trade policy is that success is as much about containing divisions within trading powers as bridging gulfs between them. If the EU joins up too aggressively with the US to go after China, Beijing can ostentatiously renege on the bilateral deal. That will not look good for Germany and France within Europe as well as for the EU with the US.

There are plenty of ways China can frustrate the intent of the agreement. Rules about foreign investment and transparency leave a great deal more room for administrative legerdemain than do cuts in tariffs. Beijing has promised only to make “continued and sustained efforts” to ratify two International Labour Organization standards: there won’t be binding dispute settlement with sanctions.

Ramming through a limited deal without getting enthusiastic internal consensus or backing from allies doesn’t look like the act of a confident, ahem, strategically autonomous trading power to us. Relying on Beijing to keep promises made in a trade or investment agreement isn’t exactly a guaranteed route to credibility. There’s a lot of risk here, and possibly not that much reward. We won’t be the only ones watching it closely and remaining to be convinced.

Charted waters

Line chart of Renminbi per dollar showing Renminbi starts 2021 on course to erase trade war losses

As the Biden administration prepares to enter the White House, foreign exchange markets are pricing in more cordial relations between the world’s two economic superpowers.

Hudson Lockett writes from Hong Kong that China’s currency has rallied to its highest level in more than two years, wiping out most of the losses suffered since the start of the country’s trade war with the US. The onshore-traded renminbi on Monday crossed the important 6.5 per dollar threshold for the first time since June 2018.

Tit for tat

Elvire Fabry, senior research fellow at the Institut Jacques Delors think-tank, joins us to answer three quick questions about Brexit.

Elvire Fabry, from the Institut Jacques Delors, says the view that the UK won the Brexit trade deal negotiations is mostly aired by Eurosceptics © JEAN-PHILIPPE BALTEL/SIPA/Shutterstock

1. Do you think the Brexit deal will go down well with public opinion in France?

French public opinion is moderately interested in the topic, but broadly understands that a deal is better than no deal. Emmanuel Macron’s vocal defence of European fisheries, together with the favourable terms achieved on this topic, produced a general impression of success and that European cohesiveness paid dividends. The view that the UK won the negotiation is mostly expressed by Eurosceptics.

2. Do you anticipate more conflict and difficult negotiations over remaining questions between the EU and UK over the next year?

There are many unsolved issues (including financial services and data protection) and plenty of room for conflict. The recent past shows that the UK may expect at least as much internal negotiation as external. Going forward, access to the single market will notably be conditional upon regulatory equivalence, which Europeans will review unilaterally on a case-by-case basis. The cumbersome lobbying to achieve equivalence where there is regulatory divergence could work as a deterrent to divergence. There will be constant dilemmas between the perceived benefits of divergence and the proven benefits of continued access to the single market. 

3. In the longer term, do you expect the EU to make much use of its ability to impose unilateral tariffs on the UK (or vice-versa) in response to regulatory divergence?

There is little doubt that the EU is prepared to impose unilateral tariffs if needed, as suggested by its firm attitude in the negotiation regarding the level playing field.

However, assuming that it is possible for the UK to replace advantageously business lost with the EU with remote trade partners, the UK’s best interest remains to keep its EU business until it is actually replaced (or realistically replaceable) with equivalent alternative business. Therefore, I don’t expect much regulatory divergence in the short to medium term.

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