The trade war is just the start: distrust of China is bipartisan in Washington and EU environmental tariffs loom

After years of assuming a closer relationship with China would make it more liberal, the West’s view is changing. Scepticism about Beijing is the one thing US political parties agree on, while an EU carbon tariff could hit China hard

Neal Kimberley

Published: 1:00am, 4 Dec 2019

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The US-China trade war is only the tip of an iceberg. It might suit China to have it resolved sooner rather than later because there will undoubtedly be new challenges to confront. Policymakers in the liberal democracies of the West are re-evaluating their attitudes towards China’s resurgence.

Let’s be honest: policymakers in the West, perhaps overconfidently or perhaps naively, felt that encouraging China’s economic expansion would not only produce a wealthier nation but also one which moved closer to embracing Western democratic values.

China is certainly wealthier, but the Communist Party doesn’t seem likely to embrace Western democratic values any time soon. Consequently, Western policymakers, particularly in the United States, are having a rethink.

Western policymakers also made the political calculation that the benefits to Western consumers of access to cheaper Chinese goods outweighed any electoral downside that might occur as manufacturing jobs shifted to China. That calculation is also being rethought, and nowhere more so than in Europe.

In the US, President Donald Trump has pushed back against what he perceives to be an inequitable trade relationship with China but there’s broad cross-party backing for his position.

The US Congress is now flexing its political muscles. It initiated the Hong Kong Human Rights and Democracy Act that Trump, without fanfare, signed into US law last week.

Such was the level of Congressional cross-party cooperation, the passage of that bill into US law became effectively unstoppable.

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If Trump had prevaricated, the legislation would have passed into US law anyway on December 3. If Trump had vetoed the bill, it would have been overridden by two-thirds majority votes in both the House of Representatives and the Senate.

Given that the Senate had passed the legislation unanimously and the House by 417 votes to one, achieving those two-thirds majorities would have been a formality.

That should ring alarm bells in Beijing. A willingness to confront China over a range of issues unites US Democrats and Republicans when little else does.

Meanwhile, the US-China trade war is undoubtedly hitting the Chinese economy. Data last week from China’s National Bureau of Statistics showed that profits at its industrial firms fell 9.9 per cent year on year in October, a third successive month of decline and the steepest drop since 2011.

As other contentious issues will arise anyway, it might suit Beijing to resolve the trade war sooner rather than later.

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Elsewhere, as part of its climate change agenda, the European Union may become a less welcoming destination for Chinese goods in the future.

The EU is committed to reducing its carbon emissions in line with its obligations under the Paris Accord on climate change, but it also wants to protect European jobs.

Brussels may roll out a carbon border tax, effectively an environmental tariff, on goods imported from countries that the EU considers are unfairly benefiting from a continued reliance on cheaper but carbon-dioxide-producing fossil fuels.

China’s continuing reliance on fossil fuels to power its economy and its still-rising carbon footprint leave it vulnerable on this issue. Still classified as a developing nation, China may not be legally obliged to cut its absolute carbon dioxide emission levels, but that will cut little ice with Brussels.

In pushing through policies that result in EU manufacturers relying on environmentally friendlier but more expensive renewable energy, those same manufacturers would be at a cost disadvantage compared with overseas competitors still utilising carbon-dioxide-producing but cheaper power sources.

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A carbon border tax addresses that problem, allowing the European Union to simultaneously send a clear environmental message and help protect EU jobs.

France and Germany stated in September their intention to combat climate change and that a carbon border tax should be considered. In October, the new EU climate commissioner, Frans Timmermans, said research would begin to examine the viability of such a levy.

New EU climate commissioner Frans Timmermans said in October that the EU would consider a carbon tax to protect European companies from competition with non-European firms where climate regulations are less strict. Photo: AFP

China has already cried foul. “We need to prevent unilateralism and protectionism from hurting global growth expectations and the will of countries to combat climate change together,” Zhao Yingmin, China’s environmental vice-minister, said last week.

But the EU has its climate change agenda and it will seek to protect European jobs. An EU carbon border tax may be on the way whether Beijing likes it or not.

The US-China trade war may prove to be the least of Beijing’s concerns. It makes sense to get it resolved but that won’t be the end of it. The West is reassessing its attitude to China’s economic rise. The road ahead will be bumpy.

Neal Kimberley is a commentator on macroeconomics and financial markets

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