The European business community continues to feel the impacts of the US-China trade conflict, as the 2nd March deadline for resolving the tensions looms. Disrupted by tariffs on USD 250 billion in Chinese imports to the US, and USD 110 billion in American imports into China, global supply chains are eager for stability. European businesses in China report a wide range of negative outcomes, from the need to shift relevant production out of either the US or China and/or change supply chains, to increased market uncertainty, which is resulting in delayed investment decisions.
However, as much as these tariffs are a source of headaches for European firms, the European Chamber’s view is that these trade frictions are to a large extent driven by China’s ‘reform deficit’. It is therefore critical that meaningful change is enacted by the Chinese Government, not only to resolve these tensions and end the tariffs, but also to the benefit of China’s own economy. This is especially crucial now that structural problems lingering from China’s old economic order are depriving the private sector of the resources it needs to develop efficiently. To achieve this, two things must happen.
First, the US must negotiate with China in good faith. The last year has seen a wide variety of articles, speeches and debates in which some have argued that China simply cannot be trusted to keep any promises it makes. These positions are ill-informed: the progress made over the years between the international business community and the Chinese Government disproves any such assertion. Instead, US leaders should embrace Ronald Reagan’s favourite Russian saying, “trust, but verify”, as it moves forward in negotiations. Doing otherwise would hardly be befitting of the country most responsible for building a global economic order based on cooperation.
Second, the Chinese side must be similarly bold with the structural reforms it needs to implement. This will require more than just commitments to purchase more American goods to balance the current US trade deficit. It will also be necessary for China to tackle issues related to market access and equal treatment, while positively addressing both its dominant state-owned sector and a financial regime that too often fails to allocate sufficient capital to the private sector.
It is imperative that China shows meaningful progress on these issues in a timely manner to validate the trust extended by the US. Low-hanging fruit like market access can be achieved overnight with the stroke of a pen, but other issues will take time to resolve, meaning that clear timelines and roadmaps for reform should also be integral parts of any deal. In the meantime, European businesses should continue to firmly engage the Chinese Government to show that the constructive approach yields results, with both the relatively easier regulatory optimisation and the more difficult structural reforms that are urgently needed.