Washington and Beijing cut a trade deal – Europe picks up the tab

(Alicia García Herrero – Lowy The Interpreter) The rollercoaster of EU–China relations continues its descent, and it is tempting to read that slide as a purely bilateral story – of Brussels cataloguing grievances over overcapacity and market access, and Beijing answering with lectures on multipolarity. But the steepest part of the current drop is being engineered elsewhere, in the managed-trade arrangement taking shape between Washington and Beijing. Europe is not a party to it, yet it absorbs many of its costs. Start with the mechanism economists call trade deflection. A managed US-China equilibrium – tariffs capped, purchase commitments made, export controls loosened in exchange for concessions – does not eliminate China’s structural surplus, which reached around $1.2 trillion last year. That output must go somewhere. To the extent that Washington and Beijing keep their bilateral flows within politically tolerable bounds, the marginal unit of Chinese overcapacity is pushed toward the most open large market still willing to absorb it. That market is the European Union. This is clearest in what Beijing calls its “new quality productive forces”, including electric vehicles, batteries and the renewable-energy supply chain. Europe is now the largest external buyer of exactly these products. The US still buys, but in a managed and shrinking way – behind tariff walls, content rules of the type pioneered by the Inflation Reduction Act, and a deliberate policy of building domestic capacity. Even Europe’s own anti-subsidy tariffs on Chinese EVs have proved more porous than American barriers. The asymmetry matters: every door the US half-closes to Chinese green tech raises the pressure on the one large door left ajar, and that door is Europe’s. – Washington and Beijing cut a trade deal – Europe picks up the tab | Lowy Institute