China 'keeping wary eye' on US and EU as trade pressure mounts

China is "keeping a wary eye" on the United States and the European Union " its two biggest trade partners " as they try to pressure Beijing to make changes, diplomatic sources and observers said.

Amid an escalating trade war, Washington wants Beijing, among other things, to stop subsidising its industrial development and technology sectors and to significantly lower market barriers.

Chinese consumers demand bigger tax cut as living costs skyrocket

Its discontent over China's slow progress on reform in these areas is shared in Europe, though the EU has opposed the US approach of using tariffs to force Beijing to change.

"The Chinese government keeps a wary eye on EU-US relations," a European diplomat said on condition of anonymity. "They know that pressure on China would rise immensely if they joined forces in trade issues.

"To avoid such a situation, the Chinese side is trying much harder than before to accommodate European concerns. China seems to be more and more aware that the country's lack of will to fully embrace an open, market-oriented economy since its accession to the WTO won't be sustainable."

Talks between Washington and Beijing concluded on Thursday with no concrete steps towards ending the trade war. The following day, the US met the EU and Japan in Washington to discuss how to upgrade the World Trade Organisation rules, in an apparent move to apply more pressure on China.

Some European firms and diplomats say that, to some extent, US President Donald Trump's high-pressure tactics may prove effective " even if they do not agree with them.

"Just think about how little China did in its market openness commitment during the [Barack] Obama administration," another European diplomatic source said.

"We don't agree with the tariff approach, but Trump does have a point regarding US concerns about China. The hard line and high pressure of Trump could force China to change," he said.

Beijing would eventually be forced to make compromises, including taking concrete steps on market access and reducing overcapacity, he said, as well as measures to ward off threats to social stability.

He added that China was nervous about the EU and US working together, and needed to move closer to its neighbours and key trading partners. "The ball is in China's court at the moment," he said.

Donald Trump's hardline tactics may prove effective, some Europeans say, even if they don't agree with them. Photo: AFP

Adam Dunnett, secretary general of the EU Chamber of Commerce in China, said that Beijing had made progress on opening its markets but had "not caught up with the pace of China's economic growth".

Every country had its own path for development and it should not affect other economies negatively, Dunnett told a seminar organised by the Centre of China and Globalisation in Beijing on Thursday.

At the heart of the conflict is China's state-led economic model, which is problematic under the global trading system.

"The global trading rules are based on assumptions that market economies are more efficient than state-led economies and that countries benefit from the free trade due to the principle of comparative advantages," said Timothy Stratford, a former assistant US trade representative.

"However, China is trying to develop many key sectors of its economy through state intervention and has also set a goal to be self-sufficient in certain key sectors such as semiconductors.

"These policies, and geopolitical considerations, constrict the space for the normal trade rules to operate," said Stratford, now managing partner of law firm Covington & Burling's Beijing office.

While the latest negotiations were under way in Washington, the US and China imposed 25 per cent tariffs on another US$16 billion of each other's products on Thursday " raising the total amount of imports from each side that are now subject to duties to US$50 billion. That came after Trump earlier reiterated his threat to slap a 25 per cent tariff on every car imported from the EU.

Still, Chinese analysts saw little likelihood of the EU and the US joining forces against China.

Lu Xiang, a US specialist with the Chinese Academy of Social Sciences, said that the structural conflicts in trade between Washington and Brussels were larger than those between China and the US.

"Trump's wishful thinking is to force America's trade partners, one by one, into submission," Lu said. "If China falls [in the trade war], then it would be the turn of the EU and Japan."

Wang Yiwei, head of the Centre for EU Studies at Renmin University of China, said that Beijing was opening up too slowly for the West, and that the lack of fairness in its markets had made Europeans feel that China was "winning twice" " rather than the "win-win" situation it often touts.

"Also, China's rise up the production chain is challenging the technology dominance of the US and the EU and their power to make rules " and they are growing wary of China's influence," he said.

Wang added that China was still attractive to foreign companies, but that it needed to speed up reform and adjust its strategy by forging more alliances rather than creating enemies.

China says it will keep striking back at 'unreasonable' US tariffs

China has warned the EU "not to stab us in the back", yet it has also tried to find common ground with Europe to defend the rules-based trading system with the WTO at its centre.

In the latest China-EU summit held in Beijing last month, disputes were set aside and the two sides released a communique " a sharp contrast with the talks held in previous years.

Offers for more talks on a bilateral investment treaty, the Comprehensive Agreement on Investment, were also exchanged during the summit. Details of the Chinese offer are not known, but the EU embassy in Beijing said that both sides would meet after the summer to "seek technical clarification".

The embassy said the European offer was "ambitious" and also provided "important transparency with a detailed listing and legal citations of the existing measures at all levels of government".

"We only hope to see a similar level of ambition in terms of the sectorial coverage, level of openness and transparency in China's first offer to us. We need to bear in mind the significant disparity in our current levels of openness, which we seek to rebalance," the embassy said.

This article originally appeared on the South China Morning Post (SCMP).

Copyright (c) 2018. South China Morning Post Publishers Ltd. All rights reserved.