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David Back St. Gallen Symposium

Competitiveness

US-China cold war will force the EU to choose sides, experts say

Published 7 May 2021 in Competitiveness ‚ÄĘ 5 min read

The US-China rivalry is descending into a new ‚Äúcold war‚ÄĚ that is fracturing the world into two blocs and will force the EU to choose sides,¬†experts said at the 50th¬†St. Gallen Symposium¬†on Thursday.¬†¬†

Speaking at a session moderated by David Bach, IMD’s Dean of Innovation and Programs, they expressed concern that the EU is in danger of becoming a hapless plaything in the escalating tensions between the world’s two biggest economies.   

Ann Lee, a leading authority on China’s economic relations, rejected claims made by America’s top diplomat Antony Blinken on Tuesday, who tried to downplay the country’s tensions with China during a separate conference.   

‚ÄúIf you look at what the US has done in the last¬†few¬†years in terms of stepping up tensions¬†with¬†China, like starting a trade war, like imposing restrictions on US companies being able to sell semiconductor chips to¬†China,¬†or¬†forbidding Chinese companies from investing in US or European¬†tech¬†companies‚Ķit shows the¬†US¬†is trying to move towards a cold war¬†with China.‚Ä̬†¬†

But she drew a contrast with the first cold war between the US and Russia, pointing out that China is one of America’s largest trading partners and there are official diplomatic relations.   

Simon Evenett, Professor of International Trade and Economic Development at¬†the¬†University of St.¬†Gallen,¬†said the ‚Äúdecoupling‚ÄĚ of the US and China was evident in¬†the drive by both sides to more closely scrutinize foreign direct investment, especially under¬†the Donald Trump administration.¬†But so far,¬†US-China investment flows¬†seem to belie the¬†rising¬†geopolitical tensions.¬†¬†

Evenett¬†suggested¬†the capitalist motive to maximize shareholder returns clashes with the political rivalry between the superpowers.¬†‚ÄúAny degree of decoupling is possible. The question is, at what price?‚Ä̬†he¬†asked.¬†‚ÄúUnfortunately, these issues are often framed solely in terms of national security.¬†The¬†economic, business¬†and¬†social benefits of engagement are overlooked.¬†That conversation needs rebalancing.‚Ä̬†¬†

EU businesses cannot afford to ignore the big market opportunities in China

Andreas Treichl, Chairman of the ERSTE Foundation and President of the European Forum Alpbach, agreed there is divergence between business and political interests, noting that European companies especially are dependent on Chinese production in sensitive areas like raw materials, pharmaceuticals and semiconductors.  

The¬†COVID-19¬†pandemic¬†caused bottlenecks that underscored the¬†need for¬†supply chain diversification.¬†But¬†Treichl¬†said that, unfortunately, Europe was forced to choose between US and Chinese suppliers, especially in the technology sector.¬†‚ÄúWe have to accept that and we are not leading anymore in any of the new technologies,‚ÄĚ he said.¬†‚ÄúIt¬†is much more urgent now¬†for Europe to¬†develop its own digital infrastructure.‚Ä̬†¬†

Treichl also expressed concern in the EU that the bloc could be wedged between the US and China, especially in Germany where Angela Merkel, the country’s chancellor, has admitted divergence with US foreign policy on China.  

‚ÄúEurope will now be faced with a situation¬†where¬†the US will demand Europe to move along with them,‚Ä̬†he said,¬†noting that this came at a¬†particularly¬†difficult time for the EU,¬†which is dealing with¬†major internal challenges¬†such as the¬†economic¬†dislocation¬†caused by¬†coronavirus.¬†¬†

Evenett¬†‚Äústrongly¬†agreed‚Ä̬†that the EU ‚Äúwill have to choose‚ÄĚ sides.¬†US president Joe¬†Biden has¬†tried¬†to mobilize allies, especially in Asia,¬†to work together to¬†deal with¬†Beijing, portraying a ‚Äúbattle‚ÄĚ between¬†democracies¬†and¬†autocracies.¬†¬†

However,¬†Evenett¬†said¬†EU¬†businesses¬†cannot¬†afford to ignore¬†the big market opportunities in China.¬†‚ÄúI think the¬†business¬†community will pull in that direction,‚Ä̬†he said.¬†¬†

China US cold warOn April 4th, 2018, the US government issued a Customs duty list, which would impose a 25% tariff on the 1333 products exported to China with a total value of 50 billion US Dollar. On the second day, with the approval of the State Council of China, the State Council Tariff committee decided to fight back with a 25% tariff on 14 categories of 106 commodities native from the United States, including soybeans, automobiles and chemicals. (Photo by Zhang Peng/LightRocket via Getty Images)

No western company can function without being part of the Chinese ecosystem

Tomas Casas¬†I¬†Klett,¬†director of University of St. Gallen‚Äôs China Competence Center,¬†does not expect the world to fracture into two blocs.¬†‚ÄúEven American companies are very attracted by the Chinese market. That‚Äôs where global economic growth will come¬†[from],‚ÄĚ he said.¬†He cited the example of Tesla,¬†which generates¬†a fifth of¬†annual¬†global sales in China.¬†¬†

‚ÄúThere is no¬†western company today that can function without being part of the Chinese ecosystem,‚Ä̬†he¬†said,¬†insisting¬†that¬†reports of¬†globalization‚Äôs death¬†are¬†greatly exaggerated.¬†He¬†added¬†that business leaders would have to learn to navigate the shifting geopolitical climate.¬†¬†¬†

However,¬†Treichl¬†highlighted the risks of globalization, and¬†urged Europe to reduce its dependency on China by¬†strengthening its own¬†digital infrastructure.¬†‚ÄúIf we don‚Äôt get our act together, we will just be¬†a¬†play ball between China and the US without really having a chance to develop our own strong position,‚ÄĚ he said.¬†¬†

Still,¬†Evenett¬†pointed out that Europe is playing¬†an important role¬†setting¬†global¬†policy, for example introducing the General Data Protection Regulation (GDPR)¬†that has set a new gold standard for data protection.¬†‚ÄúEurope actually has demonstrated¬†up until now that by moving first it is able to set a lot of the terms for business regulation around the world,‚Ä̬†he said, calling¬†it¬†the ‚ÄúBrussels effect‚ÄĚ.¬†¬†

And Lee believes that Europe can play an important¬†mediating role, helping the US and China find common ground.¬†‚ÄúI think that Europe should exercise more independence and not get pushed or bullied into an agenda that they don‚Äôt necessarily want to be part of,‚ÄĚ she said.¬†

IMD‚Äôs¬†Bach¬†concluded:¬†‚ÄúIt isn‚Äôt enough to have a large consumer market, [or] a well-developed regulatory state; you also need real leadership in the industries defining the future in order to assert a measure of global influence.‚Ä̬†¬†¬†

IMD is partner of the St. Gallen Symposium

Expert

David Bach

David Bach

IMD's Dean of Innovation and Programs

Political economy expert David Bach brings to IMD a proven track record of creating impactful learning journeys in a dual role as both Professor and Dean. Through his award-winning teaching and writing, Bach helps managers and senior executives develop a strategic lens for the nexus of business and politics.

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