Today, the European Union and the United States are economic powerhouses. They account for about half of gross world product and one-third of the world’s trade. However, these numbers have substantially declined from an all-time high of more than 65 percent less than twenty-five years ago. The “rise of the rest” has—for the first time in modern history—shifted the center of economic gravity from the Atlantic to the Pacific.

As a champion of this new trend, China has become a trade and economic superpower without posing any revisionist questions about the global order and the international system. Nonetheless, as historical precedent has shown, incumbent superpowers are skeptical and tend to balance against or even try to contain newly assertive nations.

Shi Zhiqin
An expert on European issues, Shi Zhiqin runs a program on China-EU Relations at the Carnegie-Tsinghua Center for Global Policy.
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U.S. President Barack Obama’s declaration about the initiation of official negotiations for a Transatlantic Trade and Investment Partnership can be viewed against this backdrop. The trade union could revitalize the sovereign-debt-ridden European economy and the lagging American economy. But it could also be used as a tool with clear strategic imperatives to balance China’s meteoric geoeconomic rise. Many members of the Western media have accordingly framed the declaration as a decision to form an “economic NATO.”

The relationship between China and the West is, at the moment, one based on economics and commerce—it is a business partnership. Initiatives that exclude China and do not promote economic interdependence between all parties should be viewed with caution, and they must be as transparent and open as possible. Any misperceptions about an “economic NATO” could lead to retaliation and trade war, an outcome that is certainly not desirable during this very fragile period for the global economy.

The Economics of the Agreement

There are powerful arguments in favor of the U.S.-EU pact with regard to the stagnant and anemic European and U.S. economies. Agreement between the EU and the United States would stimulate exports and produce net economic benefits. The EU’s GDP would increase from 0.3 to 0.5 percent and the United States’ from 1.0 to 1.3 percent annually, and around 2 million new jobs would be created. A number of measures would make that possible.

Today, the United States and the EU have, on average, low bilateral tariffs. But those tariffs can still have significant distortional effects on companies that engage in a substantial amount of intra-industry trade of intermediate goods. Removing the tariffs and creating a transatlantic free trade zone would add to the competitiveness of European and American companies that are facing increasing competition from Asia’s rising stars by making European and American products more affordable.

In addition to the positive returns of zero tariffs, a significant boost to the transatlantic economy would come from the elimination of nontariff barriers—a difficult task. For this to take place, the EU and the United States would need to harmonize their regulatory regimes and calibrate their licensing procedures. In essence, it would demand an unprecedented level of coordination between officials and regulatory agencies. If this were done, then the size of the transatlantic market would give Brussels and Washington a powerful edge in the World Trade Organization. They could potentially leverage that power to ask smaller economies to reform their own regulatory regimes based on the U.S.-EU model. More economic benefits would soon follow.

Potential Downsides

There are factors that could derail or detract from such an agreement. For instance, special interests and lobbies can negatively affect free trade by blocking liberalization. The benefits from trade are usually spread across a large pool of consumers and producers while the losses are felt by a more limited group and thus have more of an impact in per capita terms. The disadvantaged few have a strong incentive to form powerful lobbies against liberalization.

In terms of direct impact on the U.S.-EU pact, a recent report indicated that Brussels has become an attractive destination for lobby organizations, following in the footsteps of Washington. In this regard, the omens for the agreement are not auspicious.

Politically, there is still no clear consensus in the EU on how comprehensive the agreement should be.

Former U.S. secretary of state Hillary Clinton said in her November 2012 speech on Europe that agriculture will be the hardest topic to find agreement on during negotiations. French farmers are highly sensitive to the liberalization of the agricultural sector. Given that French public opinion of President François Hollande is at its lowest point, it is highly improbable that France will promote agricultural reforms in the pact.

Moreover, the EU is not monolithic. European countries have very different approaches to trade with the United States. For instance, Germany, the United Kingdom, and the Scandinavian states have strongly endorsed the initiative, while France has shown less enthusiasm. Any agreement on regulations and licensing will require a convergence of cultures.

Agreement on investments could also be a stumbling block. By far the most foreign direct investment in the world occurs across the transatlantic space, and both the EU and the United States trust the stability and legal protection of investors that their individual legal frameworks promote. Yet, as recent European support for a financial transaction tax, also called the Tobin tax, has indicated, the EU is evidently more cautious than the United States when it comes to financial institutions. Many European NGOs and civil society organizations have expressed concerns about the increasing power of multinationals to supersede national governments and impose their own arbitrary profit-maximization principles.

All these factors treat China’s counterstrategy as limited or nonexistent. But Beijing could also derail the pact. China has both the money and the network to directly engage with individual European states and at least try to postpone the agreement. Indeed, China has already signed a free trade agreement with Iceland and a preliminary one with Switzerland.

Ideological Differences

Some believe that the West is in decline because its elites lack strategic vision. However, Obama’s trade strategy for the Atlantic and Pacific is the epitome of a grand economic strategy, which David Ignatius of the Washington Post described as an aim to create “a global trading system.” For many Western pundits, this is perceived as crucial due to China’s meteoric economic rise and its non-Western political system.

After the 2008 Wall Street meltdown, many in the West predicted that China’s economy would also come crashing down. However, the Chinese economy and its key actors—the massive state-owned enterprises—proved resilient to the “great recession.” Even though China’s GDP growth rates have fallen to the single-digit range, the Chinese economy is predicted to become the world’s largest in terms of GDP sometime between 2018 and 2025. This will be unprecedented. A non-Western power with a distinctively non-Western political system will outperform the democratic West (the EU and United States).

In this regard, Obama’s trade policy may be an instrument that can be used to demand further opening up of China’s vast economy of more than a billion consumers. If the United States is capable of promoting both a pact that spans the Pacific and the transatlantic agreement, then China will have to open up faster, limit state subsidies, and integrate more into the global economy. That has happened before. In 2001, China joined the World Trade Organization, which marked the beginning of a decade of double-digit growth for the Chinese economy. The factors that will decide the success of this engagement will be how transparent and open these agreements are to China’s future membership.

The Geoeconomic Risks of the Pact

Historically, when a great redistribution of power between a status quo actor and a newly assertive player has been on the horizon, conflict has broken out a majority of the time. But in 1994, the United States chose to treat China not as an enemy but as a partner because enmity would have been a self-fulfilling prophecy that led to another cold war.

The strategy that the United States chose was to both engage and contain China. Once China became more integrated into the global economy, U.S. thinking went, the trade of goods would lead to the trade of ideas and to China’s democratization. And empirical evidence shows that democracies rarely fight with each other.

However, Washington realized that military containment in Asia is only possible as long as the United States remains the larger economy (in GDP terms) and can spend sufficiently more than China on its military. Geography in Southeast Asia is on China’s side, and that boosts the power of each dollar China spends on its defense. Economic weight is therefore perceived as a necessary condition for a strong military. A country cannot enjoy strong security without strong economic fundamentals.

That does not mean the U.S.-EU pact would necessarily be an economic version of NATO that would tame China’s economic development. The reason is that the partnership’s primary aim is to further integrate China into the world trade system by liberalizing the country’s opaque and clandestine state-owned enterprises, which may benefit China in the long term. The integration process, however, should be handled with great caution.

China does indeed have the economic leverage to counterbalance any U.S.-EU agreement. But economic warfare is not in anyone’s interest. It would be detrimental to global recovery and would certainly harm both developed and emerging economies.

The Importance of Interdependence

The EU, the United States, and China are by far the biggest economies in the world. The prospect of a more interconnected and peaceful international system is dependent on their cohesive and nonexclusive triangular economic relationship. The EU’s efforts to promote an economic union with as many European countries as possible has been the key to economic integration and should become an example of how trade and commerce in the twenty-first century should be conducted.

In the political realm, China’s system of governance remains very different from that of the Western republic. However, as Edward Steinfeld of MIT has said, the scale of reform that has taken place in China can be compared to a structured and more peaceful version of the French Revolution. In about three decades, China moved from a regime ruled by one leader to what Aristotle would describe as a system of shared leadership among well-selected, merit-based individuals.

Western republics should not view the Chinese political paradigm as a threat to their own political future. There is no “Beijing Consensus.” As a civilization with more than five thousand years of history and a population of 1.4 billion, China is too unique a case to be used as a paradigm for other countries. The Chinese leadership has repeatedly stated that each country is free to follow its own political system based on its own history and culture without any interference by other countries.

It is high time for China, the EU, and the United States to promote deeper and broader economic integration without constructing trade subagreements. Together, they should shape the foundation for an even closer relationship and deal collectively with global issues, such as global warming, financial stability, and terrorism, that no state alone can resolve.

This article was published as part of the Window into China series