Author: Ria Bhandarkar

The BRB Bottomline

A recent investment deal between the European Union and China has spawned discussion about whether or not the former has abandoned the United States economically. China is now the E.U.’s biggest trading partner but that isn’t a reason to worry about the U.S.’ economic strength.

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It looks like the United States just became a third wheel. Recent economic data from the E.U.’s statistical office shows that China is now the European Union’s biggest trading partner of goods, knocking the U.S. from its prime spot. While the European Union has been China’s biggest importer for some time, the relationship only became mutual during the pandemic, likely due to the increase in demand for Chinese medical products in the E.U. In turn, demand for European goods in China also grew.

During the pandemic, China was the only national economy which grew, increasing its GDP by 2.3%. More money was spent on European imports, which grew by 2.2%. The same could not be said for other foreign exports, which decreased in the past year. The United States dramatically decreased its trade with China, becoming a clear loser in international trade.

The strength of the economic relationship between the European Union and China can be pinned to the efforts of various European leaders, including Angela Merkel. Late last year, the two economies finalized a trade agreement to increase Chinese market access in Europe. The agreement established rules against forced technology transfers but is anticipated to rebalance trade. 

The deal increased anxiety among officials in the Biden administration, who worry that the new trade dynamics could affect global relationships in the future. While Biden hopes to strengthen coalitions against China, the U.S.’ allies aren’t necessarily taking actions which align with that goal. Still, the administration shouldn’t put too much focus on the new deal. The investment agreement would give Europe the same access to China’s economy that the United States was granted in a deal with China last year during the Trump administration.

In fact, Nick Marro, the global trade lead at the Economist Intelligence Unit, says that “the overall structure of the EU’s trade relations are still more or less unchanged, and the importance of the US as a trade partner hasn’t meaningfully diminished”. New trade relations with China are a consequence of the country’s position as the second-largest global economy, not any retaliation against United States economic power.

Europe is still far from being China’s biggest supporter. Its deal currently prohibits China from introducing discriminatory practices in its manufacturing and service sectors. If anything, ensuring that China is incentivized to cooperate with American allies can prevent it from seeking total economic hegemony or growing faster than the United States. The United States won’t need the European Union to cooperate in order to put restrictions on Chinese investment. In fact, it has plenty of other economic allies in Asia which can work to balance China.

The best course of action for the United States is to let the European Union remain economically neutral. The risk of isolating American companies is too great to consider meaningful retaliation against the E.U. As long as European leaders keep speaking out against Chinese economic and human rights policy, the United States shouldn’t worry about maintaining its position as a strong and well-connected global economy.

Take-Home Points

• China is now the European Union’s biggest trade partner in goods – but that’s no reason for the Biden administration to worry.
• The European Union is still not China’s economic ally, and the United States is still far ahead when services are included in imports.
• For now, the United States should not take retaliatory measures; the risk of seeming isolationist is not worth it.