Editor's Note: This article is part of Preview Policy Report for the 2018 China-EU Summit, which will be jointly published by China Watch Institute — the new think tank platform powered by China Daily — and Bruges-based EU-China Research Centre of the College of Europe.

Clouds are building on the international trade front, with a major turn in US policy. President Donald Trump has decided to come to grips with his country’s large trade imbalance, with what he terms as unfair advantage for others under the present global trading system. And he is doing this with unconventional means. The ability to impose tariffs by invoking national security was always a possibility – it was in fact a US requirement to keep this legal option in the transition from the GATT to the WTO 23 years ago. But invoking it on issues such as steel, aluminium or the auto industry is at best dubious. Even if the US membership in the WTO is not in question at this point, holding up the nomination process to the appellate body of the organization could paralyze one of its most worthy functions – the arbitration of trade conflicts.

The European Union is committed to international rules and arbitration because it is the very foundation of our prosperity, and because the capacity to avoid conflict and favor integration among nation states, including the member states of the EU, relies precisely on rule of law and binding arbitration.

The process chosen by the United States therefore leads to recourses by the European Union with the WTO and to trade countermeasures. China is taking a somewhat similar approach. The State Council has published a white paper that proclaims China’s commitment to the WTO and its rules. China’s entry into the WTO is in fact the single most beneficial international development for China over the past 17 years. Within that timespan, China’s economy has also become much more dependent on foreign trade, even though some EU member states rely even more on foreign trade for their growth. A chain reaction from supertariffs to countermeasures, safeguard actions and the unravelling of global value chains would likely turn back globalization and result in the formation of separate trading blocs. Some might welcome that in the name of self-sufficiency or domestic based economies. But the certain and immediate consequence would be a lower growth rate for all, and possibly a major depression – the experience of the 1930s is still relevant to the case.

It is therefore desirable that China and the European Union find common ground at the coming EU-China summit in defense of multilateral agreements and rules. And it is likely that each party is making its own efforts with the United States to avoid what is sometimes called a trade war. More surely, there is a risk of a breakdown for the international trading system leading to the rebirth of trading blocs.

Unfortunately, having a new problem does not automatically bring a solution to older problems. Europe still finds itself frustrated by the lack of resolution or forward movement on several issues with China. An European expert is duty bound to point out some of these outstanding issues. Yes, China has considerably restrained its criticism of the European Union in recent months, and is helping to create a positive atmosphere, which is welcome. It has been talking of advancing towards a bilateral investment agreement. It has pointed out some announcements made in 2018 regarding coming changes in economic policy – lowering barriers for auto imports, easing financial restrictions for foreign investors in some sectors, undertaking to join the international public procurement agreement. Most strikingly, it has agreed very recently with the European Commission to discuss the issue of reforming the WTO. One hears mentions of a possible joint action plan on climate issues – something which could not happen at last year’s summit. Were China to cooperate more directly on other global issues – one thinks about the plight of migrants and refugees, of cooperation on sustainable development in Africa, of bridging the gap on human rights by coming closer to a common definition – this would amount to a major shift. It would also signify that when faced with unilateral action by the world’s top power, China does not want to rely solely on its big power status, but seeks compromise and increases its commitment to multilateral action.

We are still short of that, however. Recent trade openings by China were made in response to mounting threats from the United States. The experience of the past few years in EU-China relations is that a number of statements do not come to fruition. The investment treaty, for instance, has languished for many years. So the first benchmark for success for the next EU-China summit is really about the deliverables resulting from past undertakings or commitments. The credibility gap must be closed.

Even more fundamentally, the EU has requests for changes to China’s way of doing business that are not very different from the complaints heard in the United States. One should always reiterate to Chinese friends and partners that this does not result from a misplaced ambition to "change China" from the outside. Rather, it results from the change of scale of the Chinese economy and from its increased projection abroad. China entered the WTO as a developing economy, with accordingly favourable rules. The WTO itself has been focused on trade in goods, and has far fewer provisions for an era when services, the digital sector, financial globalization dominate international exchanges. Today, the EU is questioning the role that the Chinese state financing system plays through subsidies to Chinese firms – SOEs or private. It questions the international consequences of domestic overcapacity, about which not much progress has been registered so far. It questions the comprehensive acquisition plans abroad for cutting-edge technologies, including in sectors with strategic or critical consequences. As we write, the EU is finalizing a set of measures designed to screen foreign investment that will answer some of these issues, without disvcouraging broader investment into our market economies.

This is a tall agenda, admittedly. China now has national champions in many key sectors of the economy. It would suffer from a "trade war", but can still choose to tough it out. What the European Union is offering is a gradual path to smooth out the complaints that have mushroomed in part because of China’s very success, in part because China operates on rules that differ widely from the other poles of the international economy – from the EU and US to Japan and India. Europeans have been bruised by the absence of dialogue or lack of implementation in many of these areas. Dealing with the root causes of trade conflicts is the best way to avert or limit the risk of "trade wars".

François Godement is the director of the Asia program of the European Council on Foreign Relations. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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