Closer cooperation between China and Europe is needed to find solutions to the multiple challenges confronting the world
Events in the first two months of 2020 suggest that the global economy may be subject to major disruption this year, as policy disagreements between the major economic powers remain deep. How will this affect the behavior of China and the European Union? Will it generate defensiveness and distrust or will it offer an opportunity to work together?
Consider three very different processes that are affecting the world economy today: the novel coronavirus outbreak, political developments in the United States and the EU, and continuing international efforts to manage climate change.
The novel coronavirus epidemic, which the World Health Organization has declared a public health emergency of international concern, is stretching public health resources to the limit in more than 70 countries and is threatening to depress the international economy. The unprecedented actions taken by China, Italy and other countries to isolate densely populated areas where the infection has taken hold and reduce the risk of transmission is highlighting the interdependence of national economies. International travel, tourism and manufacturing supply chains across different continents have been disrupted. From cars to toys to smartphones, manufacturing production has been reduced or even suspended because of the absence of workers, customers or parts. Transport, tourism, hospitality and entertainment services are also being hit.
Although the estimated economic impact of the epidemic so far is modest (the International Monetary Fund estimates a drop in annual output of half of one percent in China, or 0.1 percent for global output), the longer-term effects will be much greater if the epidemic is not contained. Uncertainty is driving stock markets lower around the world. The novel coronavirus not only underlines the limits of our scientific knowledge and the need for international cooperation in medical science. It has also made the task of maintaining economic growth more difficult.
Meanwhile, recent political developments in the US and Europe may weaken their leaders"" determination to address challenges to the international economic system. The early stages of selection of the Democratic candidate to run against in the US presidential election in November, for example, suggests that the opposition is divided. Another four years of the nationalist and protectionist policies of "America First" would mean a sustained US challenge to the rules-based system for management of the international economy and the further undermining of international bodies such as the World Trade Organization.
At the same time, Europe has become more divided and less politically focused. The EU became smaller last month, as its second-largest national economy in nominal GDP terms, the United Kingdom, exited the EU. The EU and the UK are now preoccupied with negotiations to arrive at a permanent economic settlement between them that must be concluded before the end of the year. And France and Germany continue to disagree about the EU""s future development after Brexit.
This year also sees another important milestone in international efforts under the United Nations to resolve the climate change crisis－the United Nations climates change summit in November－the evidence of the impact of climate change grows, such as severe storms and floods in the UK, rising winter temperatures across Europe, or the melting of the tundra in Siberia and Tibet. At the COP meeting in Paris five years ago, a close partnership between China and the EU was one of the main components of that meeting""s limited success, namely, an agreement on initial national binding targets for reduction in CO2 emissions. This time it may be more difficult to make progress. The host country of the conference, the UK, will be busy negotiating its future economic relationships with the EU and the US. The current president of the US denies that climate change is a problem. This unpromising background means that efforts to moderate the biggest potential disrupter of economic activity on the planet will probably be too little, too late.
How can China and the EU, victims of these challenging developments, best react to this difficult situation? I would suggest there are three essential tracks to follow.
First, China and the EU should recognize and openly declare their common interests and priorities for action, such as keeping international trade and investment open, avoiding defensive over-reaction to short-term disturbances in the market from whatever source, and fighting for the survival of a rules-based system for managing the international economy, especially the World Trade Organization. For 18 months China and the EU have held high-level meetings to discuss a possible common approach to reform of the WTO and have agreed on common initiatives, such as an interim solution for preserving the WTO dispute settlement procedure. Such discussions need to be further extended in order to counteract continuing US pressure to bypass or ignore the rules-based system for managing international economic exchanges.
Second, China and the EU must make strenuous efforts to avoid a deterioration in their bilateral economic relationship. EU member states should proceed cautiously before adopting further restrictive measures in respect of inward direct investment that indirectly affect China, for example, while China should deliver on its promises to open up the Chinese economy to inward direct investment from the EU and offer equal treatment of EU and Chinese investors on the Chinese market. Early agreement on an EU-China Comprehensive Investment Treaty, a priority for both sides for the last six years, would be the best way to stabilize the situation.
Finally, these two large economies, which are leading defenders of multilateralism in world trade, should seek to persuade like-minded countries to support their common agenda. Important international meetings, such as the WTO Ministerial Meeting in June, will discuss how to repair the world""s economic system. China and the EU should use this year to build alliances.