China’s Push to Renew Bretton Woods in the Era of U.S - China Disengagement
And why China's nearly $1 trillion customs trade surplus hurts, not helps, its industrial prospects
Chinese President Xi Jinping and U.S President Joe Biden at a bilateral meeting near San Francisco, November 2023. Source: Reuters
The only shared consensus on international relations between Chinese and western associates is pessimism. Pessimism about the U.S - China bilateral relationship, pessimism about western engagement in China, pessimism about the coming Trump Shock. Radical geopolitical shifts and new configurations of trade have led to strange scenes in the fallout. The loudest calls to maintain an ill-defined Bretton Woods system are coming from China, not Washington, and Europe finds itself hanging up the phone. New bipartisan alignment on the so-called “China Threat” has led trade authorities in the U.S to move aggressively in restricting Chinese access to U.S exports in strategic industries – World Trade Organization (WTO) be damned – and a collapse in European exports to China has brought Brussels along for the ride. Where the U.S used to see endless cheap labour and the EU a money-printer for automobile exports, both now see a potentially existential rival.
It’s rare to attend an international forum or talk in Beijing that does not, eventually, address the elephant in the room.
At one such instance on December 4th at the premier Beijing Grand Millenium Hotel, European Union Ambassador Jorge Albiñana took the stage addressing a crowd of anxious diplomats, journalists, and think tankers gathered to hear reassurance on Chinese - EU relations in the coming Trump era. They did not get that. Instead, he ended a particularly combative opening address with a stern warning: “Whatever happens in the White House, we will still have a problem.”
For the next seven hours, to my surprise, the conference went on as if nothing happened. Panels were held, calls for solidarity were given, and appeals for more “understanding” were shared. But it didn’t take much for attendees to notice something was off, and for rumors to fly. The U.S Ambassador, Nicholas Burns, allegedly pulled out just days before because of outrage from Washington lawmakers for his address to the U.S – China Hong Kong Forum. The only Americans the two panels on Trump were able to pull mostly hadn’t lived in the U.S in decades, let alone have an ear in the incoming administration. After watching a Reagan-dinosaur-turned-propagandist quote Sting and Metallica on stage, it was hard to take it all seriously.
But, the purpose of the conference was clear. Wang Huiyao, co-founder of the Beijing-based organization that held the event, called more forcefully to maintain the global status quo than any western participant, “80 years of the Bretton Woods system. We cannot start all over again… China is really willing to add on and to improve, enhance, and enlarge.” In every panel and every speech, Chinese organizers appealed to Europeans and “middle powers” to join them over the coming stormy years. Each call with a “we” to defend Bretton Woods was strategic positioning, hopeful that Europeans still believed they were part of the Bretton Woods “we”.
How did we reach this point? Why are the biggest calls to maintain a U.S born system coming from China? Why do Europeans find themselves not answering the call and joining the “we”?
The New Consensus
In the circuit of conferences, dialogues, and exchanges in Beijing, somehow the same statistics show up everywhere you go. I was surprised the first time hearing that American students in China are down by 93%, but by the fifth or sixth time it was just background noise. Multi-day conferences are regularly interrupted by the latest shots in a rapidly deteriorating U.S - China trade relationship. EU Ambassador Jorge Albiñana’s December 4th speech was preempted by a third round of U.S export controls on tech and semi-conductors on December 2nd, quickly followed a day later by Chinese export bans on select rare earth metals to the United States. Pessimism is not an unfounded consensus.
Dwindling channels of communication are the sign of the times. Chinese conferences that used to boast attendance from leading academics and think tanks across the U.S are now increasingly struggling to find scholars. A source familiar with the state of diplomatic channels confirmed to me that previously common dialogue channels are increasingly being seen as inappropriate to participate in by the American side. Dialogue hasn’t disappeared, delegations still come and go and Chinese policymakers still meet with western investors, but it’s certainly at its lowest in decades.
Take, for instance, the two speeches of U.S Ambassador Burns and Chinese Ambassador Xie Feng at the U.S – China Hong Kong Forum. Xie’s speech was deeply accommodative, declaring “China has no plan to overtake or displace the United States”, and calls for the US & China to “set out again” and “find the right way to get along on this planet” just like they had historically “braved wind and rain and forged ahead”. In comparison to Xie’s frictionless speech, however, Burns’ address brought the issues front and center. He stated Biden “rightly raised tariffs on Chinese EVs… and other technologies” to counter a “second China shock”, called out “Chinese aggression” in the South China Sea, and raised concerns on Taiwan, Hong Kong, Tibet, and Xinjiang.
Burns’ speech (and its aforementioned reception in the states) shows most clearly that the U.S over the past few years has settled on a new, bipartisan approach to China: reduce exposure, press the issues, and discourage engagement.
However, while the Americans may have disappeared, Europeans have not. More white-papers have been published than will ever be read in Brussels on the coming Trump Shock and Chinese policymakers can smell blood in the water. In the words of Wang Huiyao, “China and the EU have lots of similarities. [Both] want to defend [the] multi-lateral system, climate change, [and the] WTO… I think there’s another opportunity now for China and EU to get together.” I overheard a European attendee stress that it was time for Europe to “get its head out of the sand” and start pursuing it’s own foreign policy – like Macron stated in November.
The sentiment is rampant, the urgency is strong, and yet China’s reception in Brussels is tepid. Why?
The Half a Trillion Dollar Problem
On October 29th, days before the U.S election, the European Union announced strict, across-the-board tariffs on Chinese electric vehicles (EVs). Ursula von der Leyen, President of the European Commission, identified the core issue running through the heart of an EU – China partnership: Europe’s industrial base. After two years of lagging Eurozone growth and sky-high energy prices from the Ukraine war, Europe’s struggling industrial base still remains an economic life preserver. After announcing the EU’s investigation into Chinese EVs on September 13th, Ursula said,” The electric vehicle sector holds huge potential for Europe's future competitiveness and green industrial leadership... Wherever we find evidence that their efforts are being impeded by market distortions and unfair competition, we will act decisively.” In a war for industrial survival, the west’s rich consumer markets are paradoxically Europe’s strongest asset.
China agrees. In the aftermath of global lockdowns and trade disruptions from COVID-19, China roared back with a herculean explosion in its annual global customs trade surplus with a nearly $550 billion increase since 2020. Faced with the impossible task of maintaining economic growth while dealing with a deflating real estate bubble and a structurally toxic municipal debt problem, Chinese policymakers turned to global markets with exports fed by generous supply-side policies as a spatial fix for their domestic demand woes.
Source: Brad Setser
The half a trillion dollar problem has prompted waves of protectionism across the globe and concerns from China’s trading partners. Outside the west, Brazil slapped 10% tariffs on EV imports with plans to hike them to 35% by 2027 in response to concerns from domestic firms over Chinese imports. Here, overtures to Europeans and ‘middle powers’ and nostalgia for Bretton Woods from Chinese multilateralists begin to make sense. Suggestions for strategic alliance against Trump’s coming assault on the world order are veiled hopes for the continuation of an export-based recovery in a world with less and less patience for imports.
For Europe, at least, patience has run out. Albiñana’s opening address was emblematic of the sentiment now found commonplace among European policymakers and think tanks. He bluntly stated EU – Chinese trade “has become unsustainable” and “has to be leveled”, that trade talks have “made no progress… in the last 5 years”, and that “China has grown 40% since 2017… Do you know how much our exports to China have grown? Well, they are down 30%.” Fights over exports and trade surpluses are sabotaging EU – China relations as Beijing attempts to set itself up as a credible alternative for the EU to Trump’s America. Calls for cooperation and understanding are common, but results are weak. The few positive remarks Albiñana had were confined to successful partnerships with China over the “protection of biodiversity… and the environment in general”, while a September U.S - EU Joint Release on the Indo-Pacific laid out far-reaching consensus on substantive geopolitical and economic issues such as: Chinese support for Russia in the Ukraine war, alleged unfair Chinese trading practices, de-risking and reducing economic dependency on China, the human-rights situation in Tibet and Xinjiang, Taiwan, the South China Sea, and Myanmar.
It’s unclear where relations between the U.S, EU, and China will stand in 4 years from Inauguration Day. But its clear that right now, the EU does not think that they will be standing any closer with China. As an insider told me, “China will have to come bearing gifts.”
China Hawks’ New Weapon: Conceptual Slippage
On November 14th, Paul Krugman published an Op-Ed on the coming U.S – China Trade war with a small but intriguing aside. The Nobel Prize winning economist listed out a straightforward case for tariffs based on economic harm from China’s post-COVID export boom, but also delineated a second, notable reason, ”Furthermore, China is an autocracy that doesn’t share democratic values. Allowing it to dominate strategically crucial industries is an unacceptable risk.” This copies the reasoning provided by the Bureau of Industry & Security (BIS), who’s announcement on its latest round of advanced chip exports excluded any mention of concerns over economic or trade competition in the chips space. The BIS stated they hoped to “impair the PRC’s ability to indigenize the production of advanced technologies that pose a risk to our national security,” and that “advanced-node semiconductors… can be used in the next generation of advanced weapon systems.”
The new bipartisan consensus identifies the issue of Chinese industrial competitiveness as an existential security threat that is only incidentally economic. Calls for “decoupling” and “derisking” from China are not being followed by mass-onshoring but the creation of a new South East Asian-centered supply chain because the issue at stake is not the domestic economic harms of free trade, it’s U.S dependence on a perceived foreign adversary.
While the U.S may see Chinese industry more through the lens of security than economics, the rest of the world does not. And it is here that the conceptual slippage between the two gives China Hawks their greatest asset and Chinese diplomats their greatest liability.
Krugman’s recent article noted the EU’s new tariffs on Chinese EVs, which were motivated by economic concerns, yet D.C-based think-tanks are already theorizing ways to cleave an anti-China bloc using global dissatisfaction with Chinese exports. In an article for the think-tank Council for Foreign Relations last year, Brad Setser decried that “competing approaches to managing the Chinese threat have led to the fracturing of… transatlantic markets” through differing tariff regimes in the U.S and EU over Chinese steel and EVs. U.S security concerns over strategic industries are seamlessly merged with European auto sector woes as, “Europe is also struggling to adapt to a world in which China is a net exporter of autos and auto parts, not a net importer… one of Europe's most important and strategic [emphasis is mine] industries.” The suggested solution is easy to guess: “increased cooperation with the United States”, “a ‘subsidy-sharing’ agreement”, “[an] open and integrated transatlantic market between the U.S. and the EU… [and] Canada, Mexico, the UK.”
As long as China’s globally unpopular post-COVID trade surplus remains, potential partners for aggressive U.S foreign policy on China will be as expansive as there are angry trade partners. But it doesn’t have to be this way. While Chinese industrial competitiveness and its large trade surplus are obviously related, substantial reforms to fix China’s lopsided demand problems and less China-based production are paths forward that undercut U.S China Hawks while maintaining industrial strength. Much was made of Brazil’s tariffs on Chinese EVs by American pundits, but what slipped under the radar was that Brazil was happy to allow Chinese firms to continue to operate in Brazil if they built factories directly within Brazil for domestic production – and that they did. However, under the U.S’ strategic understanding of EVs, any Chinese EV in any form produced in any way is a threat.
It cannot be emphasized enough that it’s not a given these two viewpoints have a common interest. America’s securitization of U.S – China trade as part of a greater turn towards hawkish, zero-sum China policy will create as many contradictions and issues in trade with China’s displeased trade partners as opportunities. Global South states accustomed to trading with China and the west view ‘picking a side’ as a potential death knell, and EU concerns over Chinese EV overproduction do not preclude any cooperation on climate or further trade deliberations. The EU & Global South camp’s disputes over trade under these current terms only exist insofar as these terms do, while the U.S’ anti-China turn can exist in perpetuity.
My speculation is that the world’s governments are waiting. They’re waiting to see if U.S – China relations are going to get that bad, if China’s export tsunami will start to ebb with more demand-side reforms, and if this is just another cycle of premature prophesizing on the death of the international system. The hope is that, in regards to the U.S and China, the world is big enough for the both of them – or at least that Xi and Trump will see it that way. While I personally have little love lost in the event of the Bretton Woods legacy institutions meeting their end, I do see the recent hawkish turn in U.S policy towards China as deeply irresponsible. Not only is panic over competition in strategic industries misplaced nostalgia for a post-WWII U.S dominance that will never come back, it’s also ineffective in the long-term. Previous instances of U.S export controls on China have simply birthed global industry leaders, as domestic industries are forced to become very competitive, very quickly to resolve shortages in key goods.
Back to trade, we will see the interplay between the U.S and the rest of China’s trade partners start to unfold once the first shots are fired towards China by the incoming Trump administration. As the world watches and governments weigh policy choices for an increasingly protectionist world, Chinese industry should hope nations follow the Brazilian way rather than the American. But, for that, the ball is Beijing’s court – not in Foreign Minister Wang Yi’s, but in the thousands of bureaucrats that make up China’s economic planning bureaucracy.