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Asia-Pacific Outlook

Will U.S. and UK Populist Leanings Bring EU Closer to China?

If the incoming administration of President-elect Donald Trump follows through with its stated inward-looking proposals, it could cause the United States to turn away from Asia.

Trump’s statements so far, from his dislike of the Trans-Pacific Partnership (TPP) to his suggestion of imposing 40 percent import tariffs on Chinese goods, seem to indicate that he wants to retreat from President Obama’s pivot towards Asia and the current cordial U.S. relationship with China; however, this is easier in words than deeds. An analysis of what a U.S. disengagement from trade with Asia would accomplish reveals that it would help, rather than harm, China, while a more aggressive approach to the bilateral relationship with China would risk undermining U.S. interests.

Meanwhile, a unilateral increase in U.S. tariffs on Chinese goods would disrupt the global production chain. Although China seems to be more vulnerable than the U.S., because China imports less from the U.S. than the U.S. from China, both countries are now heavily integrated into the supply chain and any shock from either side would be reciprocally painful.

With the potential further integration of Asia’s economies under the Regional Comprehensive Economic Partnership (RCEP), one of Trump’s key messages during his campaign—the repatriation of manufacturing jobs to the U.S.—is not likely to happen because jobs might actually stay in a more regionally integrated and increasingly consumption-driven Asia. Even worse for the U.S. would be if China were to actively retaliate. This could take many forms given the still relatively large stock of U.S. foreign direct investment in China and the interests of U.S. companies that aim to tap into China’s huge consumer market.

More generally, given Asia’s size in terms of both GDP and population, it is hard to believe that the U.S. would just step back and watch China take its place in Asia. The production and trade structures of China and the Association of South East Asian Nations (ASEAN) bloc are increasingly complementary: China mainly imports oil, gas and other raw materials from the ASEAN countries, whereas they import electronics and textiles from China. There is also a growing production chain linking China and ASEAN countries in which U.S. companies are not necessarily involved. The ASEAN bloc is now China’s thirdlargest trading partner, surpassing the European Union. As such, Asia’s further integration through trade agreements is in the interests of all partners.

China would not be completely satisfied with the idea of dominating Asia at the cost of losing the U.S. market. A more practical possibility would be for the U.S to cooperate with China in regional leadership among East Asian countries. Still, if Trump does keep his promises (no TPP, trade barriers on China, etc.), China could cement its position in Asia and look beyond Asia to make up for the loss, namely, to Europe.

A unilateral increase in U.S. tariffs on Chinese goods would disrupt the global production chain.

EU Rising for China?

The most likely scenario is that many elements of the status quo hold: The Trump administration does not conclude TPP or the Transatlantic Trade and Investment Partnership (TTIP) successfully, but also does not impose protectionist measures on China because of the rebound effect on the U.S. Nevertheless, even in such a scenario where the U.S. does not advance on regional trade agreements, China would have a first-mover advantage.

China’s rapid reactions to U.S. hesitation over TPP during the last years of Obama’s administration sends a clear signal that China is unlikely to compromise with the U.S. under a trade-adverse Trump, and that means the Europe Union could be its next stop. This would be all the more logical given the hefty investment that China has planned—and started to carry out—for a much better connectivity with Europe under the One Belt, One Road Initiative.

As for the EU, closer economic relations with China might be the only call left in the absence of TTIP. The issue is more urgent against the backdrop of the potential Regional Comprehensive Economic Partnership, whose members would account for about 30 percent of the EU’s external trade. If the EU cannot proceed with a favorable trade agreement with the region, its firms would also face trade diversion and enjoy less market access compared with other countries in the region such as China. In fact, the EU launched a plan to negotiate with ASEAN, but the talks have moved to specific bilateral negotiations and progressed very slowly. Until now, out of the 10 ASEAN members, the EU has only concluded free trade agreements with Singapore and Vietnam. Neither agreement has yet come into force. At the current juncture, with Asia-Pacific countries moving toward trade and investment integration, it is the time for the EU to speed up and rethink its strategy. The aim should be to reach a regional agreement with Asia-Pacific countries in which China plays an important role.

For Europe to move away from its long—although increasingly fruitless—transatlantic alliance towards China, it is vital to build real trust. This is even more important than railway connections; however, trust is currently at a low level after the recent antidumping calls by the European Commission and China’s lack of reform to over-capacity sectors.

An inward-looking or aggressive Trump administration might just be the catalyst for a rapid increase in trust between the EU and China, increasing the likelihood that EU-China trade relations will improve.

Alicia García-Herrero

Senior Fellow for Bruegel and Chief Economist for Asia Pacific at Natixis

Alicia García Herrero is chief economist for Asia-Pacific at Natixis and a senior fellow for Bruegel. Previously she was chief economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria. She is a non-resident fellow at Cornell’s emerging market research centre and Senior Research Fellow at El Cano Royal Institute for International Relations. She is currently adjunct professor at City University of Hong Kong, visiting faculty at University of Science and Technology as well as at China-Europe International Business School.

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