Professors warn Europe: “Don’t make China into a bigger villain than necessary”

Europe should not follow the United States’ lead by imposing all kinds of trade restrictions on China. That is the warning from three professors in an article in the economics journal ESB. Last summer, the Dutch Scientific Council for Government Policy (WRR) argued for taking a tougher line toward China. The professors say that advice is insufficiently supported and too critical of China. They also argue that the WRR overlooks international cooperation—one of Europe’s strengths.

One of the authors is Steven Brakman, professor of international economics at the University of Groningen. He agrees with the WRR report’s main message: Europe should invest more in innovation and support its businesses so they become less dependent on foreign countries. “But we think the report misses the mark somewhat by making China into a bigger villain than necessary.”

Brakman says the economic threat from China is being overstated. For example, the WRR says China is flooding the world with products. “That’s true to some extent, but the WRR report exaggerates it.” He also questions the accusation that China manipulates its exchange rate to keep its products artificially cheap. “Yes, they influence the exchange rate, but if you look at the figures, you can see that the yuan, China’s currency, has actually risen in value. That has made Chinese products more expensive, rather than the exchange rate being manipulated and kept artificially low.”

What Brakman finds especially striking is that the WRR criticizes China for its industrial policy while also advising Europe to pursue an active industrial policy of its own. “That’s a rather strange turn in the report.”

Investing in innovation

According to Brakman, China is facing a rapidly aging population and has therefore invested heavily in innovation. Over the past twenty years, the country has tried to move beyond making only simple products and establish a leading position in key industries. He says it has succeeded.

“That’s also the message from Draghi’s report and from Wennink in the Netherlands: make it easier for startups to thrive.” China’s electric-car industry is a good example, Brakman says. China realized it would be difficult to catch up with Germany’s combustion-engine car industry, so it chose to focus on electric vehicles. The government helped companies get started, after which they competed fiercely with one another. Of the many Chinese car brands that emerged twenty years ago, only a few strong players remain.

“That’s the policy China pursued. They don’t always play fair, which is why many countries have taken the issue to the World Trade Organization.” Still, Brakman says, the policy is much like what Europe and the Netherlands now want to achieve, including through the recommendations in the Wennink report.

“The distinction between state aid and government investment is unclear”

Brakman says the distinction between state aid and government investment is less clear-cut than the WRR suggests. China is accused of unfair competition because it subsidizes companies, but the Netherlands also wants to support startups with public money.

“Think of startups, which often struggle to get financing. In the Netherlands, we’re going to set up a national investment institution to make it easier for startups to obtain funding. If that works, you could also say it’s unfair state aid, because they wouldn’t normally get that money from the market but can get it with government help.”

“So the boundary isn’t as clear-cut as the WRR report suggests.”

— Steven Brakman, professor of international economics at the University of Groningen

According to Brakman, this raises the question of whether such government support is unfair competition or simply sensible policy to help young companies. “So the boundary isn’t as clear-cut as the WRR report suggests.”

Import tariffs

Brakman is also critical of the proposal to impose broad import tariffs on China. He says that would put Europe on the same path as the United States, even though Europe criticizes American trade policy. “You can introduce tariffs in a very targeted way, but if you apply them broadly to China, you’ll hurt yourself too.”

Although China does compete unfairly in some products, Brakman says, European companies also benefit from inexpensive Chinese intermediate goods. These are used to make finished products, helping European companies remain competitive in both European and international markets.

“Look at Europe itself, in a sensible way”

At the same time, Europe needs to avoid becoming wholly dependent on China for important intermediate goods. But Brakman says the main priority should be strengthening Europe’s own competitiveness. “We need to be competitive, but that doesn’t mean we should mainly be angry at the outside world. We need to look at Europe itself in a sensible way.”

The solution Brakman favors—and “it’s not a very sexy solution”—is to restore the World Trade Organization to its former strength. “Make sure there’s a rules-based system again.”

Brakman also argues for reducing barriers to trade within Europe, such as complicated customs rules and bureaucracy. He says Europe would do better to focus on that than on broad import tariffs against China.

Closer economic cooperation with other countries could also bring Europe major benefits, Brakman says. He points to trade agreements with Canada, the Mercosur countries, and India. “That would strengthen ties with our friends around the world. It’s not easy, and Europe can be criticized on that point. The agreement with Canada still hasn’t been fully ratified. That should happen much faster.”

Europe should not follow the United States’ lead by imposing all kinds of trade restrictions on China. That is the warning from three professors in an article in the economics journal ESB.