The election of Donald Trump as American President in 2016 can be seen as a crucial moment for the West’s relationship with China to change.
Sure, also before, the United States and its allies had been annoyed about China’s disrespect for intellectual property, tensions over Taiwan had been running a long way back and China had been siding with Russia at the UN, for example when it comes to the 2003 U.S. invasion of Iraq or NATO’s Libyan campaign in 2011.
Still, despite all that, the relationship was really quite cordial. As Bruno Maçães, a former Portuguese Secretary of State for European Affairs, recalls how when he was in office, “in 2013 Portugal received a lot of pressure from Washington to sell strategic assets to China”, adding “remember that back then the US wanted China to take on a greater global role. Then 3 years later it was critical that China took on a smaller global role”.
In 2017, Trump started a trade war with China, which has been really pursued by the Biden administration, ending in the kind of tit-for-tat protectionism that one could expect from going down this path.
Also, European companies, like Dutch chip manufacturer ASML ended up in the crossfire, as due to U.S. pressure, the company last year stopped servicing customers in China, also halting all sales of its cut-edge chip making machines to any manufacturer in China.
Whether this will benefit the West in the end is very much a question mark. Sravan Kundojjala, a senior semiconductor industry analyst at Tech Insights commented that “the US sanctions have advanced China’s ambitions in semiconductor technology and helped boost revenue growth for Chinese equipment makers.”
Lithuanian Foreign Minister Gabrielius Landsbergis is on one side of the debate in Europe, arguing in the WSJ that “There is a lot of naivety, a lot of wishful thinking that we will – with trade, with diplomacy, and interaction in the multilateral arena – drag and lock them closer to the West”, adding that these methods “failed tremendously” with Russia and that “we should not be making exactly the same mistake with China.” His country is currently on hostile terms with both Russia and China, after it deepened relations with Taiwan.
On the other side of the European debate is French President Emmanuel Macron, who received a lot of criticism from diplomatic commentators in the West during his latest visit to China, where he stated that the EU should not become a “vassal” of the United States and must avoid being drawn into any conflict between the US and China over Taiwan, basically reaffirming his long-term goal of “strategic autonomy” for Europe, which involves avoiding military and economic dependencies.
Macron is also pushing to include China into negotiations over a Ukrainian cease-fire that should take place in Paris rather sooner than later. The latter is reportedly supported by German Chancellor Scholz, while U.S. President Biden is not enthusiastic about the idea, but also does not oppose it.
Meanwhile, EU Commission president Ursula von der Leyen is going on a confrontational course with China, as the Commission is considering to propose sanctioning 7 Chinese firms that are accused of selling equipment to Russia that could be used in weapons.
While it is true that Western efforts engage with Russia through trade have not been able to prevent Russian imperialism from resurging – not that it has ever really been away – one cannot say how things would have evolved if the West had conducted punitive policies after the U.S.S.R collapsed. The example of post World War I Germany suggests the outcome may have been even bleaker.
Agathe Demarais, a former French Treasury official and current global forecasting director of the Economist Intelligence Unit, documents in a new book, “Backfire: How Sanctions Reshape the World Against US Interests”, how sanctions as an instrument of policy come with a whole range of unintended side effects and most of the time fail to achieve their goals – apart from some rare exception, as for example the sanctions against the terrorist Gaddafi regime in Libya.
Then these sanctions were aimed at stopping a country from foreign attacks, not regime change. Importantly, from her experience at the forefront of attempting to introduce these, Demarais also illustrates how sanctions may ultimately diminish U.S. influence. As Elon Musk recently commented on the widely discussed fate of the U.S. dollar: “If you weaponize currency enough times, other countries will stop using it.”
The dollar’s position as world reserve currency is certainly not yet toast, however. For a start, at the moment, there is no alternative. The last thing the Chinese regime would wish for is to liberalize its financial and economic system, which are key conditions for the rest of the world to extensively save and use Chinese currency.
Even Chinese Communist Party cronies tend to prefer U.S. dollars and foreign assets, as an insurance policy in case they are the victim of the occasional regime purge. The US Dollar still denominates over 88% of foreign exchange, China’s currency is only less than 3% of that.
Still, it cannot be denied that the China’s BRICS group is becoming more popular, as 19 countries would be about to join. This includes Saudi Arabia, Algeria, Argentina, Mexico and Egypt – with the caveat that for these countries, joining BRICS does not mean ending cooperating with Western friends or with other financial and monetary institutions.
There were also some other developments. Brazil and China have agreed to conduct all future trade transactions using their own currencies. Indian-Russian oil trade has intensified, to circumvent Western sanctions, as Indian customers have recently begun paying for most Russian oil in non-dollar currencies.
Furthermore, there was Saudi Arabia seeking closer ties with China, becoming a “dialogue partner” in the China-controlled “Shanghai Cooperation Organization” and committing to a massive chemicals and raw materials investment project in China. Related to that, there is of course also China’s key role in restoring diplomatic ties between Saudi Arabia and Iran.
A separate proposal is to create a so-called Asian Monetary Fund as an alternative to the International Monetary Fund (IMF). The idea is already decades old, but it was recently again proposed by the Prime Minister of Malaysia, Anwar Ibrahim, as it was also welcomed by China.
The fact that Malaysia is the driver behind the Asian Monetary Fund is troubling for the West. South East Asia and its splendid growth prospects could make up for any reduced trade with China and Russia, given the ongoing “decoupling” process whereby Western trade with those two countries is expected to reduce.
Already, tensions between South East Asia and the EU have increased recently, mostly because of a dispute over palm oil, which is a key export for the likes of Malaysia and Indonesia. Newly proposed EU requirements to combat deforestation, have angered both countries. At least according to the FT, the rumours are that these new EU rules are “driven by lobbying from European oilseed producers”, even if these alternatives are actually a greater burden for the environment than palm oil.
A particular frustration in Malaysia and Indonesia is that the EU is flatly ignoring the undeniable progress in reducing deforestation during palm oil production. Instead of commending this, the EU is imposing ever more bureaucracy on palm oil exports.
At the same time, there is a legal dispute causing tensions for Malaysia-Europe relations. In February 2022, a French court ordered Malaysia to pay $14.9 billion to the heirs of the last sultan of Sulu, on the basis of a colonial-era deal, whereby a British trading company paid compensation to the sultan of Sulu, then considered sovereign over the territory which today is part of the resource-rich Malaysian province of Sabah.
The question here was whether Malaysia should continue to respect the old deal. The Malaysian government had always done so, paying the heirs an annual stipend of $5,300, until in 2013, following an armed incursion from the Philippines by a group claiming to be the heirs.
The context here is that politicians in the Philippines continue to make historical claims to Sabah, which contributes to regional tensions. Following the French arbitration decision, Malaysian politicians were shocked that the group claiming to represent the heirs were trying to seize bank accounts in Luxembourg of two subsidiaries of Malaysian state oil company Petronas. A French court did suspend the enforcement of the award until the conclusion of the appeal, but this all indicates how high the stakes are.
The judicial dispute is surrounded by a lot of question. In the first place, it is not clear whether the claimants are the genuine heirs of the sultan of Sulu. Secondly, the financing of the legal campaign is less than murky. According to the Financial Times, there are “multiple people close to the case” that London-based investor Therium would be bankrolling the supposed heirs, who live in the Philippines and are not wealthy.
Also, there is the fact that the Madrid high court annulled a proceeding presided over by the arbitrator in the case, Gonzalo Stampa. After that, Stampa moved the case to Paris, where a verdict going against Malaysia was pronounced. Arbitration cases can be relocated, but only when they become “unduly difficult.”
The Malaysian government has now initiated criminal proceedings against Stampa, which is indicative of the way this case has played out. To make it all even more complicated, there are historical records showing that the land never belonged to sultan of Sulu in the first place, but to the sultan of Brunei instead.
Within Europe, the debate on how to cope with the challenges posed by rising authoritarian powers has probably only begun. Sanctions and trade restrictions are unlikely to be much more successful than they have historically been. It surely makes sense to identify investments by Chinese or Russian state companies in Europe that could endanger security, with the risk that protectionist instincts will tend to use an overly broad definition of “security”.
Produced in association with Brussels Report
