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Berlin takes a risky bet on Beijing

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Happy New Year from Brussels. It used to be that trade issues wound down over Christmas, as the world’s negotiators and lawyers toddled off home to think of something other than antidumping margins for a week or two. This festive season saw more action than some whole decades in the past: a Christmas Eve Brexit deal — which we interrupted our seasonal break to comment on here — and then a “political agreement” on the EU-China investment treaty, which squeaked in ahead of the self-imposed year-end deadline (we’re resentful about the timing here, as it’s a very narrow miss in our otherwise largely accurate predictions for 2020).

Today’s main piece examines the overarching question of what the treaty means for the politics of internal EU determination, let alone transatlantic co-operation, to rein in China: we’ll get into policy detail across the spectrum in future newsletters. Today’s Tit for tat is Elvire Fabry at the Institut Jacques Delors think-tank in Paris, answering questions on the view of Brexit from the EU.

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Has Brussels allowed China to divide and rule?

It might all come good, of course. This might be the moment when the Xi Jinping regime, hitherto headed unerringly towards economic nationalism, decides on a major influx of foreign involvement in its economy and uses an investment treaty with the EU as a pole around which to pivot.

It might be the moment when an increasingly oppressive government that has put 1m people in re-education camps and used inmates for forced labour decides that this is the time to improve human rights and sign and enforce international conventions on labour standards. It might well be that China’s government decides not to use its new national security powers, let alone its endless inventiveness with bureaucratic obstructionism, to block investment and renege on promises to Brussels about market access.

It’s not exactly a given, though, is it?

The arguments against the EU-China investment treaty — only at broad political declaration stage — are well-rehearsed. For the moment, it’s hard to make a judgment on the content. Such deals are often oversold at the initial signing stage, though to be fair we haven’t seen a text yet. 

Politically, though, agreeing a deal just before incoming US President Joe Biden’s administration takes office is a bad look for the prospects of transatlantic co-operation to address China’s trade-distorting growth model. As it happens, American policymakers have been constructively restrained in responding: a somewhat tart Twitter message from Biden’s incoming national security adviser was followed by a more emollient response from the Republican chairman of the Senate foreign relations committee.

The EU says it has set down a marker for liberalisation and transparency with China that other countries can follow, and in any case it is partly only catching up with the “phase 1” deal that the Trump administration signed back in January. But a closer look at that deal underlines the big risks of relying on China to make meaningful changes — not just to international solidarity but also internal political credibility.

Ursula von der Leyen, European Commission president, attends the EU-China leaders’ meeting © Lukasz Kobus/EU Commission/dpa

The moment that Donald Trump signed that deal, he was beholden to China’s fidelity to implementing it. It was an election year: accepting that Beijing was reneging on the deal would have been an admission of weakness and naivety. The US trade representative Robert Lighthizer, normally bracingly suspicious of the good faith of trading partners, has been forced unconvincingly to insist that China being way behind its purchase commitments for US exports is just unfortunate timing. Remarkably, given his consistent strategy of China-bashing, Trump’s deal left him open to attacks from Biden in the election for being soft on Beijing.

A similar phenomenon is quite possible in the EU, given the political divisions here. This is not a universally admired deal. Voices in the European Parliament are objecting loudly. Ministers from Poland and Italy publicly expressed misgivings, though did not actually block the deal. The agreement was driven through in the dying days of Germany’s six-month presidency of the council of member states, with France’s eventual support.

The internal politics of the EU regarding China have rearranged themselves somewhat. A few years ago, western European governments complained that central and eastern European (CEE) states, organised into the 16 + 1 grouping (later joined by Greece, with Italy also signing an agreement with China), were getting too close to Beijing. But disillusionment set in among CEE and southern governments after the promised investment failed to materialise. Now it’s Berlin and Paris claiming it can make gains through engaging with China amid scepticism elsewhere.

By doing so, they have potentially handed China one of its favourite things, a tool to divide and rule — not just between the EU and the US but within the EU. One of the old truths of trade policy is that success is as much about containing divisions within trading powers as bridging gulfs between them. If the EU joins up too aggressively with the US to go after China, Beijing can ostentatiously renege on the bilateral deal. That will not look good for Germany and France within Europe as well as for the EU with the US.

There are plenty of ways China can frustrate the intent of the agreement. Rules about foreign investment and transparency leave a great deal more room for administrative legerdemain than do cuts in tariffs. Beijing has promised only to make “continued and sustained efforts” to ratify two International Labour Organization standards: there won’t be binding dispute settlement with sanctions.

Ramming through a limited deal without getting enthusiastic internal consensus or backing from allies doesn’t look like the act of a confident, ahem, strategically autonomous trading power to us. Relying on Beijing to keep promises made in a trade or investment agreement isn’t exactly a guaranteed route to credibility. There’s a lot of risk here, and possibly not that much reward. We won’t be the only ones watching it closely and remaining to be convinced.

Charted waters

Line chart of Renminbi per dollar showing Renminbi starts 2021 on course to erase trade war losses

As the Biden administration prepares to enter the White House, foreign exchange markets are pricing in more cordial relations between the world’s two economic superpowers.

Hudson Lockett writes from Hong Kong that China’s currency has rallied to its highest level in more than two years, wiping out most of the losses suffered since the start of the country’s trade war with the US. The onshore-traded renminbi on Monday crossed the important 6.5 per dollar threshold for the first time since June 2018.

Tit for tat

Elvire Fabry, senior research fellow at the Institut Jacques Delors think-tank, joins us to answer three quick questions about Brexit.

Elvire Fabry, from the Institut Jacques Delors, says the view that the UK won the Brexit trade deal negotiations is mostly aired by Eurosceptics © JEAN-PHILIPPE BALTEL/SIPA/Shutterstock

1. Do you think the Brexit deal will go down well with public opinion in France?

French public opinion is moderately interested in the topic, but broadly understands that a deal is better than no deal. Emmanuel Macron’s vocal defence of European fisheries, together with the favourable terms achieved on this topic, produced a general impression of success and that European cohesiveness paid dividends. The view that the UK won the negotiation is mostly expressed by Eurosceptics.

2. Do you anticipate more conflict and difficult negotiations over remaining questions between the EU and UK over the next year?

There are many unsolved issues (including financial services and data protection) and plenty of room for conflict. The recent past shows that the UK may expect at least as much internal negotiation as external. Going forward, access to the single market will notably be conditional upon regulatory equivalence, which Europeans will review unilaterally on a case-by-case basis. The cumbersome lobbying to achieve equivalence where there is regulatory divergence could work as a deterrent to divergence. There will be constant dilemmas between the perceived benefits of divergence and the proven benefits of continued access to the single market. 

3. In the longer term, do you expect the EU to make much use of its ability to impose unilateral tariffs on the UK (or vice-versa) in response to regulatory divergence?

There is little doubt that the EU is prepared to impose unilateral tariffs if needed, as suggested by its firm attitude in the negotiation regarding the level playing field.

However, assuming that it is possible for the UK to replace advantageously business lost with the EU with remote trade partners, the UK’s best interest remains to keep its EU business until it is actually replaced (or realistically replaceable) with equivalent alternative business. Therefore, I don’t expect much regulatory divergence in the short to medium term.

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Emerging Markets

Regulators close ranks on crypto

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Regulators are continuing to step up their scrutiny of cryptocurrencies, with central banks and South Korea’s tax authorities demonstrating fresh concerns.

In a report published on Wednesday, the Bank for International Settlements, the global body for central banks, argues that digital tokens such as bitcoin have few redeeming features and “work against the public good”. It also dismissed stablecoins — a link between crypto and conventional assets — as an “appendage” to traditional money.

Perhaps unsurprisingly, the BIS did endorse the development of digital currencies backed by central banks, saying they could be a tool to achieve greater financial inclusion and lower the high costs of payments. “Central bank digital currencies . . . offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity,” it said.

In contrast, bitcoin wasted energy and cryptocurrencies were “speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes”.

South Korea has acted against the financial crime of tax evasion, with more than Won53bn ($47m) of bitcoin, ethereum and other cryptoassets confiscated from 12,000 people. Officials said it was the largest “cryptocurrency seizure for back taxes in Korean history” and noted that local exchanges had allegedly been used to conceal assets because they did not collect the resident registration numbers of account holders. Many of South Korea’s 60 crypto exchanges are battling to meet regulatory conditions to operate beyond September.

This week’s #techAsia newsletter asks whether the death knell is being sounded for cryptocurrencies. That could be the case in China, where it is scaling up tests of its official digital renminbi, and appears serious about stamping out the crypto industry on its soil. Bitcoin fell below $30,000 on Tuesday following the latest regulatory crackdown, but it has recovered to be worth more than $34,000 today.

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China bolsters ties with Myanmar junta despite international condemnation

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Trade and diplomatic ties between Myanmar and China are normalising in the face of intense domestic opposition and international condemnation of the military junta that seized power in February.

Beijing has strengthened relations with Myanmar’s military leaders despite a series of violent attacks against Chinese business interests in the country after Aung San Suu Kyi’s government was toppled.

Yun Sun, an expert on Myanmar-China relations with the Stimson Center, a US think-tank, said Beijing had already made a “fundamental assessment” that Myanmar was moving into another prolonged period of military rule.

“I think the Chinese can see that this military coup is successful and is here to stay,” she added.

The resumption of state-level engagements and economic activity signals that Myanmar is reverting to its traditional economic reliance on China. The country has used its larger neighbour as a buffer against international sanctions and divestment by foreign investors, who have announced plans to quit the country or shelved projects.

Since the coup, 875 people have been killed by the junta and 6,242 arrested, according to the Assistance Association of Political Prisoners (Burma), a human rights group. The country’s economy and public services were severely disrupted by mass protests in the three months that followed the putsch, and have only partially recovered.

The resumption of bilateral trade will fuel the widespread suspicion among anti-coup resistance groups that China was prepared to support the new military regime.

The cumulative value of China’s imports from Myanmar for the first five months of the year was $3.38bn, up from $2.43bn in 2020 and $2.56bn in 2019, before the coronavirus pandemic, according to official Chinese customs data.

Exports to Myanmar for the same period have not recovered to the same extent, however. By the end of May, goods valued at $4.28bn had been shipped to Myanmar, compared with $4.56bn and $4.79bn in the two previous years.

In a further sign of strengthening diplomatic relations, Chen Hai, China’s ambassador to Myanmar, met coup leader and military commander-in-chief Min Aung Hlaing in Naypyidaw, the capital, in June. In a subsequent statement, Chen referred to Min Aung Hlaing as the leader of Myanmar.

China was among the countries that abstained in a UN general assembly vote last week calling on the international community to halt the flow of arms to Myanmar and release Aung San Suu Kyi and other political detainees. 

Beijing had good relations with the government of the deposed leader, who is in detention facing multiple criminal charges. However, it has refrained from criticising the military, fanning anger among the mass protest movement that sprang up after the coup. 

Beyond being Myanmar’s biggest trading partner, China also has strategic infrastructure investments in the country, including energy pipelines that give Beijing a critical link to the Indian Ocean.

James Char, a Myanmar expert at the S Rajaratnam School of International Studies in Singapore, said many people in Myanmar still blamed the Chinese government and business interests for complicity in supporting the military’s decades of rule before the transition to democracy.

“The Chinese, themselves, are very clear about [public sentiment in Myanmar],” Char said.

Attacks on China-linked businesses in the wake of the coup culminated in an explosion at a Chinese-backed textile factory west of Yangon on June 11, according to reports from local Myanmar media, as well as junta-controlled information services and Chinese state media.

Beijing’s wariness of inflaming Myanmar protesters would probably slow Chinese direct investments and the resumption of planned larger-scale developments that formed part of President Xi Jinping’s Belt and Road Initiative, analysts said.

Additional reporting by Sherry Fei Ju in Beijing



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Australia calls Great Barrier Reef warning politically motivated

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Australia has labelled a draft decision by the UN’s World Heritage Committee to include the Great Barrier Reef on its “in danger” list as politically motivated.

The committee, which is chaired by Tian Xuejun, China’s vice-minister for education, and selects Unesco World Heritage sites, proposed adding the world’s largest collection of coral reefs to the danger list because of the damaging impact of climate change and coastal development.

The designation could ultimately lead to the reef losing its World Heritage status, although officials said listing was intended to prompt emergency action to safeguard a living structure that stretches 2,300km along Australia’s eastern coast.

But Sussan Ley, Australia’s environment minister, said the government had been “blindsided” by the committee’s finding and alleged there was a lack of consultation and transparency. She added that Canberra would challenge the draft decision.

“When procedures are not followed, when the process is turned on its head five minutes before the draft decision is due to be published, when the assurances my officials received and indeed I did have been upended, what else can you conclude but that it is politics?” she said.

That the World Heritage Committee is chaired by a senior Chinese official has stoked suspicions in Canberra that it had been singled out over its diplomatic and trade clash with Beijing.

China-Australia relations have soured following Canberra’s call last year for an inquiry into the origins of Covid-19 and Beijing’s imposition of tariffs on Australian wine and barley imports.

Ley said she and Marise Payne, Australia’s foreign minister, had already spoken with Audrey Azoulay, Unesco director-general, to complain about the draft decision.

But scientists downplayed the suggestion that the “in danger” listing was politically motivated. Three mass bleaching events in five years demonstrated the need for the government to do more to tackle climate change, they said.

“I’m seeing some press coverage saying this is all a plot by China not to buy wine, lobsters and to screw the Barrier Reef. I think that’s pretty far-fetched given that the draft decision released overnight will be voted on by 21 countries,” said Terry Hughes, professor of marine biology at James Cook University.

The controversy will heap further international pressure on Canberra, which has been pressed by the US, UK and others to commit to a national target of net-zero emissions by 2050.

In a draft decision due to be voted on next month, the committee urged Canberra to “provide clear commitments to address threats from climate change, in conformity with the goals of the 2015 Paris Agreement, and allow to meet water quality targets faster”.

It noted the loss of almost one-third of shallow-water coral cover following a “bleaching” event in 2016 — a process linked to warmer than normal water that can lead to a mass die-off of coral.

The row over the “in danger” listing occurred at a difficult time for Australia’s conservative coalition, which is embroiled in internal squabbling over climate policies.

On Monday, Barnaby Joyce, a climate sceptic and supporter of coal mining, ousted Michael McCormack to become leader of the National party, the junior coalition partner to the Liberal party, and Australia’s deputy prime minister. Joyce is expected to oppose any move to commit to net zero by 2050.

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