If handling the coronavirus crisis was not enough for Europeans to be getting on with, another tremendous challenge awaits: the threat of economic coercion from both the United States and China, as competition between the two great powers escalates. Europe has recently strengthened its instruments of control over strategic investments coming from outside the European Union, but it will now also need to build its resilience to direct threats and collateral effects from the US-China rivalry.
After January’s “Phase 1” trade deal between the US and China, hopes rose that the two countries would at least pause the battle until the US election was out of the way. Donald Trump had planned to sell the deal as an achievement in pushing back against Beijing. But the coronavirus has allowed Joe Biden to attack the agreement as weak, further emboldening those in the Trump administration who always believed in broad containment of China. Trump and secretary of state Mike Pompeo have now rejoined the fray, claiming to have seen “enormous evidence” that the coronavirus outbreak originated from the Wuhan Institute of Virology, and could even have been manmade. US intelligence services are investigating and have remained cautious about jumping to conclusions. But the administration remains intent on framing the crisis as a Chinese attack on US national security that was negligent at best and nefarious at worst. So, for the rest of the year the US appears set on trying to “hold China accountable”. Since the White House does not believe in diplomacy or military ‘instruments’ in foreign policy, it will use economic coercion to do so.
The debate in China is naturally more opaque, but its actions are not: Beijing has set out to gain influence by filling the void left by US non-leadership. To achieve this, it looks to increase third parties’ dependencies on its economy and value chains, and it has already used economic coercion by weaponising its health sector. The Chinese government is countering the Wuhan lab allegations with ferocious anti-American propaganda at home and more economic coercion abroad: when Australia called for an independent inquiry into the pandemic’s outbreak, for instance, China threatened a vast boycott of Australian goods, universities, and its tourism sector as well as punitive tariffs – and has now moved to ban Australian red meat from the Chinese market. Economic coercion will be met with economic coercion – and third parties like Australia or Europe will get hit directly or indirectly.
In this bipolar great power competition, relative gains and losses will matter more than absolute ones
So what are the strategic calculations for the US and China? And why, in this great crisis, are they willing to risk some of their own economic interest? At first it may appear that such crises should deter governments from deploying economic weapons because of the risk of them rebounding – a Chinese tariff will also hurt the Chinese economy, for example. But for players pursuing a wholescale ‘maximum pressure’ strategy aimed at winning a bipolar great power competition, economic crises create new opportunities for economic coercion. Political leaders around the world right now are so desperate to pull their countries out of the downturn, that, according to this logic, they will be eager to avert any measures that lead to additional damage. They will therefore more easily comply with the coercer’s demands. Whether this really works or not, the US has already put this logic into practice by tightening sanctions on countries like Iran, Venezuela, and Cuba at the beginning of the crisis. The Trump administration might think similarly about Europeans and their strategic dilemmas, too: the car industry in Germany is in deep trouble, for instance. The threat of car tariffs against Europe would cause huge alarm among German politicians. So in the eyes of the Trump administration the chances may be rising of economic coercion bringing about changes in behaviour.
What is more, in this bipolar great power competition, relative gains and losses will, to a certain extent, matter more than absolute ones. When its opponent loses more, China or the US might be willing to take a hit – as long as they can make sure the pain inflicted on their economy is not blatantly noticeable in the economic chaos of the crisis, or does not trigger a sufficient number of key lobbyists to oppose the measure. Whipped-up nationalism and public outrage about an opponent’s policies can both further increase leaders’ geo-economic room for manoeuvre. And, finally, leveraging a one-sided dependency an opponent has on a certain sector or product will always come with fairly low immediate economic cost – and the crisis might incentivise such measures rather than render them less viable.
In the next few weeks or months, these developments could converge into a ferocious battle with economic weapons at its heart. This could be once US dependency on specific Chinese medical imports has decreased, once American unemployment figures have skyrocketed to levels previously unthinkable, once the US election is just a few months away, and once the deadly consequences of early US reopening have become clear for all to see. At this point, Trump could lash out against China. In advance of this, Europeans should engage in some scenario planning around the exact measures that China and the US could take at that time. Both countries have a vast variety of tools at their disposal for economic coercion, many of which would come with secondary or primary effects and cause real damage for Europeans. If Europe does not want to get caught in the crossfire, it should get its defences and countermeasures in place now.
This is the first analysis in a series of three on economic coercion in the coronavirus crisis. The next piece will analyse some concrete instruments of economic coercion the US could use against China or others. The third will list possible Chinese measures against the US or others.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.