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A Now (Very) Uncertain Trilateral Relationship – China, Europe, and the United States (June 2022)

June 1, 2022

Comment by Leonardo Đinić


The trilateral relationship between China, the European Union, and the United States is threatened by the current geopolitical and macroeconomic uncertainty exacerbated by the war in Ukraine. While the United States and its allies continue to sanction Russia through the dollar-dominated international trading system, China and Russia continue cooperating through multilateral institutions like the BRICS initiative. While the West sends massive weapons shipments to the front in the Donbas region and continues to support, train, and finance the military in Taiwan, China and Russia continuously communicate red lines to which they promise to retaliate if crossed. As the bloody human tragedy in Ukraine unfolds, the idea of an eventual special military operation in Taiwan appears possible. The West continues to flirt with the concept by making statements that aim to provoke Mainland China into war. 

This analysis does not plan to determine the feasibility of such a Chinese-led operation against Taiwan. It instead seeks to reveal the recklessness of European politicians as they sacrifice national interests to fulfill the wishes and demands of Washington. In other words, the political elite in Washington, rather overtly, plans to push Europe deeper and deeper into diplomatic, economic, and perhaps military conflict with Russia and China. The war in Ukraine has provided a free pass to European capitals to dismantle their economies so that they can ‘weaken Russia’ through sanctions and weapons shipments. In the event of a conflict in or around Taiwan, which the United States could provoke through public statements, weapons shipments, military training, or personal security guarantees, Europe would lose even more in terms of trade, investment, and critical imports relative to the sanctions war against Russia.     Therefore, a war in Ukraine, which prudent political scientists like the American John Mearsheimer predicted since at least the 1990s due to America’s dismissive approach to Russian interests, is accelerating de-globalization through the West’s aggressive attempt to sanction Russia’s gross energy exports. As a result of sanctions and Russia’s diplomatic isolation, Europe has found itself uniquely weakened, as the economies of European countries and the United States continue to report higher inflation rates, stagnant or contracting growth, and food, energy, and critical mineral shortages.

Blaming Russia for the global crisis is short-sided, especially from the European perspective, since debt, unemployment, lack of growth and development, and political disunity were all characteristics of the Eurozone before President Putin’s ambitious special military operation in Ukraine. However, the Kremlin launched the attack at the right moment to weaken the economies of the West while preserving and ballooning Russia’s energy export profits. 

The thesis of this work is that European politicians are consciously working against their national interests to harm Russia and satisfy the foreign policy elite in Washington. The concern is that European politicians may act similarly in the event of a harsh US-China decoupling, which would only further bury the European economies, especially the industrial ones, and entirely place Europe in the position of a complete US economic and geopolitical vassal. 

This analysis will examine:

  • Europe’s general and longstanding macroeconomic imbalances before the coronavirus pandemic;
  • Europe’s extreme dependencies on both China and Russia for imports;
  • Europe’s primary concerns in the China-EU-US relationship;
  • Washington’s consistent urge to dictate foreign and macroeconomic policy to Europe and Europe’s tendency to accept US directives irrespective of their consequences;
  • The current US policy on the China-EU-US relationship;
  • The concerns surrounding Taiwan and how a conflict in or around Taiwan could affect Europe; 
  • The role of the US dollar and how Washington weaponizes it against geopolitical adversaries; 
  • The potential future of the BRICS and their current role in the global order; and
  • Europe’s future in the trilateral relationship with a few thoughts on how it should prioritize its national interests instead of accepting the will of the Washington foreign policy elite. 

The Inherent Weaknesses of the Eurozone Economies Before COVID-19

The current supply-chain and Ukraine crises are completely devastating a European Union that was already economically vulnerable since before the coronavirus pandemic. In fact, the European Union has been in constant economic and financial crisis since at least the great financial crisis (GFC) of 2008. 

The legacy problem facing the European Union and the Eurozone was not just its overall indebtedness of the member states. Rather it was, and continues to be, the distribution of debt among the Eurozone members. The large variance of the countries’ debt profiles traditionally complicated both fiscal and monetary policy and prevented policymakers from employing effective uniform approaches to deleveraging. The Eurozone was traditionally divided into three levels of indebtedness (pre-COVID) - nine members maintained low to medium levels of debt; five had a high level or a borderline high level of debt; and five had very high levels of indebtedness.[1]    

The Netherlands, Ireland, and Luxembourg had low levels or public debt but very high levels of private debt.  France, Spain, Portugal, Belgium, Greece, and Cyprus had high levels or borderline high levels of both public and private debt.  High levels of debt limit the ability of economies to offset deleveraging of one sector with the leveraging up of the other. France was traditionally in its own category as the one large Eurozone economy whose debt, both public and private, continued to increase since the GFC. Of the other major economies, Germany, Austria, and Finland all had low or moderate levels of both public and private debt and all had modestly deleveraged since the peak of the crisis in 2010.  However, Finland had private debt levels that were borderline high. 

The persistent current account surpluses of these three (Germany, Austria, Finland) economies along with that of the Netherlands were always one of the main causes for the macroeconomic imbalances within the Eurozone and one of the reasons deleveraging among the more highly indebted economies had been economically difficult. This reality also complicated political issues within the European Union where the ‘core nations’ had significant political disagreements with those of the ‘periphery.’ 

The Eurozone crisis, which dragged on until the COVID-19 pandemic, had its origins in the large imbalances that developed among Eurozone members in the years leading up to the crisis.  The adoption of the euro led to lower interest rates and increased borrowing in the peripheral economies. Real estate bubbles emerged in Portugal, Ireland, Greece. 

Current account deficits ballooned in these economies as they lost competitiveness due to rising wages while surpluses in Germany continued to grow as a result of suppressed wage levels.  Normally, a change in currency values would have corrected the imbalances before they reached a dangerous level.  But with a single currency, that adjustment process could not happen.   

Deleveraging required a reversal of these imbalances.  Ideally, to deleverage, debtor economies should run current account surpluses while creditors reduce their surpluses. Portugal, Ireland, Greece and Spain in fact have all moved to current account surpluses. But Germany has stubbornly clung to its surplus, thus limiting the deleveraging process.  Deleveraging has only been able to occur because the Eurozone as a whole has moved from a small current account deficit to a large surplus.

With Germany, the Netherlands and other core Eurozone economies continuing to run current account surpluses, Eurozone deleveraging has been made possible only by a significant improvement in the Eurozone’s overall current balance. In 2011, the Eurozone ran a small current account deficit.  By 2018, the deficit had turned into a surplus of 3.6% of GDP.  

The Eurozone highly indebted economies could have achieved much more deleveraging with less austerity if the core surplus economies of the Eurozone—in particular, Germany and the Netherlands—had done their part and expanded demand and reduced its surplus. Instead, Germany pursued policies that increased its savings and its surplus, thus shifting the burden to the rest of the world.   

The Eurozone debt crisis resulted in a loss in GDP, an increase in unemployment, weak wage growth, and a decline in business investment. The impact of the crisis varied among Eurozone economies, with Cyprus, Greece, Ireland, Italy, Portugal, and Spain experiencing the most damage to economic growth in the five-year period from 2008-2012. Austria, Belgium, Estonia, France, Germany, Latvia, Lithuania, Malta, and Slovakia experienced the least. 

Similarly, the recovery from the crisis has varied among the Eurozone economies.  From 2008 to 2018, GDP levels in Austria, Belgium, Cyprus, Estonia, France, Germany, the Netherlands, and Slovenia increased by 5 – 15% over 2007 pre-crisis peaks. In Ireland, Lithuania, Luxembourg, Malta, and Slovakia, the GDP increased by more than 15% from pre-crisis peak GDP levels. Finland, Latvia, Portugal, and Spain hardly recovered with GDP levels just slightly above pre-crisis peaks, while Italy’s GDP was 4.2% less in 2018 than in 2007 and Greece’s was 23.8% less than its pre-crisis peak.

Despite some deleveraging, high levels of private and public debt continue to act as a drag on economic growth, holding down investment and consumption.  The principal source of economic growth has been external demand with the Eurozone moving from a balanced current account in 2007 and a small deficit in 2008 to a 3% surplus in 2018. These facts mostly continued on until the COVID-19 struck the Eurozone and the world. When the pandemic arrived in Europe, most of the peripheral nations of Euro-Med had elevated unemployment, slow growth, limited wage growth, increased austerity, and stagnant investment.

What Did COVID-19 Find in the Eurozone?

The macroeconomic realities and trends outlined above prove (very clearly) that some countries in the Eurozone never fully recovered from the wider debt crisis as the coronavirus pandemic arrived in Europe. Europe has been under severe economic stress for nearly two decades. 

Growth rates have been stubbornly uneven, with the Euro-Med lagging behind many countries within the Eurozone. The correlation between high levels of total debt and slower growth is apparent since economies with higher debt in the Euro-Med recovered much more slowly than those with lower debt levels. In short, COVID-19 halted the recovery from the last crisis, tossing the Eurozone into more uncertainty that weakened unity. 

The greatest blow to the world economies with the arrival of coronavirus was the rapid halt of household consumption due to national lockdowns. Fiscal stimulus and the promise to keep economies open is the main factor fueling the ‘recovery.’ Importantly, before COVID-19, debt was high while growth was still struggling in much of the Euro-Med. While the overall contribution of ‘money printing’ and its correlation with skyrocketing inflation in 2021-2022 is still somewhat debated, a valid point is that stimulus was not optimized and was not completely allocated to productive sectors of the economy, but instead fueled speculation, paid down debts, and never went to major job-producing projects that could have strengthened the recovery. Lockdowns also worsened the already poor unemployment situation and assets appreciated due to the unproductive money-printing frenzy. 

Therefore, many economies entered the COVID-19 crisis with chronic issues from the last crisis and relatively high total debt levels, which limited available fiscal space. After painfully deleveraging and reducing deficits through austerity and sectoral rebalancing for years, much of the EuroMed entered the COVID-19 crisis with debt burdens that remained high. These chronic levels of debt create an ongoing drag on economic growth because of the constraint on both the creditworthiness of the private sector (and its ability to access credit or issue credit) and the limited fiscal space of economies to use public spending to increase investment and growth. The US-led China trade war, and Washington’s foreign policy decisions on Ukraine over the past decades placed Europe in an adversarial position toward both China and Russia, which will only further damage the economies of the EU. 

A Weak Eurozone Dependent on China and Russia

The COVID-19 pandemic and subsequent economic and financial shocks exacerbated the Eurozone’s preexisting macroeconomic imbalances. At the same time, the war in Ukraine and the related sanctions on Russian energy products created additional divisions on long-term commitments to ‘abandon’ Europe’s dependence on Russian energy. 

Before COVID and the Russian invasion of Ukraine, the central problem was the unequal distribution of debt among Eurozone economies, complicating monetary and fiscal policy. The lack of appropriate adjustment mechanisms to distribute the burden of debt and support economic growth are at the heart of the ongoing Eurozone crisis of slow growth. European economic growth was struggling before these crises. Its growth ‘struggles’ and overall resilience to economic shocks varied mainly across the EU, with the most vulnerable southern or periphery member states. 

Therefore, the EU could not address macroeconomic imbalances without a coherent fiscal union. Now, these different interests are only more exacerbated because countries in Europe vary in their dependence on both Russian oil and Chinese manufactured goods. In short, not all EU states have the same interests, debt profiles, or trade profiles with both China and Russia. Each additional division creates more political risk and room for disagreement. 

The ‘core’ European countries, or pentagon and growth zones (low commitment to such terms), are the growth generators of Europe that traditionally maintained very large current account surpluses. Additionally, most of these countries are significantly dependent on both Russia for gross energy imports, and China for manufactured goods or Chinese markets to fuel current account surpluses.  

The most significant divisions between the European Union member states that can contribute to overall EU disunity on issues related to China and Russia include the facts that different member states have:

  • Different public and private debt profiles that influence fiscal flexibility;
  • Different energy dependence profiles;
  • Different import profiles (manufactured goods);
  • Different cultural and ideological profiles (liberal/progressive views versus traditional/patriarchal/religious/etc.)
  • Different GDP composition profiles (some overly dependent on industry while others on tourism);
  • Different relationships (security, economic, trade, and cultural) with third party nations that heavily influence the outcome of the EU-China relationship (Great Britain and the United States); and
  • Different expectations for European strategic autonomy (French position) versus a foreign policy more aligned with the Anglo-Saxon sphere (UK, US, Canada, Australia, etc.)

For example, the Euro-Med region was uniquely susceptible to economic shock from the COVID-19 crisis in comparison to the rest of Europe due to high existing fiscal deficits and long-standing debts and reliance on tourism and services. Most of the debt stifling growth in the Euro-Med is legacy debt left over from the last crisis. The Euro-Med contains Cyprus, Greece, Italy, Portugal, and Spain (can also include other non-Eurozone nations with similar profiles).

As these imbalances remain, the EU continues to import more from China, but some member states import more than others, revealing additional weaknesses. China is the world's largest exporter and the world's second or first largest importer (roughly tied with the United States). China is one of the EU's top-three most prominent export destinations (10%), while China is the EU's largest partner for importing goods (about 23%). The Netherlands is the largest importer of goods from China (through the port of Rotterdam). At the same time, Germany is the largest exporter of goods to China (think about Germany's massive and longstanding current account surplus). France and the Netherlands are the second and third importers of Chinese goods in the EU. 

There are significant differences in overall trade profiles within the EU concerning China and trade. For example, Germany is China's 5th largest trading partner, while France is 17th or 18th. Before the COVID-19 pandemic and the war in Ukraine – both the Netherlands and Germany were very hesitant about 'Euro bonds' and other mechanisms that could effectively deleverage or redistribute unionwide debt. The different trade relationships vary across the EU and further create competition for national interests when the broader European Union aims to develop a coherent 'China policy.'

To make matters worse, the European Union continues to import more from China, while it exports less overall, and China imports less from the European Union. Therefore, the European Union is growing more dependent on China, while China is becoming less dependent on the European Union. Lastly, most of the goods imported into the European Union are inherently important and include telecommunications equipment and automatic data processing machines. For example, in 2021, only three-member states had a trade surplus with China. 

The largest surplus was held by Germany (€ 6 624 million), followed by Ireland (€ 4 014 million) and Finland (€ 277 million). There were 24 Member States that had a trade deficit with China.  The largest deficit was held by the Netherlands (€ 94 514 million), followed by Poland (€ 28 057 million) and Italy (€ 22 834 million).

What is the EU most concerned about?

The government in China has ‘internationalized’ its worldview through projects like the Belt and Road Initiative, which largely promotes win-win deal making. This approach is not typically common in US foreign policy implementation which immediately attracts countries in need of credit. Domestically, China has adopted a mixed for of authoritarianism and idea of capitalism with Chinese characteristics. Despite the ‘mix’ in ideology, both Washington and Brussels have been concerned with China trade practices, and Europe’s worries have led to stalls in negotiations. 

Here are a few of Europe’s most pressing concerns: 

EU level-playing field concerns

China has limited foreign competition while at the same time implementing industrial policy, granting subsidies and providing a favorable regulatory framework to national enterprises, in many cases state owned (SOE) and in critical sectors such as ICT, energy technology or medical equipment. Another reason for concern for the EU has been asymmetry in market access.

Security and strategic concerns

In the context of a strong role of the state in the Chinese economy, an added reason for concern in the field of FDI has been the increasing Chinese investment directed towards high value added sectors in Europe. 

Unilateral US policy and the US-China war negatively contributed to the EU-China trading relationship due to trade diversion and decoupling

$120 of the $200 billion in increased Chinese imports from the US negotiated in the framework of the Phase One deal directly compete with EU manufactured goods. At the same time, the increasing trend of technological decoupling between the United States and China puts EU companies competitiveness at risk, having to abide by two different ecosystems that they do not control.

The War in Ukraine

The war in Ukraine has signaled to China that the United States and its allies are willing to weaponize the U.S. dollar on international markets to sanction adversary states. Further, they are eager to freeze hundreds of billions of dollars in foreign currency reserves. This is telling since similar strategies can be utilized against other U.S. adversaries in the future, prompting a general international push to become less dependent on the U.S. dollar for international trade. China has also increased some energy imports from Russia since it invaded Ukraine while remaining relatively quiet on reacting to the war on the diplomatic stage. 

The concerns ultimately led to Europe's failure to ratify the Comprehensive Agreement on Investment (CAI). 

On 30 December 2020, the E.U. and China concluded the Comprehensive Agreement on Investment (CAI) negotiations. The agreement grants E.U. investors greater access to China's market. The CAI has not yet been ratified and has therefore not yet entered into force. European Parliament failed to ratify the CAI over human rights concerns in Xinjiang and Hong Kong. Despite pushback from the EU, French President Macron and (then) German Chancellor Merkel expressed support for the deal, highlighting Europe's divided foreign policy apparatus. 

However, it is essential to remember that America was the E.U.'s top trading partner, but in 2020 China surpassed the U.S. A $26.7 billion boost for Chinese imports and a $5.3 billion increase in E.U. exports resulted in China officially becoming the E.U.'s largest trade partner. Displacing the U.S. as a trade partner is another reminder that China is playing catch up to America's economy. In 2020, there was an approximate $5.6 trillion gap in nominal GDP between the two nations, and a decade ago, the gap was more significant at $9 trillion. 

The CAI is a bilateral investment treaty that guarantees particular protections for businesses investing in another country. Under the CAI, China and the E.U. pledged to reduce industrial subsidies, limit state intervention in enterprises, and address forced technology transfers. After giving Chinese companies greater access to European markets, E.U. manufacturers in electric vehicles, telecoms, and private hospitals would gain vital access to Chinese demands to boost national exports. Although the CAI has many critics who label it a pro-Chinese agreement, it is more important to European exporters than to China. Beijing has done much to amend foreign investment laws and increase investment access in China through regional incentives in the finance, A.I., healthcare, procurement, and e-commerce industries. The Regional Comprehensive Economic Partnership (RCEP) Free Trade Agreement also increased market access to all 10 ASEAN nations and Australia, Japan, New Zealand, and South Korea. The suspension of the CAI appears to signal that most of the E.U. have officially joined Washington's collective effort to counter China's global influence through political and business measures as outlined in the Strategic Competition Act. Given the war in Ukraine and the Biden's slight and recent 'pivot' to criticizing Beijing again, it is unlikely that we will see the CAI ratified soon. At the time, the European Commission was under severe pressure from the United States to press sanctions on China concerning two main issues: the political situation in Hong Kong and accusations of 'genocide' in Xinjiang.

What is Washington’s current ‘China Policy?’

The US has pursued diplomatic and largely symbolic summits or rhetoric. One of the most notable diplomatic moves was the Boycott of the Beijing Olympics (alongside Australia, Canada, and the UK) citing the Chinese government’s human rights abuses in Xinjiang and elsewhere. More recently, the White House announced the U.S.-led Indo-Pacific Economic Framework for Prosperity (IPEF), boldly claiming the 13-country partnership to address concerns around supply-chain resilience, infrastructure and clean energy, tax and anti-corruption, and rules and regulations for digital trade “renews American economic leadership but adapts it for the 21st century.” However, the administration is yet to announce a free trade agreement, and continues to pledge to protect Taiwan in the event of a conflict. The Biden administration’s primary strategy has been to develop an international coalition to combat Chinese influence via trade and diplomacy. However, the outbreak of the war in Ukraine has led to nearly 70% of the world remaining neutral or in support of Russia’s invasion of Ukraine. 

The grouping of countries that sanctioned Russia almost exclusively include the populations of North America, Europe, and some of the former English colonies. Those that criticize Beijing openly, do so by bringing up its human rights record and unfair trade practices. The G7 pitched the Build Back Better World Partnership (B3W) as a ‘first-world commitment’ to investing $40 trillion to assist low – and middle-income countries hit hardest by the COVID-19 pandemic. The B3W is also presented in some circles as a serious alternative to the Belt and Road Initiative (BRI). If implemented, the B3W could serve as Washington’s primary investment tool to influence nations that see China or Russia as significant diplomatic, trade, and investment partners. The B3W is “a values-driven, high-standard, and transparent infrastructure partnership, while the BRI is a pragmatic global infrastructure plan representing a third of the world’s GDP and two-thirds of the worldwide population. Despite their differences, some believe that the B3W and the BRI could become complementary, but this will require significant compromise in Beijing and Washington. 

If Biden keeps Trump's economic policies in place, Europe will continue developing a case-by-case relationship with Beijing. If Biden improves the US-China relationship and relaxes tariffs, the European private sector will rejoice to know that they can continue increasing business ties with no real political consequences. Corporate leaders and respondents in Europe still view China as a top export market for European goods. It will be increasingly hard for Biden to organize a significant pro-US bloc among European allies. If this is somewhat difficult in Germany, imagine how hard it might be in Hungary or Italy. If Biden goes about recruiting states to join diplomatic efforts, Europe will likely split along a France-Germany divide. Countries that rely on BRI financing for infrastructure projects or export goods to China will hesitate. In contrast, countries that do not rely on Chinese credit or export destinations will join Washington's diplomatic coalition. 

Would a Taiwan crisis be more complicated than the war in Ukraine?

Although there are military analysts who claim that China does not have the amphibious military equipment necessary for a successful landing and subsequent takeover of Taiwan, the US media, as well as individual American politicians continue to compare and treat Taiwan as an inevitable point of contention between the US and China. Thanks to Ukraine, the island is considering extending compulsory military service for young citizens from four months to a year. Taiwan has also doubled the length of annual reserve training. 

Washington uses Taiwan as an instrument to effectively test Beijing’s patience in some ways that resemble the crisis in Ukraine prior to the actual Russian invasion. In contrast, Taiwan is not a warzone like Ukraine was prior to February 2022, and Taiwan is incredibly important to the global tech industry for its contributions to global semiconductor production. ‘A takeover’ or form of elite capture of Taiwan that would give Beijing control of semiconductor production would level its capabilities with that of Western partners. The US continues to provoke Beijing with the training and arming of military forces in Taiwan, while sending politicians, and making statements that indirectly support the notion of an independent Taiwanese state. 

When you observe the countries that participate, fabricate, and assemble semiconductor goods, you find that most of them are US allies. At the same time, the US is pursuing semiconductor independence at home with new legislation for domestic production. 

The US dollar as a Weapon

At least half of cross-border trade invoices across the world are in dollars, which is five times America’s share of global good imports, and three times its share of exports. Most central banks use the dollar, and it serves as the primary currency for capital markets. Dollar dominance elevates the importance of American monetary and fiscal policy, since interest rates, markets, and currency swaps all influence the flow of USD for global transactions. 

The U.S. also controls SWIFT, the primary cross-border messaging system used by banks, as well as CHIPS, a clearing house that processes 1.5 trillion dollars daily. When Washington decides to isolate a potential individual or country from the global financial infrastructure, the consequences are devastating.  

The share of USD in foreign exchange reserves of all IMF members fell from about 72% in 2000 to about 61% by 2020. The dollar is slowly waning, and we could witness a multi-currency reserve system in the future. Especially with incremental changes made by other countries to take on greater self-reliance over the next decade. This future could be one in which the euro and renminbi, and to some extent gold, share dominance on global markets. 

Countries that are vulnerable to U.S. punitive measures are most likely to head toward ‘de-dollarization.’ Iran, Malaysia, Turkey and Qatar considered using cryptocurrencies, national currencies, precious metals, or barter for trade policies, while China and Russia conducted 90% of bilateral trade in USD back in 2019, but recently dropped this figure to below 51%. 

China pursues its own Central Bank Digital Currency (CBDC) development for several key reasons, most of which allow the Chinese government to monitor its domestic financial system with a supreme degree of authority and insight. The People’s Bank of China (PBOC) could control firms within the country with greater financial transparency. Ultimately, a switch to a digital currency would allow greater control over anyone or any firm operating within China, with data as its cornerstone.

The war in Ukraine, the aggressive use of sanctions, and the seizure of foreign reserves have only shown other countries that an ‘over dependence’ on USD is risky if you plan on opposing the US-led world order. Russia has also proven that raw materials and commodities can serve as a crucial counterbalance to sanctions. Beijing might be able to do something similar with its exports in the event of a true ‘decoupling’ with the West. 

Will the BRICS be a central part of a new world order?

The US sanctions against Russia have led some countries to rely more on their national currencies in foreign trade. There is also increased talk of efforts to integrate payment systems and create an alternative to the SWIFT payment messaging platform. Central banks of the BRICS countries have already agreed to conduct the fifth test of a banking mechanism that will allow them to jointly pool “alternative currency” reserves to shield their economies from outside shocks.

Russia and China, for example, have been developing bilateral trade meant to cut out the U.S. dollar for many years. Russia is resource-rich, and China has the world’s largest manufacturing and export base. Only weeks before the invasion of Ukraine, Russia signed a 30-year oil and gas contract with China worth hundreds of billions of dollars. This deal coincides with the construction of a major pipeline from Russia to China which will be completed by 2025.

India also made arrangements for increased oil shipments from Russia, and will pay without the dollar (formerly the world’s sole petro-currency). Furthermore, the promise of lower prices while the rest of the oil world is experiencing rapid inflation in energy prices is highly tempting for those purchasing oil, natural gas or coal from Russia.

The other nations of the BRICS bloc (Brazil, India, China and South Africa) have all been highly active in trade with Russia despite western sanctions and the removal of Russian banks from the SWIFT international payments network. This is exactly what I predicted would happen many years ago.

This is of note as the average Chinese middle-class income is slightly lower than that of Russia’s, while the average Indian middle-class income is just 20% of the Russian standard. We can compare the Russian GNI per capita with that of the BRICS economies as follows. This is also significant as the BRICS is estimated to account for 50% of global trade by 2030 while the bloc has also been in discussions to ditch intra-member US dollar transactional trade and switch to either mutual settlements in respective currencies and/or bring in a BRICS coin digital trade wallet.

Quick Conclusions:

This analysis can conclude the following:

  • The European Union contains states that have extremely different macroeconomic and trade profiles prior to both the coronavirus pandemic and the war in Ukraine. These differences often led to animosities and disagreements between the EU’s core and periphery. 
  • The European Union member states also have different relationships with both China and Russia, on which some are extremely dependent on for energy and manufactured goods imports. Completely sanctioning or isolating either China or Russia would be catastrophic to some of the EU’s members.
  • China, like Russia, has clear red lines associated with its view on territorial integrity, sovereignty, and the future of the international order. It is likely that China would retaliate in one way or another if the United States and its allies crossed a perceived line. One form of retaliation could be denying much needed goods or market access. 
  • Some of the wealthiest European nations rely on both Chinese imports and Chinese markets as export destinations. 
  • European Union dependency on China is not slowing down. 
  • The imported goods from China are critical for telecommunications infrastructure, automatic data processing, electronic equipment, electrical machinery, household equipment, and base metals for manufacturing. 
  • The same countries that are dependent on China for imports, are also dependent on Russia for gross available energy.
  • The government (mostly bipartisan) in the United States is not okay with the fact that Europe is dependent on China for goods, or on Russia for energy. 
  • The US is taking steps to produce some critical minerals, medical equipment, semiconductors, etc. domestically. 
  • The US largely pressured Europe not to ratify the CAI with Beijing.  
  • The Biden administration hopes to rally a coalition to pressure Beijing into accepting he US-led world order despite the fact that it goes against Chinese interests. 
  • There are areas for EU-US-China cooperation but they are mostly symbolic and related to human rights, climate change, and WTO reform. 
  • The global semiconductor industry is just as, if not more, globalized than the global food supply chain setup. 
  • Globalization via the US dollar has been used by Washington to punish its adversaries with the US dollar since at least the Obama administration when it targeted Iran. 
  • Many countries are reconsidering their place in the world order and are slowly taking steps to be less dependent on global supply chains and US dollars for transactions. 

Europe’s Future in the Trilateral Relationship

The European Union’s dependency on Russian gross energy imports revealed that the metrics used to evaluate the importance of national economies to global supply chains was inherently flawed. Europe is facing both an energy and food crisis that could have been avoided with more prudent diplomatic negotiations. 

Like Russia, China has the potential to disagree with the United States and its allies on some fairly dangerous topics – one of which is the question of Taiwan, another is the South China Sea. In the event of an aggressive US position toward Chinese interests, the cost could be incredible for the EU. The European Union could essentially lose access to affordable energy, critical Asian markets, and cheap manufactured goods. 

Europe should try to develop a more coherent and unified foreign policy that considers and prioritizes its own interests first, rather than allowing the US to dictate them as it has during the war in Ukraine. The European position, largely encouraged by London and Washington has divided the EU and will likely lead to catastrophic economic impacts over the next years. 

As history has shown us, Europe is prone to violence and social instability during periods of severe economic stress. The pandemic, coupled with inflationary pressures and increased energy prices are creating an environment that is economically untenable in most of the less wealthy member states. 

Europe should use the war in Ukraine to develop a more independent industrial and energy base that can fuel the manufacturing of necessary goods critical to the entire European Union so that future geopolitical tensions between the United States and its adversaries do not jeopardize the standards of living hundreds of millions of Europeans.

[1] The sections entitled, ‘The Inherent Weaknesses of the Eurozone Economies Before COVID-19’ and ‘What Did COVID-19 Find in the Eurozone?’ are inherently inspired and provide content from projects written by Leonardo Dinic’s previous work at the Private Debt Project alongside Justin Ederheimer and the late Sherle R. Schwenninger.

A Now (Very) Uncertain Trilateral Relationship – China, Europe, and the United States (June 2022)
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