“Europe has lost negotiating capacity with China because Beijing does not need it”
The Trade Ministers of the European Union (EU) address this Monday the pact sealed with the United States to avoid a trade war with the country’s trade representatives. The meeting will also discuss trade relations with China, including Beijing’s announcement of new controls on the export of rare earth elements and their subsequent suspension for one year. The Twenty-Seven are in the middle of a struggle between the two largest economies on the planet and there is an obvious fear that they will not emerge well from this clash of tectonic plates. Economic Information has spoken about this and other current issues with Alicia García-Herrero, chief economist for Natixis for Asia-Pacific.
With the perspective that the days give us… How do you evaluate the agreement between Beijing and Washington by which Beijing extends the suspension of the 24% tariff to the US for one year and also lowers the restrictions on exports of rare earths?
The agreement was not read well because it was unambitious and non-transparent. It was not clear, for example, on aspects such as US export controls. There are many negotiations that have not been made public. Taiwan’s is surely different. Hence the market’s skeptical reaction. Trump needs a bull market before the election mid-term (half term) and that is why he has been closing meetings with Beijing. There is a certain vertigo in the market in relation to this issue. The Trump administration is not playing its cards well with China.
How does this lack of transparency in negotiations affect Europe? Because he was already falling behind in this fight
It’s terrible. Europe is literally not at the negotiating table and is going to have to assume what Trump wants, by joining his rare earths agreement with China. European companies were concerned that if the United States has a concession, they would only have to apply for licenses for these five traditional rare earths. Now that the US doesn’t need them, there will be no pressure for them to leave soon. I think Europe saw the problem and that for China it would be very costly in terms of image.
Have we Europeans lost negotiating capacity?
Yes, we have lost it and it is not new. I would tell you that we have no idea where we are in the talks with China. We have no information, not even about what concerns us. The United States is setting the agenda for China and this affects Europe brutally. I think that Europe has to resume this discussion now, proactively, even if there is that margin of one year given by Beijing. In the end, Europe has the largest market for China, and they take that market for granted. They know that it took us 18 months to impose a tariff of 18%. We do not have a fluid dialogue because Beijing considers that it is not necessary.
Is it as serious as it sounds?
It’s that serious.
Is it possible to compete in AI with an economy like China’s that puts enormous energy subsidies on the table for its big technology companies and much more flexible regulation?
The United States still dominates in what we call radical patents, which are the most advanced. China does not want to limit the ability to use coal to produce cheap energy for all data centers, and I think the US will also try to reduce energy costs as much as possible, but it will not be that easy.
What role can artificial intelligence play in deciding the outcome of the trade war?
A lot, because the United States cares about military hegemony and for that you need vertical AI, you need drones, supersonic precision weapons… You also have to have rare earths and other critical metals and China has the upper hand there. In large numbers the US may seem the winner.
How does all of the above affect China’s economic prospects?
China thinks it is going to receive a lot of investment and there seems to be some acceptance that it is dominating the United States in this trade war. I think that the Chinese economy has a situation of great weakness that we do not see because we read all this really impressive news. However, in Beijing they are very concerned that economic weakness will suddenly become more visible and that is why they are saying that they are going to expand the fiscal package. The confidence of Chinese households remains at historic lows and savings are higher than in 2022, with the ‘zero Covid’ policy.
Hence your massive purchases of gold?
They are seeing that the world is becoming de-dollarized. The largest demand for gold in the world is in Chinawhich has even allowed insurance companies to buy it. Bonds do not yield as much, real estate prices continue to fall and citizens no longer trust the stock market. With gold they follow their usual strategy: if an investment does well for me, I double or triple it.
