The global race to reindustrialise

US Treasury Secretary Janet Yellen is visiting Beijing this week as part of America’s efforts to ratchet down tensions with China. US Secretary of State Antony Blinken’s visit to China last month saw both sides seeing ‘progress’ in stabilising ties. Meanwhile, Chinese Premier Li Qiang’s tour of Europe two weeks ago was seen as a charm offensive of sorts. Geopolitics is in a dynamic phase, though no one can see where it is headed.

With its economy stalling, Beijing needs to reduce geopolitical tensions with Washington.

The US has felt the need to cool the situation and prevent things from getting out of control. With its economy stalling, Beijing needs to reduce geopolitical tensions with Washington. It has reached out to US corporate leaders such as Jamie Dimon (JP Morgan), Elon Musk (Tesla) and Bill Gates, who met President Xi Jinping recently. In the middle of all this, the European Union is carving out a policy of ‘de-risking’ even as it seeks to maintain healthy economic ties with Beijing.

Shortly after Blinken’s return, it was reported that the US may further tighten chip exports to China and that the Biden administration was also considering restricting the lease of cloud services to Chinese companies.

Planned restrictions on outbound investment to China are likely to be announced after the Yellen visit. This is in keeping with the pattern of the US announcing restrictions on China just before or after visits by its officials.

Indeed, just days after Blinken’s return, the US announced charges against China-based chemical manufacturing companies and the arrest of two executives involved in fentanyl manufacturing. The Chinese said this was yet another example of US ‘long-arm jurisdiction and bullyism’.

Premier Li Qiang’s visit to Germany and France was a clear indication that Beijing would adopt a two-track policy with Europe improving business relations and climate cooperation, and seeking to play down issues of concern such as China’s approach to the Ukraine war.

But the Europeans are also playing their version of hardball. Even as Li began his visit, the EU Commission revealed its draft Economic Security Strategy, which calls for measures to prohibit outbound investments deemed security risks. Besides this, the EU will tighten rules on inbound investment screening, and undertake more internal cooperation on export controls. China is not specially mentioned, but it’s clear that China and Russia are its main targets.

The message put out by the EU leadership is that China remains a key partner on global challenges such as climate change and, as Ursula von der Leyen, the President of the European Commission noted, for “the vast majority of trade and economic relations with countries, and also China, is business as usual.”

The European Council meeting, held on June 29-30, included a dialogue with NATO Secretary General Jens Stoltenberg. The meeting discussed Ukraine and reconfirmed its “readiness to provide sustainable military support to Ukraine for as long as it takes.”

On China, the council reiterated its 2019 formulation of China as a simultaneous partner, competitor and systemic rival. It said that EU and China had a shared interest in pursuing ‘constructive and stable relations’ and they would cooperate in tackling global challenges like climate change, biodiversity, health, pandemic preparedness, debt relief and humanitarian assistance.

But, even while the EU sought to reduce critical dependencies and de-risk, it had no intention of decoupling. At the same time, the document laid out the EU’s unhappiness with China’s Russian policy, as well as its actions in South China Sea.

The European dilemma is palpable as it unfolds in a dynamic economic landscape. Europe remains dependent on the United States not just for its security, but for technology, energy and capital, making a mockery of its claim to ‘strategic autonomy’. There has been a steady decline in European fortunes. In 2008, the EU and US economies were roughly equal, but by 2022 the EU and UK together had a GDP of $19.8 trillion, while that of the US had risen to $25 trillion.

All these issues are now elements in the global race to reindustrialise, triggered by trends in deglobalisation and decarbonisation. Covid-19 has revealed the importance of reshoring and onshoring manufacturing and creating supply chain resilience. Since 2018, the US has steadily increased restrictions on exports to China and made it clear that its aim is to hobble the Chinese technological progress in certain key areas.

Now, through its Inflation Reduction Act, the Bipartisan Infrastructure Law, and the Chips and Science Act, the US has got into the subsidy and incentive game in a big way. The EU, conscious of its dependence on both the US and China, is making its own efforts for ‘green and digital transitions’. Indeed, the Europeans who now have much less financial power than the US, fear that American subsidies could negatively affect them. Meanwhile, they have made it clear that barring some restrictions, it will be business as usual with China.

As for China, it remains a leader in several technology areas, especially in solar and battery manufacture, and it holds important trump cards like rare earths. It is aiming to alter Europe’s automotive landscape by its electrical cars as EU phases out petrol and diesel vehicles by 2035, upending the dominance of European manufacturers. This is the end stage of a carefully crafted strategy that goes back a quarter of a century.

While Blinken may talk of ‘intense competition’, this vast reordering of the global economy seems set to unleash forces that may not be easy to control. Getting the reindustrialisation competition to stay within bounds is the challenge of our times.