Merz trades blows with Beijing over export flood

Trade tensions between the European Union and China are deepening. On June 16, the EU’s trade chief, Maros Sefcovic, said the bloc’s unbalanced relationship with China “had reached a point that requires a reset.”

The German chancellor, Friedrich Merz, then criticised Beijing days later for what he claimed were its unfair trade practices. In comments made in Brussels after a European Council meeting, Merz accused China of “flooding markets” through the use of “high subsidies.”

He also said its currency was undervalued by 30%, making goods artificially cheaper in global markets. Merz pointed to the Plaza accord as an example of how this issue could be addressed.

Signed in 1985 between the United States, Japan, Britain, Germany and France, it saw Tokyo agree to appreciate the value of its currency, the yen, against the US dollar. The five signatory nations also agreed to intervene in currency markets to weaken the US dollar.

The green back had appreciated massively in the early 1980s, reducing the global competitiveness of American goods. The yen’s value quickly increased following the Plaza accord, appreciating by around 46% against the US dollar by 1986.

Lost decades

In doing so, the imposition of protectionist measures against Japan was avoided. Yet, the yen’s appreciation had some severe consequences for the country, which is something Chinese policymakers are seemingly very aware of.

For example, its appreciation was widely seen as being a major contributor to the Japanese asset price bubble in the late 1980s. The implosion of this bubble led to Japan’s so-called “lost decades” of economic stagnation, which has characterised its economy since then.

For Chinese policymakers, the current trade tensions between Beijing and the West are reminiscent of the contentious relationship between Washington and Tokyo decades ago.

GDP Per Capita | 1990-2003 with IMF Forecasts 2024-2029

Many of the complaints made about China’s growth model and economic practices are similar to the gripes about Japan at that time. Those complaints concerned significant trade deficits with the US, as well as its alleged unfair trade practices against American manufacturers.

Among other things, Washington claimed that Japanese semiconductor and electronics manufacturers were flooding the US market with products priced below production costs.

Consequently, China views the Plaza accord not as a beneficial agreement. Instead, it is seen as a US-led attempt to cripple Japan’s economy, spelling the beginning of the end for the competitiveness of Japanese manufacturing. A theme underlined by Chinese state media.

In 2018, Xinhua News Agency described the Plaza accord as the cause of Japan’s economic woes. This line was also present in a recent editorial in the Global Times, a tabloid under the direction of the Chinese Communist Party’s flagship newspaper, the People’s Daily.

Negative effect

The editorial argued the accord was a historical example of Western economic coercion and political pressure, rather than a model for international cooperation. Merz’s message may not have been intended as a suggestion that the EU should seek to curtail the Chinese economy.

But, given the wariness among Beijing policymakers of the negative effect of the Plaza accord on Japan, it is likely to be interpreted as such in the Chinese halls of power.

In recent years, China has reacted forcefully to what it perceives as external attempts to limit its economic competitiveness.

It has taken proactive measures against the US in response to the imposition of tariffs and other restrictions on Chinese goods and President Donald Trump’s proposed Mar-a-Lago accord, through which he hopes to lower the value of the US dollar to boost American exports.

On June 22, for example, China added an additional 10 US firms to its rare-earths export control list in response to American restrictions on Chinese firms such as electric vehicle manufacturer BYD.

The Chinese commerce ministry said the measures were a response to the “US government’s malicious practice,” adding they were taken to safeguard national security and interests.

Merz’s comments leave Europe open to similar measures. These moves include tighter restriction on European access to Chinese rare earths, which are key components in many modern military technologies.

Such a move would hamper the EU’s push to rearm itself in the face of Russian aggression. Yet, unlike Washington, Brussels has been hesitant to start an open trade conflict with Beijing.

Manufacturing dominance

As a result, China’s most likely response to tensions with Europe will be to follow its established pattern of dealing with individual states rather than the EU as a whole. Beijing has used this approach to overcome previous efforts by Brussels to forge a unified line.

What is clear is that the EU-China relationship is entering a contentious stage. Their differences are set to intensify as China seeks to maintain its dominance in manufacturing and make strides in technologies that were once the preserve of advanced European economies.

Tom Harper is a Lecturer in International Relations at the University of East London.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.