Trade tensions between the EU and China are deepening. On June 16, the EU’s trade chief, Maroš Šefčovič, said the bloc’s unbalanced trade 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 China’s currency was undervalued by 30%, making its 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 US, Japan, Britain, Germany and France, the Plaza accord was an agreement which saw Japan agree to appreciate the value of its currency, the yen, against the US dollar. The five signatory nations also collectively agreed to intervene in currency markets to weaken the US dollar, which had appreciated massively in the early 1980s, reducing the global competitiveness of US goods.
The yen’s value quickly increased following the Plaza accord, appreciating by around 46% against the US dollar by 1986. In doing so, the imposition of protectionist measures against Japan was avoided. However, the yen’s appreciation had some severe consequences for Japan, which is something Chinese policymakers are seemingly very aware of.
For example, the yen’s 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 the Japanese economy since then.
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For Chinese policymakers, the current trade tensions between Beijing and the west are reminiscent of the contentious relationship between the US and Japan decades ago. 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 primarily concerned Japan’s significant trade deficit with the US, as well as its alleged unfair trade practices that disadvantaged American manufacturers. Among other things, the US claimed that Japanese semiconductor and electronics manufacturers were flooding the US market with products priced below the cost of production.
Consequently, China views the Plaza accord not as a mutually beneficial agreement. It instead sees the accord as a US-led attempt to cripple Japan’s economy that spelled the beginning of the end for the competitiveness of Japanese manufacturing. This is a stance that has regularly been conveyed by Chinese state media.
In 2018, China’s state-run 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. The editorial argued the accord was a historical example of western economic coercion and political pressure, rather than a model for international cooperation.
Coming to blows
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 Chinese policymakers of the negative effect of the Plaza accord on Japan, it is likely to be interpreted as such by Beijing.
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 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 ten US firms to its rare-earths export control list in response to US 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 measures perhaps most notably 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.
However, unlike Washington, Brussels has been hesitant to start an open trade conflict with Beijing. As a result, China’s most likely response to trade tensions with Europe will be to follow its established pattern of dealing with individual states bilaterally rather than the EU as a whole. Beijing has used this approach to overcome previous efforts by the EU to forge a unified line regarding China.
What is clear is that the relationship between the EU and China is entering a contentious stage. Their differences are set to intensify as China seeks to maintain its global dominance in manufacturing and make strides in key technologies that were once the preserve of advanced European economies.
