G7 Tightens The Circle Against Economic Coercion

THE G7 GROUP looks increasingly like what it is: the United States allies among the world’s largest economies.

Its 1,600-word statement at its Hiroshima summit on ‘economic coercion’, addressed to all countries but clearly directed at China, hitches the EU’s ‘derisking’ approach to economic relations with Beijing to Washington’s ‘decoupling’.

The commonalities are diversification of supply chains, especially for critical minerals and semiconductors, protection of trade and technology, including more robust cyber defences against hacking and IP theft and more stringent export controls to keep technology out of the hands of China’s military and intelligence services, and a tougher diplomatic stance towards China overall.

Beijing has responded sharply but in a pro-forma way. It accused the G7 of interference in its internal affairs over Taiwan, Hong Kong, Xinjiang and Tibet, called for the United States to stop what it says is bullying to coerce allies to disrupt the stability of global supply chains and urged the G7 to abandon its ‘Cold War mentality’.

The G7’s statement on economic coercion is a rebuff to Beijing’s efforts to divide Europe internally and with the United States on China policy, using the sticks and carrots of China’s economic power.

Yet not an unexpected one in Beijing. Its response is directed less at Europe and more at the Global South, of which China presents itself as the champion of an anti-West coalition rejecting the historic exploitative hegemony of the past.

The G7 is also competing for the hearts and minds of the Global South, some of whose members are not enthusiastic about a straight swap of Chinese hegemony for US hegemony. It has launched a ‘coordination platform’ to counter coercion and work with emerging economies. Details are vague, but G7 members will likely seek to increase their trade and aid with sympathetic Global South economies.

Japan will likely play a pivotal role in the Asia-Pacific in this regard. However, China has a massive head start there and in another key region of competition, Africa. It is difficult to see the G7 closing the gap significantly.

Europe Gets More US Aligned Over China

IT HAS NOT been a good ten days for Beijing in Europe, where a hardening stance on China is being more readily articulated.

Last weekend’s G7 meeting solidified US President Joe Biden’s steady assemblage of an alliance against China. It elicited a promise from Italian Prime Minister Mario Draghi that his country would reassess its participation in the Belt and Road Initiative (BRI); Italy is the first and so far only EU country to sign up for the BRI, which Biden now wants to counter with his Build Back Better World (B3W) investment initiative.

The G7 further pushed Beijing’s buttons by criticising China for alleged human rights abuses and called for a further investigation into the origins of Covid-19. For the first time, a G7 summit communique mentioned Taiwan.

Hard on the heels of the G7 came a NATO summit that warned that China was increasingly operating within its sphere of influence and said that Beijing is rapidly expanding its nuclear arsenal, is opaque about its military modernisation and is co-operating militarily with Russia. Those are strong words, by NATO standards.

The Europeans’ ranks may be closing but are still not solid. Europeans do not want to be pushed into making a public choice between the United States and China, especially as they know they would have to side with the former. That would have political consequences they would rather avoid.

France and Germany are particularly keen to keep open trade, investment and academic and research links with China. However, Germany’s enthusiasm may moderate once Chancellor Angela Merkel, the European leader least convinced of the need to reset relations with China, steps down from office at the end of her fourth term in a few months.

Italy, too, will take its time in deciding whether to withdraw from the BRI, fearful of the potential damage that could cause the fragile Italian economy.

More worrisome for Beijing is that the far right-wing Brothers of Italy may be part of the next Italian government. The party holds a generally hawkish view of China and a Trump-like position on protecting the Italian economy from Chinese economic influence in strategic sectors.

How much the past ten days have substantively changed the relationship between Europe and China is moot. That Beijing has reacted in its now routine way — by denouncing the West for interfering in its domestic affairs and taking a Cold War mentality — may suggest that the change is one more of tone.

Tone, though, matters in international relations. These past ten days have confirmed that elite opinion in Europe is now more aligned with those European politicians and publics that are increasingly inclined to view China negatively and with similar shifts in attitudes in the United States.

This will improve the effectiveness of EU measures that seek to redress what is seen as undue influence in Europe’s civil societies and unfair Chinese competition in its markets and bolster Biden’s efforts to coordinate policy towards China with like-minded democracies.

That, in turn, will require new strategies from Beijing, which will no longer be able to create and exploit divisions in the West as easily.

The Dollar And The Yuan, Not A Turkish Delight

The finance ministers’ meetings in Istanbul over the weekend revealed a deep crack in the veneer of harmony over the global financial crisis that the world’s leading economies have been seeking to present to the world. Ministers from the seven largest rich nations urged China to take steps to strengthen the yuan, a move Beijing has resolutely declined to undertake since the crisis broke. Yi Gang, a Peoples Bank of China vice governor, who was also in Istanbul for one of the plethora of finance-related meetings, made it clear that wasn’t going to change anytime soon: Beijing’s policy would continue to emphasize stability for now, for all the intention it says it eventually has to free up the yuan, which its critics now hold is undervalued.

This now sets up an interesting confrontation in the foreign-exchange markets. The U.S. dollar has fallen by 15% on a trade-weighted basis over the past six months. The G7 has as good as said it will not intervene to prevent it continuing to decline. China is not going to let that happen, at least not against its own currency: This commentary on Xinhua about what it calls the “G7’s RMB complex” gives a flavor of its mood.

Beijing can manage holding the line (the dollar/yuan rate has barely budged since the crisis began) but  it will have to deal with the consequent hot money and inflation implications even as it faces down the forex traders.

Long-term Washington wants and needs a strong dollar, especially if inflation becomes not just a clear but also a present danger as the economy recovers. For now, at least, it is in the U.S.’s interest, to keep its currency low to shore up exports, particularly those of its beleaguered manufacturers, and to lower the value of the debt that the U.S. Treasury is piling up. Similarly, it is in China’s near-term interest to keep its currency stable (for which read low)  to shore up exports, particularly from its beleaguered manufacturers, and to protect the value of the U.S. Treasury debt it is piling up. Though, of course, neither would admit it.