Why rising Asia risks souring US-EU relations

Asia’s rise is going to need careful management by the U.S. and the EU, The U.S. and EU must manage their reactions to the rise of Asia because this transition for it has the potential to deepen existing strains in the transatlantic relationship. The need for America and Europe to manage cope with such external influences is hardly new. Transatlantic relations have been buffeted over the years by trends ranging from Europe’s process of de-colonisation to America’s Vietnam War, and from conflict in the Middle East to war in Afghanistan.

Global changes affect North America and Europe differently, and so can lead to misunderstandings because the long-term rise of Asia will change the world. Europeans and Americans need to build a more nuanced understanding of their shared interests.

There are different interpretations of the rise of Asia, but five aspects are particularly interesting. It can be seen as an economic phenomenon, a strategic challenge, a global power shift, a recognition of the re-emergence of China and India, and an acknowledgement of the many “middle powers” in the region. All five interpretations are likely to influence the views from North America and Europe.

Asia contains a number of the largest economies in the world. China last year accounted for over 16% of global GNP, as measured by purchasing power parity. Japan for 5.4%, India 5.8% and the U.S. 16.3%.

Although trade is important, investment flows show a more complex relationship. International capital is taking a renewed interest in stable, established markets now the sparkle of emerging ones is being dimmed by slower growth. For European countries, Asia and especially China has become a source of investment income. The economic crisis has ushered in an era of inadequate intra-European investment, creating a profound need for investment in Europe just at a time when China wanted to invest its huge surpluses internationally. Chinese investors and others found bargains in Europe. The result is that Chinese foreign direct investment (FDI) into the EU grew a whopping 338% between 2010-2012. UNCTAD reports that Chinese investment in the United Kingdom doubled from $1.4bn, it was $2.8bn during that period, and the overall value of Chinese investment stock in the EU rose to $31.5bn from a mere $1.3bn in 2006. Chinese investment in the U.S. reached $17bn in 2012, up from a similarly low level of $1.2bn in 2006.

Yet, despite this dramatic increase in Chinese investment, the U.S. and Europe are still by far each other’s most significant economic partners. In 2012, the U.S. accounted for about a quarter of the EU’s foreign investments, with China trailing far behind at 6.1%, Hong Kong at 5.9% and India only 2.1%. As to U.S. foreign investment, Europe received $2.7 trillion in 2013, almost a fifth of which went to the UK alone. Asia as a whole was of far less interest than Europe to American investors, getting $695bn in 2013, of which $61.5bn went to China.

The transatlantic partners know well that increased investment brings deeper social engagement. But cCorporate investors’ decisions canalso affect local labour conditions, and now some of the most difficult negotiations over TTIP relate to investment disputes. The perception that other countries’ standards are not as high as your own creates a politically charged climate for negotiations. Europe has agreed investment provisions with Canada, but is still debating them with the U.S. in the TTIP negotiations. Europeans worry that American companies will use the investor state dispute mechanisms to circumvent the EU’s labour, health and safety standards.

For their part, the Europeans want such mechanisms to be included in the pending EU-China bilateral investment treaty precisely to protect them from local actions in the less transparent Chinese dispute resolution system. Different types of investors in China enjoy different degrees of market access, with the state-owned enterprises there controlling an important segment of Chinese international investment., although tThey are less transparent than many commercial investors yet wield political clout. Europe arguably needs this investment agreement more than China as it wants greater access to Chinese markets, while China already benefits from access to Europe’s open economies.

One possible source of transatlantic tension is that the U.S., and but only some EU countries, requires a security review of investments by foreign government entities. This raises questions about whether NATO-member the EU countries will be able to develop acceptable investment rules with some Asian countries from a security perspective. The rise of Asia is creating opportunities, but is also opening new areas for politically charged debate.

The biggest transatlantic divergence over Asia’s rise is the strategic outlook now that many Asian countries are greatly increasing their military spending. China last year spent $216.4bn, triple its 2006 defence budget of $71.4bn. While the U.S. accounts for over a third of global military spending, China’s share has risen to 12.25%. Part of the heralded U.S. “rebalance” to Asia reflects Washington’s efforts to revitalise transpacific political and security relationships as Asia raises strategic and political issues for America as well as economic ones. Europeans may speak of Asia as a neighbouring region, but for many Americans the U.S. is part of the Asia/Pacific region. Fifty million Americans live in the five states that border the Pacific Ocean.

The United States is not alone among the countries of the Asia/Pacific region to have been alarmed by China’s adventurism in the East China and the South China Seas.

Yet from a U.S perspective the rise of Asia in strategic terms means not only the challenge of a more assertive China but also the benefit of more capable regional partners for Washington. America and Japan have been allies for over 60 years, and Australia and New Zealand have been bound by the ANZUS treaty for as long. The U.S. and India have moved closer together over the past decade in a stronger security relationship, with their 2008 agreement and subsequent work to bring India closer to international nuclear weapons control regimes having removed barriers to more widespread co-operation.

The re-emergence of Asia is recalibrating global power balances. These changes are likely to have a particular impact on Europe, whose leaders may feel they need to ingratiate themselves with the emerging Asian powers to stay in the game. While the United States will be a large and powerful country for decades to come, Europe may feel disadvantaged in its relations with Asia, and that could cause tensions with the U.S.

Close transatlantic communications can help to avert possible misunderstandings. Amid these changes, the United States and Europe are not competitors because they are not playing the same game. For the U.S., the rise of Asia raises strategic, political, and economic issues. As the current leader of the international system, the United States must consider whether emerging powers aim to be peer competitors and systemic rivals or spoilers, or stakeholders sharing the burdens of managing global crises.

For Europe, the rise of Asia is largely being treated as an economic issue, but with political overtones. This discrepancy of approach could cause tensions as Americans may wish for greater European support to defend the norms and standards they also claim to champion. They need to ensure that they do not undercut each other in their respective trade and investment negotiations. Europeans may harbour the same concern about American approaches as trade and investment negotiations are an important frontier of human rights and labour standards. For Americans, one of the positive arguments for TTIP is that it would be an agreement between parties with high human rights, environmental and labour standards, so TTIP would be good for economic and human well-being. One place we may see the influence of Atlantic states in Asia may be the negotiation of TPP in which include the U.S., Canada and Mexico. All three see themselves as Atlantic and Pacific countries. Meanwhile, European and other countries which join the Chinese-sponsored Asian Infrastructure Investment Bank can help reinforce global standards when shaping this institution.

The rise of Asia does not mean that all decisions will be led by one hemisphere. There is a diffusion of power, so in the coming decades we still are likely to see a still strong United States, an increasingly strong China and a rising India. Yet global trends are not inexorable forces; leaders’ decisions matter. America must overcome internal political obstructionism and reinvest in education and innovation. China must address the strain of its transition away from high growth and its environmental costs, and India will have to decide on its international profile as it tries to bring millions out of poverty. And Europeans will need to make their economies more robust while addressing the social challenges. The rise of Asia will change the international distribution of power, and such tectonic shifts can lead to strategic confrontation. The transatlantic community must maintain its focus on the impact of global issues.

The article was written with the support of Udunopa Abalu