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Global economic tensions and rising militarisation of Europe

US Treasury Secretary Steven Mnuchin, second from left, shakes hands with Chinese President Xi Jinping as US. Trade Representative Robert Lighthizer, left, and Chinese Vice Premier Liu He, right, look on before their meeting at the Great Hall of the People in Beijing on February 15, 2019	— AP
US Treasury Secretary Steven Mnuchin, second from left, shakes hands with Chinese President Xi Jinping as US. Trade Representative Robert Lighthizer, left, and Chinese Vice Premier Liu He, right, look on before their meeting at the Great Hall of the People in Beijing on February 15, 2019 — AP

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The Deputy Managing Director of International Monetary Fund, David Lipton while attending the American Economic Association meeting in Atlanta in early January this year told the Financial Times that the next recession was somewhere over the horizon and the leaders of the largest economies were less prepared to deal with it than they were in the last crisis (in 2008). His comment sums up not only where we are likely to be heading towards and how well-prepared global leaders who matter most.

Growth forecast of the International Monetary Fund (IMP) for this year is 3.5 per cent but the World Bank (WB) paints a much gloomier picture and its estimate for global growth stands at 2.9 per cent this year. The IMF has a history of changing the minimum threshold of the global growth rate to determine whether the global economy is in recession or not. The current IMF definition of global recession is rather very complicated and that leaves ordinary mortals like us unable to make any sense out it.

The global economy is now facing multidimensional challenges both in economic and strategic fronts. In essence they are very much interrelated. The most challenging issue facing the global economy now is the on-going trade war between the US and China which is fuelling the prospect of a full-blown economic war with the consequent military implications. According to a Financial Times columnist there are close similarities between the US-China clash and the conflict between Britain and Germany prior to the outbreak of the World War I.

A high-level trade delegation headed by the US Treasury Secretary Steven Mnuchin and the USTR Robert Lighthizer have already arrived in Beijing ahead of the meeting with the Chinese delegation to be headed by Vice Premier Liu He. The US terms were set out in a document presented to the Chinese authority in May last year and that document remains central to the talks. Trump has stiffened his position in his SOTU (State of the Union) address by making specific references to structural issues that must reform. The US has also made it clear that it would not be accepting any legal changes brought in by China to affect structural changes in its economy unless the US has direct involvement in the oversight of the implementation of those changes. Such a US enforcement regime will be considered as a surrender of national sovereignty the reminiscent of the European colonial powers' gunboat diplomacy of the 19th century resulting in humiliating treaties surrendering Chinese national sovereignty.

If the two sides cannot reach an agreement by March 01, the US has threatened to increase tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent. This is to back the US demand that China must stop going ahead with its cutting-edge technological and industrial development which the US views as an existential threat to its national security, a view also shared by the Democrats. Washington is expected to press ahead with those demands.

Meanwhile, Trump has ruled out any meeting with President Xi before March 01, dampening hopes that a trade deal could be reached before the deadline. But a meeting between the two leaders would be necessary to finalise the deal. However, White House Senior Counsellor Kellyanne Conway said that a meeting between the two leaders was still possible soon. She then further added that Trump wanted a deal with China, but it must be "fair to Americans, American workers and American interests'' - as if China does not have any national interests including those of its workers.  Whatever might be the outcome of the trade talks, Trump has set in motion a much wider agenda for global conflict.

TRUMP'S TWO-TRACK TRADE POLICY: Trump also has Europe on his radar, especially targeted more at Germany. While trade conflicts with Europe still remain on hold since July last year as a result of Trump striking a deal with the European Union (EU) using his usual bullying tactics to use tariffs against European car imports using  national security grounds. Now Trump is expanding his trade agenda to include EU tariff reductions on US agricultural products exports to the EU. Trump in fact indicated he was quite willing to use car tariffs as a means to force to open up the EU market for US agricultural products. But his stance on Europe is much softer and accommodative than with China. Also, he tweaked around NAFTA (North American Free Trade Agreement) and gave it a new label, USMCA (United States-Mexico-Canada Agreement). In fact he is pursuing a two-track trade policy - a much milder and softer bargaining with the EU and a very hard confrontation with China.

But Trump's attack on global multilateral trading system, to which both China and the EU have strong commitment, are unlikely to bring China and the EU closer. In fact, the EU, like the US, is tightening it rules on mergers and acquisitions by foreign companies (read Chinese companies) and in essence the EU is on the same page on the issues of technology acquisition and intellectual property with the US. The EU is now using Trump's trade and industry policy handbook targeted towards China as the template for the EU to formulate its trade and industry policy towards China including the security concerns relating cutting-edge technologies developed by China. Even a country like Lithuania is examining security threat posed by new Huawei 5G phone network which is being developed by the company. Lithuania's action might sound absurd but the anti-China rhetoric is now almost verging on paranoia in the EU. It has been alleged by a German newspaper that almost 250 Chinese spies are in operation in Brussels alone. Donald Trump's trade actions against China and the EU will not bring them together on trade. Both will resist Trump's attack on them and his attack on the global trading system but they will do that separately in their own ways.

Meanwhile, German Chancellor Angela Merkel clearly outlined her vision of Europe to be capable of standing by itself without the help of the US, both economically and militarily, in her speech at the Davos meeting in January this year.  Germany's 2016 White Paper on Security Policy outlined the massive rearmament of the German armed forces. Now Chancellor Merkel's Economic Minister Peter Altmaier added economic dimension to that militarisation policy promoting industrial monopolies by amending European Competition Laws. The policy also targeted industries and safeguarding high technology-oriented industries with state subsidies. That will inevitably lead to the use of trade-restricting measures. Obviously, such an industry policy will exclude Chinese Huawei from German mobile network. Altmaier vision is to create a Europe of new age technology-based manufacturing but under the leadership and control of Germany. Such a Europe under the leadership of Germany can look forward to be a counterweight both to the US and China, economically as well as militarily.

Meanwhile, Britain has drawn up a plan for post-Brexit greater military reach and lethality. UK Defence Secretary Gavin Williamson is preparing his country to display its hard power to confront Russia and also China. He quoted Winston Churchill to rain down terror on enemy coasts. He has envisioned 2.0 per cent of gross domestic product (GDP) to be earmarked for war purposes to conform to the NATO (North Atlantic Treaty Organisation) benchmark and reiterated that the US remains its closest partner in its military ventures having same shared world vision. He then took a swipe at Chancellor Merkel and posited that Britain would not be detracted by an EU army.  He also declared that the UK is a global power with global interests. Many, however, consider Williamsons' sabre-rattling is nothing more than a lot of hot air because Britain simply does not have the money to do what Williamson wants to do. Dutch Prime Minister Mark Rutte is right to the point  declaring that the UK is a waning country, too small to stand alone on the world stage.

LOOMING SPECTRE OF CONFLICT: The immediate outcome of the ongoing talks between the US and China is uncertain but wider implications of the conflict is drawing attention across the world. US Vice President Mike Pence has already declared cold war with China and that shift in US policy predates Trump - it all started with Barack Obama with his "Pivot to Asia'. What is new is that Trump seriously believes the US can forestall China's economic and technological progress. Trump's attempts to do so will lead to conflict. Now Trump has on his side a rising militarised Europe under the leadership of Germany echoing the same security concerns like the US.

Both Washington and Brussels will be gravely mistaken not to recognise that Beijing also has legitimate global interests. Tariffs and economic sanctions are the tools of economic war and that may pave the way for military escalation.

Muhammad Mahmood is an independent economic and political analyst.

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