The first is to limit economic decoupling, which the IMF reckons could cost anything between a manageable 0.2% of world gdp and an alarming 7%.


Trade in non-sensitive sectors also helps maintain routine contact between thousands of firms, thereby narrowing the geopolitical divide.


Embargoes should be saved for sensitive sectors or areas in which China has a chokehold because it is a monopoly supplier: these account for a minority of Sino-American trade.


Where possible, businesses that straddle both sides of the cold war, such as TikTok—accused of spreading Chinese misinformation—should be ring-fenced, sold or spun off, not be forced to close.


The second principle is to lower the chances of war.


Both sides are locked in a “security dilemma” in which it is rational to shore up your position, even as that makes the other side feel threatened.


The West is right to seek military deterrence to meet a growing Chinese threat—the alternative is a collapse of the American-led order in Asia.


But seeking military dominance around flashpoints, notably Taiwan, could spark accidents or clashes that spiral out of control.


America should aim to deter a Chinese attack on Taiwan without provoking one.


This will take wisdom and restraint from a generation of politicians in Washington and Beijing who, by contrast with the leaders of America and the Soviet Union in the 1950s, have no personal experience of the horrors of a world war.


The last principle is that America and its allies must resist the temptation to resort to tactics that make them more like their autocratic opponent.


In this rivalry, liberal societies and free economies have big advantages: they are more likely to create innovations and wealth and to command legitimacy at home and abroad.


If America sticks to its values of openness, equal treatment of all and the rule of law, it will find it easier to maintain the loyalty of its allies.


America must be clear that its dispute is not with the Chinese people, but with China’s government and the threat to peace and human rights that it poses.


The 21st century’s defining contest is not just about weapons and chips—it is a struggle over values, too.


|Berlin, Brussels and Paris

International | From Macron to Mercedes
Europe can’t decide how to unplug from China
We calculate the continent’s exposure to the Asian power

How should Europe handle China?


After decades of pursuing trade, Europeans are pondering how much to decouple.


Their closest ally, America, wavers between China-bashing and war talk on the one hand, and de-escalation and partial detente on the other.


Individual European countries struggle to agree with each other.


Last week Josep Borrell, the eu’s chief diplomat, urged Europe’s foreign ministers in a letter to find “a coherent strategy” in the face of “a hardening of the us-China competition”.


But it is far from clear what that strategy might be, or whether Europe would remain so closely aligned with America in the event of a war over Taiwan.


An awkward procession of Europe’s leaders to Beijing in the past few months points to the lack of a plan.


Germany’s Olaf Scholz paid a visit accompanied by business leaders in November; his foreign minister, who is from a different political party, went last month and struck a tough tone.


Spain’s prime minister, Pedro Sánchez, went to open doors to his country’s trade.


Emmanuel Macron ostentatiously sought to strike a partnership with Xi Jinping.


The French president took 53 corporate bosses with him, and insisted that Europe distance itself from Sino-American tensions and from a conflict over Taiwan.


His clumsy comments caused an uproar in Europe and America.


The war in Ukraine has complicated matters further as the mood has turned against autocracies.


Most countries on the eu’s eastern flank—which once opened their arms to Chinese investors—have become hawkish.


“Russia’s invasion of Ukraine had a sorting effect in Europe when it comes to China,” says Janka Oertel of the European Council on Foreign Relations, a think-tank.


It seems that those in the east are as leery of the “no-limits” friendship between Moscow and Beijing as they are of Mr Macron’s talk of “strategic autonomy” from America.


Meanwhile, everyone knows that China remains keen to exploit transatlantic differences.


Finding common cause is onerous because it is hard to tell what America wants.


Jake Sullivan, President Joe Biden’s national security adviser, and Janet Yellen, the treasury secretary, have each recently distanced the Biden administration from hard talk of “decoupling”, in favour of “de-risking”—a term also used in the past few months by Ursula von der Leyen, the head of the European Commission.


(She had intended to distinguish Europe’s policy of managing risk from what seemed to be a tougher American approach akin to economic divorce.


) Yet it is not long since the spy-balloon episode, when us-China relations hit a 30-year low.


Congress and public opinion in America are hostile to China.


Tensions may rise during the election campaign in 2024, and a pugnacious Republican, perhaps Donald Trump, may win.


All this makes it urgent for Europe to devise a coherent China policy.


Its leaders need to work out how far they want to reduce its dependency on China, and in so doing also respond to the hundreds of billions of dollars in green-industry subsidies unveiled last year in America’s Inflation Reduction Act.


They also need to decide what they would do if America became more demanding.


In an extreme case, in the event of a war over Taiwan, Europe might be expected to impose sanctions on China like those it has slapped on Russia, and to back a military campaign.


Some hope that the new doctrine of de-risking is a compromise that solves the dilemma.


Others fear that it will prove meagre and inflexible in the face of changing technological and geopolitical realities.


Europe is more economically exposed to China than America is.


Some 8% of publicly listed European firms’ revenues are from China, compared with 4% for American ones, according to Morgan Stanley, an American bank.


Europe and America send a similar share of goods exports to China (7-9%), but because Europe is a more trade-intensive economy its sensitivity is higher.


Multinational investments in China are worth 2% of Europe’s gdp compared with 1% for America.


To form a holistic view we have come up with a yardstick of “total China exposure” (see chart 1).


This has three elements: exports of goods, exports of services and the sales of Western-owned subsidiaries in China.


These figures are for 2020, the last year for which data are available.


The services and subsidiaries data include Hong Kong.


We define Europe as its six largest economies, including Britain.


We measure each country’s exposure as a share of its own economy.


The European big six’s total China exposure has hit 5.6% of their combined gdp, up from 3.9% in 2011.


There is a big range: Italy and Spain are at just 1-2%, France and Britain are at 4-5%.


Two-thirds of the European big six’s exposure is from the sales of subsidiaries in China rather than from exports from Europe.


Often these are the Chinese arms of industrial giants such as Volkswagen and basf.


In the event of a “rigid” fragmentation of supply chains, the eurozone’s gross national expenditure would drop by over 2%; roughly double the amount America’s would, according to the European Central Bank.


Germany’s fall would presumably be higher.


Similarly, an imf study in April found that in the event of an investment split between the West and China, European gdp would fall by 2%, more than twice the hit to America.


In addition, a separation would cause a crisis at some leading European firms that rely on China, including Germany’s carmakers, France’s luxury empires and two British banks.


The emerging policy of de-risking refers to a calibrated reduction in links with China, rather than a wholesale economic decoupling.


Even this is a big departure from how things were a decade ago.


Back then European businesses were still stuffing their order books with Chinese contracts, suppressing their doubts about rising industrial competition.


Overall trade between China and the eu grew 428% between 2002 and 2019.


An eu strategic paper four years ago marked the first stage of the pivot.


It argued that China was not just a partner and an economic competitor, but a systemic rival.


Capitals across Europe, which flogged ports and other infrastructure to Chinese investors, started to have second thoughts.


To America’s delight, many countries in Europe began to prise Huawei from their 5g networks (though Germany still let the Chinese telecoms firm in).


Remonstrations over human-rights abuses, particularly of Uyghurs in Xinjiang, grew louder.


Supply-chain glitches during the pandemic showed the perils of relying too much on Chinese industry.


The Sino-eu “Comprehensive Agreement on Investment”, struck in December 2020, was put to one side by Europe.


And China’s declaration of a “no-limits” friendship with Russia just weeks before the invasion of Ukraine soured the mood further.


Mrs von der Leyen thinks that de-risking is the next step, and one that Europeans can agree on.


But what it means in practice has yet to be clearly defined.


It does not mean shutting the door to China altogether.


It is partly about diversification, bolstering economic security and eradicating forced labour from supply chains.


It is also focused on security concerns: hampering China’s ability to get its hands on security-relevant technology such as quantum computing, which threatens encryption, or semiconductors for military purposes.


Like America, Europe is most strategically vulnerable when it comes to its critical dependence on China for certain supplies.


In 2022 China mined nearly three-fifths of global rare-earth elements, used as components in electronic equipment.


It also refined 60% of the world’s lithium and 80% of its cobalt, two core inputs for the production of high-capacity electric batteries.


Europe imports 98% of its rare earths from China, even more than America, which imports 80% from the Asian power.


According to a study by merics, a German think-tank, the eu relies on China for 97% of its chloramphenicol, used to manufacture antibiotics.


European firms have already been diversifying suppliers since the pandemic, “friend-shoring” to allies, and “near-shoring” closer to home.


America’s energy secretary also declared in March that the Biden administration wanted supply chains in countries “whose values we share.


” “All of us learned from covid-19 that we have to double- and triple-source, and not only from China,” says a French corporate titan.


Firms are looking to India, Mexico, Morocco, Norway and Turkey, among others.


Policymakers are pushing in the same direction.


The eu has unveiled a Critical Raw Materials Act, designed to ensure that no more than 65% of annual consumption of any listed material should be sourced from any single country by 2030.


In the realm of technology European firms that are embedded into America’s technology industry are mirroring American export controls. asml, a Dutch firm which makes equipment used to build semiconductors, has limited the sale of its cutting-edge machines to China.


Europe’s multinational companies are adjusting how they operate in China, too.


In others they are making subsidiaries in China more self-sufficient, with a higher share of inputs and sales made locally.


One measure of this is the share of investment by subsidiaries in China financed from their own profits, rather than from capital sent from Europe.


For German subsidiaries in China this has risen from 2% in 2002 and 52% in 2012 to a new high of 85% in 2022 (see chart 2).


If these Chinese subsidiaries were perfectly self-sufficient they could in an extreme scenario be separated from the European parent, with both arms able to continue to operate: think of vw Germany and vw China.


The result would be huge wealth destruction for shareholders in big European firms (many of whom are not actually European) but less damage to Europe’s economy.


In practice this shift to “one company, two systems” is only just beginning and for many large firms decoupling would be severely disruptive.


A final element of de-risking is stricter screening of Chinese investment coming into Europe.


Strategic infrastructure is increasingly off-limits for Chinese investors, as inward investment in Europe is screened for security risks.


Overall Chinese investment in Europe last year fell to its lowest point since 2013, according to a study by merics and Rhodium Group, a consultancy based in New York.


China’s foreign direct investment peaked in Europe back in 2016, Rhodium estimates.


The emergence of de-risking is understandable, but Europe’s middle way is riddled with potholes.


Big companies, still keen on the China dream, may refuse to go along for the ride.


“There are certain no-go areas on tech in China,” says one senior European industrialist, “but on the rest we are not decoupling; it is business as usual, and the more the better.


” When Mr Macron was in Beijing, Airbus, a European aircraft manufacturer, agreed to expand an assembly line in Tianjin, and confirmed an order to sell China 160 planes.


De-risking may also struggle to adapt to technological change and its commercial effects, which can create new links even as old ones are dismantled.


The eu exports almost no electric vehicles to China.


Yet almost all of China’s car exports to the eu, many of which are made for European brands, are battery-powered (see chart 3).


Exports have shot up from less than €100m ($112m) a month before the pandemic to around €1bn a month now.


As Europe’s motorists seek greener transport, China is both eager and well positioned to flood the continent with cheaper electric models.


The greatest weakness of de-risking in its current guise is that it little prepares Europe for the shock that would follow an attempt by China to seize Taiwan.


Europe’s armed forces and its defence industry are already stretched, and the continent would struggle to find the capacity to provide much military support to America and Taiwan.


Its leaders have little appetite for involvement in another war.


But America would probably expect Europe to enforce the kind of embargo put in place on Russia.


That would hurt American firms: despite Apple’s efforts to diversify its production to India, the tech giant still relies on China.


But it would harm Europe more, causing a bigger economic hit and destabilising more companies.


Mr Macron’s recent suggestion that Europe should not follow America’s lead on Taiwan, in case it is dragged “into crises that are not [its] own”, delighted Beijing and dismayed European capitals.


Gabrielius Landsbergis, Lithuania’s foreign minister, retorted tartly that, at a time when Europeans depend on America’s backing of Ukraine, they should be trying to preserve transatlantic unity rather than “begging for dictators to help secure peace in Europe”.


Officials in Paris note, as Mr Macron eventually did, that it is official French policy to support the status quo over Taiwan.


With naval bases and territories in the Indo-Pacific, France has direct interests in the region.


“The problem isn’t French policy but the disconnect between what we do and what Macron says, which creates unnecessary doubts among our partners,” notes Antoine Bondaz, at the Foundation for Strategic Research, a French think-tank.


One virtue of Mr Macron’s comments, notes a Scandinavian minister, is that they have prompted Europeans to talk more about China.


Many on the continent fret about escalatory American rhetoric.


On May 12th the eu’s foreign ministers managed to agree to a set of principles for future dealings with the country.


It will be discussed at the eu’s next summit in June.


The bloc’s deliberations in the coming months will depend heavily on France and Germany, which are its two biggest economies, and among the most exposed to China, and some of the least keen on cutting commercial ties.


Mr Macron has long pushed Europe to become more self-reliant.


Mr Scholz, faced with divergent views in his coalition government and a strong industry lobby, is still working on a national strategy that will shape Germany’s approach to China (which keeps on being delayed).


He is expected to host a bilateral summit with the country next month.


Much of eastern Europe seems wary of Chinese influence.


The country’s bullying of Lithuania in recent years over a Taiwanese diplomatic office in the country disgusted many.


That is in spite of the fact that central and eastern Europe received some €3.8bn through China’s clubby “16+1” initiative between 2000 and 2017.


Comments made last month by Lu Shaye, the Chinese ambassador to France, helped focus minds.


He appeared to dispute the legal status of all former Soviet countries (even if China later corrected his remarks).


Europe needs a measured debate about what to do next.


France and Germany both have reservations about Mrs von der Leyen’s de-risking measures, but they back the principle.


Outward investment screening is under discussion, though will be difficult to put into practice.


Inward investment screening is up and running, although Europeans disagree on how much to tighten the rules.


Beyond de-risking, collective eu policy has not been thought through.


That is in spite of the fact that de-risking doesn’t provide an answer to a scenario in which relations between America and China were to rupture.


Since Russia invaded Ukraine, the transatlantic alliance has stood remarkably firm.


A Chinese move on Taiwan would prove an even more dangerous, and far more difficult, test.


|BEIJING and SYDNEY

Asia | Surviving the dragon
Australia has faced down China’s trade bans and emerged stronger
The “lucky country” may be uniquely able to endure Chinese bullying

WHEN China launched a campaign of economic coercion against Australia in 2020, Communist Party bosses thought they had crushing leverage.


The economies of the two countries—resource-rich Australia and commodities-hungry China—were complementary and closely connected.


By massively curbing shipments of everything from timber to coal, lobsters, barley and wine, on pretexts including exaggerated concerns about trade practices and pest infestations, China imposed a A$24bn ($16bn) hit on Australia, representing 5.5% of its total annual exports.


And like a surfer surviving a shark attack with no more than a lightly gnawed board, Australia is now emerging from three years of Chinese bullying in remarkably good shape.


Its exports briefly suffered under the strictures, then surged—culminating last year in Australia’s biggest-ever trade surplus, equivalent to more than 7% of gDP.


And the trade blocks, imposed after Australia’s then-conservative government dared call for an inquiry into the origins of Covid-19, are coming off.


On May 18th, after a meeting between the two countries’ trade ministers in Beijing, China lifted a de facto ban on Australian timber.


(“Serious study” by quarantine officials had allayed its concerns about bug infestation, explained Xiao Qian, China’s ambassador in Canberra.


) Since January, Chinese importers have been quietly buying Australian coal: in the first quarter of 2023 Australia sent them A$1.2bn-worth of the stuff.


Australia’s centre-left Labor government says cotton and copper exports are also resuming.


China is reviewing tariffs on barley, Australia having suspended its case against them at the World Trade Organisation (WTO).


After years of unchecked Chinese bullying, on Asia’s seas, in its multilateral forums and beyond, Australia’s escape is being widely understood as a significant win.


Yet it involved, as well as strong nerves, a large dose of luck.


As their boycott began, Australia’s economy was indeed reliant on China.


Exports of goods and services to China accounted for 11% of outbound trade in 2005.


Mitigating its reliance, Australia’s bet on China was chiefly a wager on international trade.


Australia has relatively few multinationals that manufacture and sell inside China.


But even without vast China-based subsidiaries, Australia was vulnerable.


The Economist’s in-house index of China exposure adds goods exports to China, services exports to China and Hong Kong, and the revenue of foreign multinationals’ affiliates operating in China and Hong Kong.


Australia’s exposure, at 8.2% of GDP in 2020, was double that of America, and close to that of Germany.


Luckily for Australia, however, the two economies were such a good fit that China’s firms felt as much pain from the curbs as Australia’s, if not more.


And some commodities, such as Australian iron ore, were so hard to replace China chose not to target them.


Also luckily, many of Australia’s bruised exporters found other markets.


After China slapped a tariff of up to 80% on Australian barley, its producers sold it to South-East Asian countries.


And Chinese beer-makers had to buy other countries’ barley, which was not as good.


When China blocked shipments of Australian coal, similarly, it had to buy more from Russia and Indonesia.


That left India and Japan short, so Australia sold to them.


Meanwhile, rising world prices made Australian miners lots of money.


Australian pain, though not insignificant, was concentrated: lobster fishermen struggled; wine exports to China’s middle classes plunged.


Australia’s efforts to manage the crisis politically were assisted by Chinese overreach.


China’s propaganda machine fiercely denounced Australia, and almost all official contacts were frozen.


In November 2020 China’s embassy in Australia made public a list of 14 grievances with the country’s then conservative government.


Ranging far beyond economic questions, China moaned that members of Australia’s parliament were allowed to criticise the Communist Party and that the country’s news outlets published “unfriendly or antagonistic” reporting on China.


The then-prime minister, Scott Morrison, suggested that these complaints were essentially against “Australia just being Australia”.


Encouraged by such missteps, Australia held its nerve.


The election of a new government, led by Anthony Albanese, then gave China an excuse to climb down.


Mr Albanese’s government has been careful not to crow.


Dispelling talk of a big win for the West, it claims to be steadfastly respectful and pragmatic in its dealing with China.


The idea, ministers say, is to “co-operate where we can, disagree where we must”—meaning no gratuitous poking of the dragon.


“Disagree behind closed doors, but don’t amplify your differences,” warns another Australian official.


”
Alongside such caution, Australia also understood its strengths.


China relented because it “saw that we wouldn’t capitulate”, the same official argues.


Australia resisted demands to change laws, overturn investment bans and muffle critics.


Rather, under its previous and current government, it tied its security policy tighter to America through AUKUS, a trilateral submarine-building pact that also includes Britain, and a policy of deterrence.


It is also doing more diplomatically to counter China’s influence in the Pacific.


The trade bans have in this sense backfired.


Australia set another useful example at the wto.


China agreed to review its barley tariffs just as Australia’s case against them was concluding.


Rather than force the issue to a judgment, Australia suspended its action.


“China does not want to be shamed in the international arena,” says Matthew Goodman of the Center for Strategic and International Studies in Washington.


Australia was additionally helped by the fact that China wants to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a vast regional trade deal.


As a CPTPP member, Australia could block China’s accession.


It accordingly made clear there was no possibility of accession talks so long as China was trampling economic rules and its pre-existing free-trade agreements with Australia.


How will Australia guard against the risk of a repeat?


Decoupling is not on the agenda—China still accounts for almost a third of its total goods and services exports.


But three years of Chinese bullying have left a mark.


Australia is trying to reduce its reliance on China by signing free-trade agreements with India and Britain.


China’s aggression has concentrated minds among Australia’s partners and allies, too.


At meetings in Japan on May 20th, leaders of the Group of Seven (G7) countries voiced concern at the “disturbing rise in incidents of economic coercion” and promised, for the first time, to collaborate against attempts to “weaponise economic dependencies”.


There is more talk of solidarity and co-ordination, so countries do not profit by selling more to a bully when a friend or neighbour is being targeted.


America’s ambassador to Japan, Rahm Emanuel, talks of his country offering “support and countervailing opportunities to partners in their times of need”.


China is the largest trade partner of a long and growing list of countries.


Very few have the wealth and natural resources that protected Australia, the “lucky” country.


Even so, many are studying the lessons of Australia’s escape from China’s grip.


The Economist explains
What does “de-risking” trade with China mean?


Europe wants to reduce its exposure to, but not decouple from, the country

AT THEIR SUMMIT in Hiroshima on May 20th, the leaders of the G7 group of rich democracies talked about “de-risking” their economic ties with China, but not decoupling from it.


The same phrase appeared in an important speech by Ursula von der Leyen, president of the European Commision, in March.


In principle, the idea is easy to illustrate.


Consider Europe prior to the invasion of Ukraine.


Many countries, notably Germany, piped much of their imported gas from Russia, creating a worrying economic vulnerability.


They could have stopped, despite the costs.


Alternatively, Europe might have prepared a more robust back-up plan, investing more heavily in terminals and storage tanks that would allow it to import gas from elsewhere in a pinch.


It is an attempt to reduce economic vulnerability with the least possible damage to trade and investment.


After Russia’s invasion, Europe has become more worried about its economic dependence on other geopolitical rivals, especially China.


The EU, Mrs von der Leyen pointed out, relies on China for 98% of its rare-earth supply, 93% of its magnesium and 97% of its lithium, a critical input for electric-vehicle batteries.


In a dispute, China could restrict supplies, just as it briefly curtailed exports to Japan during a territorial squabble in 2010.


China is also a vital market for many EU companies.


They could face the kind of boycotts, arbitrary inspections and delays imposed on Australian wine, beef and other products after the two countries fell out in late 2017.


Mrs von der Leyen also worried that European technology could help China modernise its military and improve its intelligence capabilities.


How is the EU trying to reduce these risks?


The first step is to identify them more precisely, through “stress tests” and supply-chain audits.


The bloc plans to cultivate alternative trading partners, Mrs von der Leyen said, including India, Australia and the Association of South-East Asian Nations.


The Commission has recently proposed the Critical Raw Materials Act, which aims to increase mining of resources like lithium and graphite within the EU and diversify its foreign suppliers.


Members such as France, Germany and Italy have increased their scrutiny of direct investment from China, especially in sensitive high-tech sectors, and the European Commission has tried to make this screening more consistent and co-ordinated.


It is harder now to imagine a deal like that in 2016 when Kuka, a German robotics firm, was acquired by Midea, a Chinese firm.


In March the EU agreed on the text of a new, more predictable protocol for responding to “economic coercion” with tariffs and similar measures.


The union is also contemplating the use of export controls and more screening of outward direct investment.


“De-risking” is sometimes seen as a label for a more commercially minded approach to China than the tougher decoupling that is popular with hawkish American policymakers.


But the distinction is not so clear in practice.


America’s national security adviser, Jake Sullivan, has been happy to borrow the term to describe his government’s approach, which includes stricter export controls than Europe has adopted.


And since a clean economic break with China is hard to imagine (last year American imports of goods and services from China reached a record high), the partial or piecemeal decoupling that some in America advocate may be hard to distinguish from de-risking.


If the EU eventually imposes export controls or blocks a European investment project in China, it will no doubt call it de-risking.


And China will probably call it decoupling.


|Mexico City

The Americas | Comrades across continents
What does China want from Latin America and the Caribbean?


Along with trading with the region, it is increasingly important in geopolitical terms

China’s engagement with Latin America has tended to be purely transactional.


It went from hardly trading with the region at the turn of the century to overtaking the United States to become the top trading partner for South America, and the second almost everywhere else in Latin America.


Annual goods trade between China and Latin America rose to $445bn in 2021, up from $12bn in 2000.


But its relationship with the region appears to be evolving.


Latin America is increasingly useful to China in geopolitical terms, too.


On June 8th the Wall Street Journal reported that the Communist government of Cuba had secretly agreed to allow China to set up an electronic-spying facility in the country.


At first American and Cuban officials denied the story.


Two days later the White House admitted that a base has existed for some time.


This is not the first time that China has been reported to have military or security footholds in the region.


China has long been thought to have a small military presence in Cuba and access to listening stations.


It has several satellite ground-stations in Latin America, which are believed to also have spying purposes.


A space observatory in Argentina is run by the Chinese army and its activities are opaque.


The latest move is “a small step”, says Evan Ellis of the United States Army War College, “but over a big threshold”.


Deepening geopolitical ties follow closer economic ones.


China is a big source of cash for the region.


Between 2005 and 2021 Chinese state-owned banks loaned $139bn to Latin American governments.


It has invested billions of dollars in the region, mainly in energy and mining.


Some 21 countries in Latin America and the Caribbean have signed up to China’s Belt and Road Initiative, a massive global infrastructure-building spree.


Latin American countries are also turning to the yuan for trade and to include in their central-bank reserves.


On June 2nd Argentina doubled its currency-swap line with China, meaning that around a third of its central-bank reserves, which stand at $32bn, will effectively be in yuan.


Last year, the yuan surpassed the euro to become the second-most important foreign currency in Brazil’s central-bank vaults.


Many commercial projects have caused concern.


In some cases, they are in sensitive industries such as telecoms or energy.


In April a Chinese state-owned power company reached an agreement to purchase two power suppliers in Peru that would give China a near-monopoly over the country’s energy grid.


Some fret over Chinese construction of ports in the region, such as the Chancay megaport near Lima in Peru, fearing that they could be repurposed to military ends.


China’s most recent strategy paper on Latin America, published in 2016, says it will “actively carry out military exchanges and co-operation”.


Although the United States remains the primary military partner in the region, China has boosted engagement with law-enforcement agencies.


It has trained police forces from countries including Argentina and Brazil, donated cars and investigative equipment to Nicaragua and Costa Rica, and sold surveillance equipment to Ecuador.


So far, China seems to be winning the geopolitical popularity contest—and not just with the usual suspects, such as Venezuela’s autocratic regime or Cuba’s socialists.


Since 2017 five countries in the region have ditched ties with Taiwan in favour of China.


In March, Honduras was the latest to do so.


Xiomara Castro, the president of Honduras, wrapped up a six-day visit to China on June 14th.


Argentina, Honduras and Uruguay are all in the process of joining the Shanghai-based New Development Bank, founded by the BRICS countries.


Argentina’s centre-right opposition is challenging an agreement between the governor of Tierra del Fuego, at the southernmost tip of the continent, and a Chinese petrochemicals group to build a port, power station and chemical plant there costing $1.2bn.


But mostly Latin America’s leaders shrug off concerns about Chinese meddling.


The chance to avoid what they perceive as hypocritical lectures from the United States appeals not only to left-wingers, but also to populists who have little time for human rights, such as El Salvador’s president, Nayib Bukele, and to moderates in Ecuador, Panama and Costa Rica.


Even under Jair Bolsonaro, Brazil’s right-wing president from 2018 to 2022, who made critical comments about the country, China continued to trade and invest in Brazil.


Whether China’s deeper engagement is a risk depends on “the eye of the beholder”, says a Mexican official.


China has tended to avoid provoking the United States, keeping its engagement primarily in South America rather than Central America and the Caribbean (with the exception of Cuba).


But China’s growing ambitions and Latin America‘s supplies of many of the minerals needed for the green transition, such as lithium and copper, mean ties are likely to deepen.


|SHANGHAI

Business | China and Europe
Why is China blocking graphite exports to Sweden?


Its motive may be more commercial than political

IN EARLY 2020 Swedish battery-makers noticed something alarming.


Their Chinese suppliers were no longer able to sell them graphite, a mineral crucial to the production of lithium-ion cells.


The Swedes assumed the problem would pass.


Yet three years on, as Chinese investments in the battery industry have surged in Europe, Swedish firms are still largely cut off.


In 2020 China’s exports to Sweden of two types of graphite nearly disappeared.


In 2021 and 2022 they vanished completely.


Although China’s commerce ministry has issued no formal ban, many Chinese graphite exporters face a prohibition in all but name.


One company was told that licences to export graphite to Sweden were no longer being issued by Chinese regulators.


Given that China supplies more than 60% of the world’s natural graphite and almost all the man-made version, the situation alarms producers that rely on China for the graphite anodes used in their cells.


A halt in supplies from China can upset supply chains, raise costs and disrupt production.


For Sweden, where the industry is just getting off the ground, a total ban on exports could do serious damage.


In its only official statement on the matter, the European Commission said earlier this year that the drying up of Chinese graphite exports “is creating negative repercussions for battery production in Europe, a key sector for the eu green transition”.


China frequently throws its weight around when it seeks to punish countries over political disputes.


In a row with Australia that started in 2020, it officially banned imports of coal from down under (the restriction was lifted this year) and put in place an unofficial ban on lobsters, with devastating consequences for Australian sellers who had come to rely almost exclusively on Chinese appetites.


Officials in China have often threatened to ban exports of minerals such as rare earths to America as retaliation for sanctions.


Export bans for battery minerals such as lithium and cobalt have become more common.


According to the OECD, a club mostly of rich countries, China was the greatest offender in restricting the supply of materials needed for the transition to renewable energy.


Grasping the reasons behind the Swedish graphite ban could be just as important as dealing with it.


At first blush, the ban appears to have been triggered by one of many small diplomatic spats between China and Sweden in recent years.


In late 2019 Swedish PEN, a free-speech advocacy group, gave an award to Gui Minhai, a publisher and dissident who is imprisoned in China.


The Chinese embassy in Stockholm immediately lashed out with threats against Sweden.


Mr Gui, a Swedish citizen, has been at the centre of a dispute between the two countries since he was kidnapped by Chinese agents in Thailand in 2015.


In 2020 and 2021 people familiar with Mr Gui’s case believed it was the motive for the graphite restrictions.


The same people now believe there could be more to it than a petty quarrel over an award.


As graphite exports to Sweden have slumped, China’s overall battery and electric-vehicle investments across Europe have soared.


In Hungary China’s top battery-maker, CATL, poured $8bn into a factory last year, which amounted to one of the biggest foreign investments ever made in the country.


In Poland smaller but similar factories are being built by Chinese firms.


At the same time, graphite exports to those two countries have rocketed.


Hungary imported more than $230m-worth of one form of graphite in 2022, up from just a few thousand dollars’ worth of the stuff five years earlier.


As it happens, one of the most competitive firms in Europe’s nascent battery business is Northvolt of Sweden.


The company has begun to expand in Europe and will receive subsidies to build new factories.


It is unclear what impact, if any, the graphite ban has had on Northvolt.


But it is believed to have the potential to raise costs at a time when competition to win market share is fiercer than ever.


The insiders aware of the Chinese graphite ban have started to question if the unofficial measures have been designed to stymie innovation in Europe as China builds a foothold there.


In May one Chinese firm, Putailai, announced a $1.3bn investment to build Europe’s largest factory for making anodes.


It will become a core supplier to the Swedish battery industry.


|Singapore

Finance & economics | Rising tigers, hidden dragon
How America is failing to break up with China
The countries’ economic ties are more profound than they appear

WHEN IT COMES to tracing the geography of global supply chains, few companies provide a better map than Foxconn, the world’s largest contract manufacturer.


This year the Taiwanese giant has built or expanded factories in India, Mexico, Thailand and Vietnam.


The Chinese production sites once loved by Western companies are firmly out of fashion.


Souring relations between the governments in Washington and Beijing have made businesses increasingly fretful about geopolitical risks.


As a consequence, in the first half of the year, America traded more with Mexico and Canada than it did with China for the first time in almost two decades.


The map of global trade is being redrawn.


At first glance, this is almost exactly as desired by America’s policymakers.


Under first Donald Trump and then Joe Biden, officials have put in place an array of tariffs, rules and subsidies.


The latest arrived on August 9th: an executive order introducing screening for outbound investment, and banning some investment into Chinese quantum computing, artificial-intelligence projects and advanced chips.


America wants to weaken China’s grip on sensitive industries and, in a motivation that mostly goes unspoken, prepare for a possible invasion of Taiwan by its adversary.


This attempt to “de-risk” trade with China is the cornerstone of the White House’s foreign policy.


Yet despite extensive efforts, and the reshaping of trade seemingly evident in headline statistics, much of the apparent de-risking is not what it appears.


Instead of being slashed, trade links between America and China are enduring—just in more tangled forms.


The American government’s preferred trading partners include countries such as India, Mexico, Taiwan and Vietnam, in which it hopes to spur the “friendshoring” of production to replace imports that would have come from China.


And trade with these allies is rising fast: just 51% of American imports from “low-cost” Asian countries came from China last year, down from 66% when the Trump administration’s first tariffs were introduced five years ago, according to Kearney, a consultancy.


The problem is that trade between America’s allies and China is also rising, suggesting that they are often acting as packaging hubs for what, in effect, remain Chinese goods.


This flow of products means that, although America may not be buying as much directly from China as before, the two countries’ economies still rely on each other.


For evidence, look at the countries that benefit from reduced direct Chinese trade with America.


Research by Caroline Freund of the University of California, San Diego and co-authors investigates this dynamic.


It finds that countries which had the strongest trade relationships with China in a given industry have been the greatest beneficiaries of the redirection of trade, suggesting deep Chinese supply chains still matter enormously to America.


This is even truer in categories that include the advanced manufacturing products where American officials are keenest to limit China’s presence.


When it comes to these goods, the share of American imports arriving from China declined by 14 percentage points between 2017 and 2022, whereas those from Taiwan and Vietnam—countries that import heavily from China—gained the greatest market share.


In short, Chinese activity is still vital to the production of even the most sensitive products.


Exactly how the rerouting works in practice differs across countries and industries.


A few products can be sourced only in China.


These include some processed rare earths and metals where Chinese companies dominate entire industries, such as the gallium used in chip production and the lithium processed for electric-vehicle batteries.


Sometimes exports to America and the rest of the West from their allies are nothing more than Chinese products that have been repackaged to avoid tariffs.


Most often, though, inputs are simply mechanical or electrical parts that could be found elsewhere at greater cost by an assiduous importer, but are cheaper and more plentiful in China.


All three types of phoney decoupling can be found in China’s backyard.


The latest official data, published in 2018, concerning exports by the Association of South-East Asian Nations (ASEAN), a regional club, show that 7% by value were actually attributable to some form of production in China—a figure that is probably an underestimate, given how difficult it is to disentangle trade.


Fresher data suggest that China has only grown in importance since then.


The country has increased its share of exports to the bloc in 69 of 97 product categories monitored by ASEAN.


Electronic exports, the largest category, which covers everything from batteries and industrial furnaces to hair clippers, have exploded.


In the first six months of the year Chinese sales of these goods in Indonesia, Malaysia, Thailand, the Philippines and Vietnam rose to $49bn, up by 80% compared with five years ago.


There is a similar pattern in foreign direct investment, where Chinese spending in crucial South-East Asian countries has overtaken America’s.


Factories farther afield are also humming with Chinese activity, perhaps most notably in the car industry.


In Mexico the National Association of Autopart Makers, a lobby group, has reported that last year 40% of nearshoring investment came from sites moving to the country from China.


A rich supply of intermediate goods is duly following.


In the past year Chinese companies exported $300m a month in parts to Mexico, more than twice the amount they managed five years ago.


In central and eastern Europe, where the car industry has boomed in recent years, phoney decoupling is even more conspicuous.


In 2018 China provided just 3% of automotive parts brought into the Czech Republic, Hungary, Poland, Slovakia, Slovenia and Romania.


Since then, Chinese imports have surged, thanks to the rapid adoption of electric vehicles, where the country increasingly dominates production.


China now provides 10% of all car parts imported into central and eastern Europe, more than any other country outside the eu.


Tighter trade links between America’s allies and China are the paradoxical result of America’s desire for weaker ones.


Firms panicked by worsening relations across the Pacific are pursuing “China plus one” strategies, keeping some production in the world’s second-largest economy, while moving the rest to countries, such as Vietnam, that are friendlier to Uncle Sam.


Yet American demand for final products from allies also boosts demand for Chinese intermediate inputs, and produces incentives for Chinese firms to operate and export from alternative places.


Although Apple, the world’s largest company by market capitalisation, has moved production outside China in recent years, this comes with a caveat: much of the production still relies on Chinese companies.


The tech giant lists 25 producers in Vietnam on its official suppliers list.


How worried should American policymakers be?


In the worst-case outcome—a war in which supplies of goods between China and America are almost completely severed—dealing only indirectly with China or with Chinese firms on the soil of third countries is probably an improvement on Chinese production.


Moreover, companies are adapting to security rules so as to reduce costs for consumers.


But this also carries risks: a belief that decoupling is under way may obscure just how critical Chinese production remains to American supply chains.


The fact that so much production in Asia, Mexico and parts of Europe ultimately relies on imports and investment from China helps explain why so many governments, particularly in Asia, are at best fair-weather friends to America, at least when it comes to shifting supply chains.


If forced to choose between the two countries once and for all, exporters would suffer mightily.


A recent study by researchers at the IMF models a scenario in which countries must pick between America and China, with their decision on which of the two superpowers to side with determined by recent voting patterns at the UN.


Such a scenario, the researchers calculate, would reduce GDP by as much as 4.7% for the worst-affected countries.


Those in South-East Asia would be struck particularly hard.


Given that most countries are desperate for the investment and employment that trade brings, America has been unable to convince its allies to reduce China’s role in their supply chains.


Many are content to play both sides—receiving Chinese investment and intermediate goods, and exporting finished products to America and the rest of the West.


Ironically, then, the process driving America and China apart in trade and investment may actually be forging stronger financial and commercial connections between China and America’s allies.


Needless to say, that is not what President Biden had in mind.


Leaders | Costly and dangerous
Joe Biden’s China strategy is not working
Supply chains are becoming more tangled and opaque

On August 9th President Joe Biden unveiled his latest weapon in America’s economic war with China.


New rules will police investments made abroad by the private sector, and those into the most sensitive technologies in China will be banned.


The use of such curbs by the world’s strongest champion of capitalism is the latest sign of the profound shift in America’s economic policy as it contends with the rise of an increasingly assertive and threatening rival.


For decades America cheered on the globalisation of trade and capital, which brought vast benefits in terms of enhanced efficiency and lower costs for consumers.


But in a dangerous world, efficiency alone is no longer enough.


In America, and across the West, China’s rise is bringing other aims to the fore.


Understandably, officials want to protect national security, by limiting China’s access to cutting-edge technology that could enhance its military might, and to build alternative supply chains in areas where China maintains a vice-like grip.


The result is a sprawl of tariffs, investment reviews and export controls aimed at China, first under the previous president, Donald Trump, and now Mr Biden.


Janet Yellen, America’s treasury secretary, has travelled to Delhi and Hanoi to tout the benefits of “friendshoring”, signalling to company bosses that shifting away from China would be wise.


Although such “de-risking” measures would lower efficiency, the thinking goes, sticking to sensitive products would limit the damage.


And the extra cost would be worth it, because America would be safer.


The consequences of this new thinking are now becoming clear.


Unfortunately, it is bringing neither resilience nor security.


Supply chains have become more tangled and opaque as they have adapted to the new rules.


And, if you look closely, it becomes clear that America’s reliance on Chinese critical inputs remains.


More worrying, the policy has had the perverse effect of pushing America’s allies closer to China.


All this may come as a surprise, because, at first glance, the new policies look like a smashing success.


Direct economic links between China and America are shrivelling.


In 2018 two-thirds of American imports from a group of “low-cost” Asian countries came from China; last year just over half did.


Instead, America has turned towards India, Mexico and South-East Asia.


In 2016 Chinese firms invested a staggering $48bn in America; six years on, the figure had shrunk to a mere $3.1bn.


For the first time in a quarter of a century, China is no longer one of the top three investment destinations for most members of the American Chamber of Commerce in China.


For the best part of two decades, China claimed the lion’s share of new foreign-investment projects in Asia.


Last year it received less than India or Vietnam.


Dig deeper, though, and you find that America’s reliance on China remains intact.


America may be redirecting its demand from China to other countries.


But production in those places now relies more on Chinese inputs than ever.


As South-East Asia’s exports to America have risen, for instance, its imports of intermediate inputs from China have exploded.


China’s exports of car parts to Mexico, another country that has benefited from American de-risking, have doubled over the past five years.


Research published by the imf finds that even in advanced-manufacturing sectors, where America is keenest to shift away from China, the countries that have made most inroads into the American market are those with the closest industrial links to China.


Supply chains have become more complex, and trade has become more expensive.


In the most egregious cases, Chinese goods are simply being repackaged and sent via third countries to America.


At the end of 2022, America’s Department of Commerce found that four major solar suppliers based in South-East Asia were doing such minor processing of otherwise Chinese products that they were, in effect, circumventing tariffs on Chinese goods.


In other areas, such as rare-earth metals, China continues to provide inputs that are hard to replace.


More often, though, the mechanism is benign.


Free markets are simply adapting to find the cheapest way to supply goods to consumers.


And in many cases China, with its vast workforce and efficient logistics, remains the cheapest supplier.


America’s new rules have the power to redirect its own trade with China.


But they cannot rid the entire supply chain of Chinese influence.


Much of the decoupling, then, is phoney.


Worse, from Mr Biden’s perspective, his approach is also deepening the economic links between China and other exporting countries.


In so doing, it perversely pits their interests against America’s.


Even where governments are worried about the growing assertiveness of China, their commercial relationships with the biggest economy in Asia are deepening.


The Regional Comprehensive Economic Partnership, a trade deal signed in November 2020 by many South-East Asian countries and China, creates a sort of single market in precisely the intermediate goods in which trade has boomed in recent years.


For many poorer countries, receiving Chinese investment and intermediate goods and exporting finished products to America is a source of jobs and prosperity.


America’s reluctance to support new trade agreements is one reason why they sometimes see it as an unreliable partner.


If asked to choose between China and America, they might not side with Uncle Sam.


All this carries important lessons for American officials.


They say that they want to be precise in how they guard against China using a “small yard and high fence”.


But without a clear sense of the trade-offs from their tariffs and restrictions, the risk is that each security scare makes the yard bigger and the fence taller.


The fact that the benefits have so far been illusory and the costs greater than expected underscores the need for laser focus.


Moreover, the more selective the approach, the greater the likelihood that trading partners can be persuaded to reduce their reliance on China in the areas that really matter.


Without it, de-risking will make the world not safer, but more dangerous.


China | Chaguan
A Chinese dispute with the Philippines is a test of America
China yearns to expose its rival as an unreliable ally

To grasp China’s approach to the international rule of law, look at the South China Sea.


In recent weeks and months, large white-hulled ships belonging to China’s coastguard have been bullying small boats sent to resupply a rusting ship-cum-garrison purposely grounded by the Philippines—an American treaty ally—on a disputed coral atoll two decades ago.


China claims that atoll, the Second Thomas Shoal, as its own.


At the same time, fighter jets from the People’s Liberation Army (PLA) have repeatedly staged dangerously close intercepts of American reconnaissance flights in international skies close to China’s coasts.


To justify such assertiveness, China offers convoluted claims about the history of the South China Sea and about international law that are rejected by almost all its maritime neighbours.


To understand this apparently self-defeating strategy, the Broadway musical “Guys and Dolls” is an oddly helpful guide.


Specifically, China’s approach to geopolitics brings to mind Big Jule, a character in that peerless drama, first performed in 1950.


A visitor from Chicago, Big Jule intimidates a cast of small-time New York gamblers with hints of ties to mobsters and glimpses of a gun under his coat.


After losing a fortune on a dice game, Big Jule proposes a few more rounds, this time using his own custom dice, which are blank.


But I remember where the spots formerly were,” he explains, after patting his revolver meaningfully.


Playing this version of the game, his outraged but fearful hosts proceed to lose large sums to Big Jule.


The link with Chinese statecraft involves Big Jule’s use of spurious rules to get his way, rather than simply admitting to robbing fellow gamblers at gunpoint.


There are no “Guys and Dolls” references in “China’s Law of the Sea, The New Rules of Maritime Order”, a recent book by Isaac Kardon of the Carnegie Endowment for International Peace.


Leaving that flaw aside, the book is a fine, deeply researched guide to China’s efforts to subvert or reinterpret any principles that complicate its claims to more than four-fifths of the South China Sea.


Citing Chinese official texts, Mr Kardon shows how the Communist Party sees international law as a “weapon”: a way to codify power relations between larger and smaller states, rather than a source of binding, universal norms.


In painstaking detail, the book records how soon after China signed the UN Convention on the Law of the Sea (UNCLOS) in 1982, officials in Beijing began passing laws that challenged the treaty.


China applies rules for drawing maritime boundaries around rocks, reefs and far-flung islands in different ways, depending on whether features are Chinese-controlled or occupied by the troops or fishing fleets of its rivals.


Chinese authorities forcefully defend exclusive fishing, mineral and navigation rights within 200 nautical miles of their territory, citing UNCLOS.


At the same time, China routinely sends naval ships, fishing fleets and oil- and gas-survey vessels into waters that are just as close to other countries.


(America upholds UNCLOS rules but is not a party to the convention.


)
In 2016 the Permanent Court of Arbitration in The Hague largely upheld a claim by the Philippines government that China’s assertion of “historic rights” over swathes of the South China Sea is without legal basis.


China calls that arbitral ruling a scrap of waste paper and continues to maintain and expand military bases on disputed reefs and artificial islands.


In its confrontation with the Philippines over the Second Thomas Shoal, China has given public warning that it will not allow boats to deliver building materials to shore up the crumbling hulk of the Sierra Madre, the beached ship used as a garrison by Filipino marines since 1999.


Chinese coastguard cutters have used lasers and water cannon against supply boats, and collided with a Filipino vessel in October.


The Philippines government released videos of these clashes.


With American credibility as a treaty ally at stake, President Joe Biden said last month that any attack on Filipino aircraft, vessels or armed forces would trigger the two countries’ “ironclad” mutual-defence commitments.


To Chinese experts, it is self-evident that politics will decide these questions of international law.


Zhou Bo, a retired PLA senior colonel now at Tsinghua University’s Centre for International Security and Strategy, argues that China has been “restrained” at the Second Thomas Shoal and that the use of water cannon does not count as force.


As a result he is sceptical of suggestions that America might escort Filipino convoys to the Sierra Madre, especially with conflicts raging in Ukraine and the Middle East.


“Without the use of force, I think it would be difficult for the US to be provocative, especially with two wars going on in the world,” he says.


Against that, Hu Bo, a naval expert at Peking University, concedes that China faces a diplomatic dilemma at the Second Thomas Shoal, where neighbouring Asian countries may sympathise with the Philippines as the weaker party.


“Right now, nobody cares about the truth and facts.


Right now, people just say China has big ships and the Philippines has small ships,” he says.


As for mid-air intercepts, American arguments about its legal rights to fly and sail through international airspace and waters, and its calls for more “professionalism” from Chinese pilots, fall flat.


“I consider a collision almost inevitable, given the high frequency of encounters,” says Mr Zhou.


But if Chinese pilots stayed farther away, that would amount to “escorting America as it harms China’s interests,” he insists.


The South China Sea is a dangerous and revealing place just now.


Both China and America have every reason to avoid conflict there.


But China yearns to expose America as an unreliable ally, and to make the Philippines obey Chinese-drawn red lines, or pay a visible price.


To keep the peace, rules will be of less help than calculations of relative power and national interests.


In this bleak world, Big Jule would be right at home.


Asia | IPEF MIA
America’s crumbling trade initiative in Asia
Joe Biden’s limp trade strategy has just got even weaker

THERE IS NO lack of American engagement in Asian capitals on security and geopolitics.


That is what all the talk of a “free and open Indo-Pacific” is about—seeking friends and allies in a new great-power contest, to China’s annoyance.


There has been much less evidence of an economic dimension to America’s Asian diplomacy—despite a strong desire for one across the region.


Countries in East and South-East Asia thrive on their economic ties with China, but want an American counterbalance.


They fear that over-relying on the regional giant would erode their agency and sovereignty.


Yet hopes of serious American engagement were dashed when, in one of his first acts as president, Donald Trump in 2017 pulled out of the Trans-Pacific Partnership, a high-grade trade deal with 12 members.


What remained of those hopes has just taken another beating.


A cornerstone of President Joe Biden’s economic initiative for Asia, launched in May 2022 and called the Indo-Pacific Economic Framework for Prosperity (IPEF), has crumbled.


At the initiative’s unveiling in Tokyo, Mr Biden called it “an economic vision” that would underpin “new rules for the 21st-century economy”.


Four pillars were envisaged: that America and its Asian partners would co-operate to promote clean energy; fight tax evasion and money laundering; boost trade, especially of the digital sort; and build resilient supply chains in the face of such things as pandemics.


IPEF was emphatically not a trade pact to open markets and cut tariffs.


Trade deals need congressional approval, which is a non-starter in Washington these days, given the protectionist turn in both America’s main parties.


Yet if IPEF looked weaker for that, it was thought to be executive-led, so relatively fleet and flexible.


Countries swiftly signed up, including Australia, Brunei, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam.


A summit of APEC, the Asia-Pacific trade talking-shop, held in San Francisco on November 16th and 17th, was due to showcase this American initiative.


After months of negotiation among ipef members, agreements on all four pillars were promised.


A signed deal to co-operate more on supply chains was announced, along with in-principle agreements on green energy and fighting corruption.


Yet the most important pillar, concerning trade, collapsed.


At the last minute America dropped plans to announce even a partial agreement on enforceable trade rules.


This has left Asian negotiators (Australian and Japanese above all) and Asian and American business executives utterly dismayed.


They had known something was wrong for months.


For one, America flipped its negotiating position on digital trade, from pushing to ease access to data to opposing it.


That seemed to be in response to pressure from Senator Elizabeth Warren, a left-winger who thinks big tech has conspired to capture government.


Additional opposition, it emerged last week, had come from another leftist Democrat, Senator Sherrod Brown, who is up for re-election next year in Ohio, a battleground midwestern state.


Last week Mr Brown criticised the proposed trade pillar on the basis that it “lacks enforceable labour standards”.


That seems to have put the kibosh on it.


The US Trade Representative, Katherine Tai, no avid fan of open trade herself, says the negotiations will continue and a conclusion is possible.


To develop digital business with America and others, countries such as Indonesia and Vietnam were prepared to allow more scrutiny of their labour and environmental standards and resist their own protectionist impulse to wall off national data.


Now, says Deborah Elms of the Hinrich Foundation, a think-tank in Singapore, that carrot is off the table.


Asian policymakers have no illusions about the dysfunctional nature of American politics or how long it may last—this week Mr Trump promised to “knock out” IPEF if he is re-elected next year.


Even so, there is still Asian goodwill towards America, though dwindling.


Despite their growing sense of frustration, Asian governments want to persist with IPEF.


That is partly because, as one South-East Asian diplomat says, the region views the framework as of more strategic than economic value.


So it is better to keep America engaged in lengthy discussions about Asian supply chains and standards than to see it wander off altogether.


) maybe one day it might even rediscover that trade liberalisation is in its interest.


China | Chaguan
China and the EU risk a trade war
Massive Chinese overcapacity in electric cars is a giant political risk for Europe

China and the European Union could not have set expectations much lower for their summit on December 7th in Beijing.


Before Xi Jinping hosted Charles Michel, president of the European Council, and Ursula von der Leyen, head of the European Commission, EU officials warned that substantive agreements on trade, climate change or geopolitical differences were unlikely.


The EU visitors were expected to raise China’s closeness to Russia and to ask about alleged sales by Chinese companies of dual-use items, such as semiconductors or drone parts, that help Russia’s war effort in Ukraine.


Alas, China’s line on Ukraine has hardened in recent months.


Chinese officials have left Western diplomats with the impression that they expect Vladimir Putin to avoid a humiliating defeat, and to see Western unity crumble, making a frozen conflict a likely outcome.


Just in case China’s indifference to moral pressure was not clear enough, on December 4th Mr Xi hosted Alexander Lukashenko, the president of Belarus, for the second time this year.


Mr Xi spoke of strengthening political trust with Mr Lukashenko, a Putin ally and pariah in EU circles.


Arguably, the China-EU summit was not as urgently needed as last month’s meeting between Mr Xi and President Joe Biden in California.


For months the Chinese government had severed channels of communication with America.


In contrast China-EU dialogues and working groups never stopped.


That said, recent high-level China-EU contacts are described as “talking about everything, without concrete results”.


Yet the lack of drama should not be mistaken for calm.


Tensions are high because, as so often before, Chinese state planners and local officials have subsidised overcapacity in a promising sector.


Over the years, Europe’s industrial landscape has been reshaped several times by China opening far more firms and factories than markets need.


Whereas in the past the threat involved basic commodities such as steel, lately China has achieved dominance in advanced sectors which European firms once led, like wind turbines or solar energy.


Another such sector is cars, an industry with a powerful grip on public hearts and minds.


China has focused on battery-powered electric vehicles.


Even after consolidation in the sector, over a hundred firms still produce such cars.


Chinese firms became dominant through a mixture of subsidies and coercive transfers of foreign technologies, but also hard work and foresight, as they leap-frogged slow-to-change foreign firms.


Between them they make far more cars than China’s market demands.


Some European governments are ready to resort to crude protectionism.


In October the European Commission launched an investigation into Chinese electric vehicles and whether their makers receive subsidies that break international trade laws and harm EU firms.


The probe could see punitive tariffs imposed.


German carmakers—whose China operations remain huge, though less profitable than before—are anxious about retaliation.


In a recent speech, Ms von der Leyen retorted to German politicians that Europe faces unsustainable competition.


“There is clear overcapacity in China, and this overcapacity will be exported.


Especially if overcapacity is driven by direct and indirect subsidies,” she said.


“This will worsen as China’s economy slows down, and its domestic demand does not pick up.


”
In early December Chaguan attended the Stockholm China Forum, a private gathering in Singapore of American, Chinese and European officials and scholars convened by the German Marshall Fund, a think-tank, and Sweden’s foreign ministry.


One theme was Chinese overcapacity in manufacturing and its potential to disrupt European attempts to “de-risk” relations with China.


When considering the European perspective, it helps to think about EU goals as sides of a triangle.


On one side is the bloc’s determination to embrace green, low-carbon technologies.


On another is its desire to end damaging dependencies on Chinese products and inputs.


And on the third side is its goal of preserving industrial jobs.


As of now, Europe cannot have all three sides of its triangle.


The EU could prioritise the first goal, focusing on the environment by importing Chinese-made electric vehicles and other clean tech.


But that would ignore fears about lost businesses and jobs.


European officials worry that millions of subsidised Chinese cars could be dumped on its markets each year, especially as tariffs and other rules close American markets to batteries from China.


Of course, guarding European jobs and businesses by blocking Chinese vehicles would raise the opposite problem: Europe would be less green than it wants to be.


Such protectionism would also harm drivers.


A bigger challenge pertains to the second side of the triangle.


China is determined to keep the EU reliant on its supply chains.


Indeed, in 2020 Mr Xi called such dependencies a “powerful counter-measure” for controlling foreigners.


Since then China has imposed export controls on critical minerals, including a form of man-made graphite that European firms need to make advanced batteries.


The EU could work to avoid dependencies on Chinese technologies while trying to keep factories humming at home.


But without Chinese minerals, for instance, those same factories cannot produce electric cars or batteries at scale, forcing Europe to forgo or delay its low-carbon revolution.


For years to come, then, Europe must choose between the planet, independence from China and shielding industry at home.


China, for its part, continues to invest heavily in manufacturing.


Chinese officials appear to believe that their country’s market power and control of clean technologies will force Europe to back down.


They hope that Ms von der Leyen’s commission lacks support from key EU governments.


If they are wrong, this could end with a trade war.


China | China and the world
Xi Jinping’s paranoia is making China isolated and insular
From his personal travel plans to capital flows, cross-border exchange is shrinking

“NIhao, china” is the name of the country’s latest effort to attract foreign visitors.


The logo accompanying the phrase (which means “Hello, China”) features a panda—an image always handy when China wants to seem cuddly.


Chinese officials have been touring the West to promote the campaign, helped by a video in which happy-looking foreigners intone the Chinese greeting.


Those with a deeper grasp of the language might sense a different mood, including billboards on city streets warning people to look out for foreign spies, and government propaganda on social media urging vigilance against threats to national security.


The Communist Party often tells people that tourists, journalists and businesspeople could all be after China’s secrets.


More than a year after Chinese leaders scrapped the “zero-covid” policy which had kept the country sealed off from most foreign visitors from early 2020 to the end of 2022, they are now pushing in two contradictory directions.


Parts of the government appear eager to court foreigners.


Last month China sent a large delegation to the World Economic Forum in Davos, Switzerland.


Li Qiang, the prime minister, told the gathering that “no matter how the world changes, China will…open its door still wider to the world.


”
In at least one key respect this is true: China’s trade in dollar terms is 31% higher than in 2019.


But The Economist has looked at a range of other measures, from the number of flights and visits to China by foreign tourists to levels of academic exchange, investment flows and even the personal travel schedule of China’s leader, Xi Jinping.


They suggest a country overshadowed by a profoundly changing relationship with the West, a more security-driven style of policymaking at home and by the parlous state of its economy.


China has become more inward-looking, as the West has become more wary.


At the most basic level, far fewer outsiders are crossing borders into China.


Last year the country recorded about 62m fewer entries and exits by foreigners than in 2019, before the pandemic began—a drop of more than 63%.


In the three years during which China shut its borders to prevent the spread of covid, and its leaders hunkered down at home, the West, led by America, was engaged in a wide-ranging rethink of how to cope with China’s rise as a global power.


President Donald Trump focused on trying to cut America’s trade deficit with China, but his administration sought to push back on other fronts, too, including efforts to contain China’s military activity.


There was no let-up after Joe Biden became president in 2021.


In the following year Russia’s invasion of Ukraine drove the wedge between the West and China even deeper.


China had just called itself a “no-limits” partner of Russia.


Mr Biden ramped up controls on the export to China of advanced semiconductors.


The invasion threw up an unexpected obstacle to the restoration of normal flows of people between China and America.


In response to Russia’s aggression, America and its allies barred Russian airlines from using their airspace.


This has impeded the reopening of aviation routes between America and China that were severed during the pandemic: America does not want to give an advantage to Chinese airlines by allowing routes to reopen, when those airlines could save time and fuel, and therefore gain passengers, by flying over Russia.


At a meeting in November Mr Biden and Mr Xi agreed to “work towards a significant further increase in scheduled passenger flights”.


According to oag, a travel-data firm, in February 2019 there were 1,219 scheduled direct flights from China to America.


In February 2024 there are 269 (see map).


According to FlightAware, an American flight-tracking website, Chinese airlines are avoiding Russia on newly approved routes.


In part, America is to blame for a reduction in contacts between the two countries that were once considered routine.


In 2022 it ended a Trump-era campaign by the Department of Justice, known as the China Initiative, whose aim was ferreting out Chinese spies in American academia and business.


The scheme had become mired in accusations of racial profiling.


But ditching it has not put scientists at ease.


Worried about being accused of helping China by sharing advanced know-how, American researchers have become increasingly wary of collaborating with their Chinese counterparts.


In 2020 the number of science papers jointly produced by Chinese and American researchers began to fall.


“That is certainly a consequence of the political environment” in America, says Jonathan Adams of Clarivate, an analytics firm.


Of China’s internationally collaborative research papers, the share involving American co-authors has fallen from a peak of 47% in 2013 to 32% in 2022,  the company’s data show (see chart 1).


At America’s borders, officers have become twitchier about Chinese entering for study.


Chinese diplomats complain that some students with valid visas are being subjected to lengthy interrogations, often about Chinese government backing for their projects.


They say a few of them have been sent back.


Deborah Seligsohn of Villanova University in Pennsylvania, who has been studying Sino-American exchanges in science, says she knows Chinese academics whose research is “completely uncontroversial” who have been subjected to such questioning.


Among foreigners mulling trips to China, memories have been slow to fade of the sometimes brutal enforcement of its zero-covid measures.


China now all but ignores covid (it abolished the last vestige of pandemic control in November, by ending the need to fill out a health-declaration form on arrival).


But potential visitors are “still fearful at the back of their minds about potential lockdowns,” says John Grant of oag.


“You know, the horror stories that we’ve all heard about…all of that impacts consumers’ perceptions of the market.


”

China’s state-controlled media like to highlight examples of American mistreatment of Chinese people.


Such cases serve a propaganda campaign that portrays the West as racist and a builder of barriers and of menacing security networks that are aimed at keeping an innocent China in its place.


Perhaps intentionally, this depiction of the West may be deterring some Chinese students from going to America: in the academic year of 2022-23 they numbered about 290,000, down from a peak of more than 370,000 in 2019-20.


Mr Xi likes to present his own country as a champion of global engagement (in a world laden with doubt about globalisation, he describes it with striking confidence as an “irreversible trend of the times”).


In reality he seems less inclined to travel abroad.


In 2023, after the better part of three years without venturing overseas, he spent only 13 days outside the country, compared with a more typical 28 days in 2019.


In September last year he shunned an annual gathering of g20 leaders in India, despite having attended previous such events in person or online.


He did, however, travel to San Francisco in November for a summit of the Asia-Pacific Economic Co-operation forum.


There, at his first face-to-face meeting with Mr Biden for a year, he insisted that for America and China, “turning their backs on each other is not an option”.


Many Chinese officials survey their struggling economy, with its collapsing property firms and mountains of debt, and still see benefit to be gained from the West’s markets, capital and technology.


Mr Xi is maintaining military pressure on Taiwan but does not appear ready for an all-out clash with the West that an assault may entail.


In December China resumed military-to-military communications with America, having suspended them for more than a year in protest against high-level contact between America and Taiwan.


The door is barely ajar: China’s armed forces share little in such dialogue.


But the message is that Mr Xi wants a stable relationship with the West.


He appears not to want Westerners to rush for the exits.


That is evident in the “Nihao, China” campaign.


Since December tourists from France, Germany, Italy, the Netherlands, Spain and Switzerland, as well as Malaysia, have been allowed to visit China visa-free for 15 days.


Russians may be close friends, but they do not enjoy such a concession.


Many Western businesspeople, however, worry about China’s shaky economy and the government’s heavy hand over it.


Foreign direct investment in greenfield projects in China has declined from more than $87bn in 2013 to less than $18bn in 2022 (see chart 4).


Flows of portfolio investment into China have been negative for the past four quarters as global funds dump Chinese equities (see chart 5).


Foreign businesspeople are anxious about the growing assertiveness of China’s secret police: raids last year on foreign consulting firms in China rang alarm bells.


On February 1st the American Chamber of Commerce in China released its annual survey of member companies’ mood.


Nearly 40% said they believed foreign firms were less welcome in China than they were in 2022, a year when many businesses were battered by covid-related lockdowns.


Mr Xi is “living in his own world, surrounded by the security people”, says a prominent Western businessman in Beijing.


“And then you have these economic decision-makers around him who find it very difficult to find time with him, to alert him and to stop this erosion in sentiment.


”

Mr Xi keeps railing against what he sees as “ideological infiltration” by the West, and talking up the need to make China’s economy “self-reliant”.


The West’s heightened resolve to counteract harmful behaviour by China abroad has stiffened his sinews.


In response to America’s chip war, his government is pumping money into Chinese companies to help them produce cutting-edge technology by themselves (see Business section).


What about the big exception to the trend of isolation, China’s soaring trade flows, which reflect its continuing role as an industrial powerhouse?


During Mr Xi’s rule, the share of China’s foreign trade with major rich-world economies has been falling.


In recent years, trade with the ten-member Association of South-East Asian Nations and the other countries of brics—namely Brazil, Russia, India and South Africa—has grown more rapidly than its trade with Europe and America (see chart 6).


For Mr Xi, although America remains important, “south-south co-operation” is growing fast as a strategic and economic priority.


What he means by this is the creation of an alternative centre of world power—one that pivots around China, with the West at a safe distance.


China is stepping up efforts to woo countries of the “global south”, as Mr Xi calls it, trying to secure them to China’s orbit with implicit promises of economic gain in return for their acquiescence to China’s worldview.


This time it is setting the terms for those allowed to enter.


China | America’s election, viewed from Beijing
How scared is China of Donald Trump’s return?
60% tariffs are a danger, yet some Chinese nationalists are cheering him on

IF YOU WANT to get a sense of how China feels about the prospect of Donald Trump winning America’s presidential election, Chinese social media offers some revealing signals.


In the past few weeks it has begun to boil over with fury and mockery.


The prospect of American tariffs of over 60% on Chinese imports?


“Add even more,” rages one online commentator in the mainland.


“I’d be curious to see how ordinary Americans would live.


” Others think Mr Trump would increase the odds of a war.


The world will “never be at peace” with him around, reckons another netizen.


“This old madman is too vicious,” says a third.


”
It is not just online: the prospect of a Trump victory is the subject of debate among China’s elite, too.


They fear his return to the White House would lead to an even hotter trade war, with potentially vast economic costs.


But they also believe his contempt for alliances (witness the latest outburst against NATO) could yield huge propaganda gains and undermine the American-led security system in Asia, freeing China to act as it pleases on Taiwan and more.


Some Chinese nationalists are cheering his successes and call him Comrade Chuan Jianguo: Chuan being a common rendering of Mr Trump’s surname, and Jianguo meaning “build the country”.


It is a way of suggesting that Mr Trump’s excesses make China stronger.


For Xi Jinping, China’s leader, the unpredictable trade-offs that a Trump presidency would involve are especially difficult to weigh, even if the two men’s relationship is reasonable enough after multiple encounters from banquets in Beijing to steak dinners at Mar-a-Lago, Mr Trump’s lair in Florida.


“I like President Xi a lot,” Mr Trump recently told Fox News.


“He was a very good friend of mine during my term.


” On the one hand Mr Trump’s presidency from 2017 to 2021 saw a profound shift in America’s policy.


His administration deployed tariffs in an attempt to reduce America’s trade deficit and protect jobs.


It redefined the domestic debate in America, with China portrayed as a political, technological and military adversary.


On the other hand Mr Biden’s more systematic approach to governing has posed a different kind of threat to China than that of Mr Trump’s first term.


America has kept the Trump tariffs in place, but on top of that also built a comprehensive system for restricting Western technology flows to China.


And by investing in America’s security partnerships and alliances, from Australia and India to the Philippines and South Korea, it has rejuvenated an Asian security system to deter and contain China.


Mr Biden may be known as Shui Wang, or Sleepy King, in China.


But while more restrained than Mr Trump, he has in some ways been a more formidable opponent.


A big part of Mr Xi’s calculus now is working out what Mr Trump could do on China in a second term.


You might imagine that after four years in office, the MAGA appetite to confront China would be sated.


Yet the available signals suggest that opposition to China in Mr Trump’s inner circle may have intensified.


Take the views of Robert Lighthizer, Mr Trump’s influential trade representative, who could get a top job again in the White House.


In the period from 2017 to 2021 he launched an investigation into Chinese theft of intellectual property and invoked Section 301 of America’s trade law, which allows the president to punish trade partners that do not play fair, in order to raise tariffs.


The average tariff faced by Chinese firms rose from 3% in 2018 to 21% by the end of 2019, when the two countries struck a truce (see chart 1).


Mr Lighthizer’s position remains intensely hostile to China, whose totalitarian instincts, he argues, pose an ever greater danger.


In a book published last year, “No Trade is Free”, he argues China is “the greatest threat that the American nation and its system of Western liberal democratic government has faced since the American revolution”.


The book contains several tough proposals, including screening of Chinese investments not just on security grounds but also for “long-term economic harm”; the prohibition of any Chinese company from operating in America unless there is reciprocal access for American firms in China; and the banning of TikTok, a Chinese-owned short-video app.


Crucially, Mr Lighthizer recommends another huge increase in tariffs.


The goal, he argues, should be “balanced trade”—that is, presumably, no goods-trade deficit at all.


Last year China still enjoyed a surplus with America of nearly $280bn, down from a record $419bn in 2018, but not far off the $347bn before Mr Trump took office.


To correct this Mr Lighthizer calls for the undoing of “one of the worst mistakes” in America’s history: its decision to enter into “permanent normal trade relations” (PNTR) with China in 2000.


This allowed China to pay the same low tariffs America charges most of its trading partners, rather than an alternative, steeper set of levies that appear in “column 2” of America’s tariff schedule and apply to only a handful of countries such as Cuba and North Korea, and now Russia and Belarus.


Ending PNTR with China would raise tariffs on Chinese goods to 61% on average, according to Oxford Economics, a consultancy, assuming the Section 301 tariffs remain in place.


For Chinese mobile phones, tariffs would jump from 0% to 35%; for Chinese toys from 0% to 70%.


Instead of settling for the existing column 2 tariffs, America might write a new tariff schedule just for China.


That could be even stricter on some goods (such as cars) but less restrictive on other products dear to American consumers, such as Apple iPhones.


Mr Xi will be busy asking his advisers to estimate how high the economic fallout might be.


At its height, the trade war knocked as much as 0.8% off China’s quarterly GDP, according to Goldman Sachs, a bank, equivalent to roughly $40bn in today’s dollars.


Overall, the net trade effect was negative for China and positive for America.


But the conflict eroded the incomes of both Chinese and Americans by raising prices, disrupted financial markets in each country and led to policy uncertainty that inhibited business spending (see chart 2).


During negotiations with China, Mr Trump liked to be both the arsonist and the firefighter, as one observer put it, starting conflagrations with angry tweets and then dousing them with diplomatic dinners.


Another guide to the potential cost is modelling.


Repeal of PNTR would shrink America’s expected share of China’s exports from about a fifth under existing policies to about 3%, according to Oxford Economics (see chart 3).


There are many moving parts to such simulations.


One consideration is whether firms believe that new Trump tariffs would be maintained after he left office, as was the case last time (see Finance & economics section).


Another is that some Chinese components would still find their way into America’s market embedded in goods assembled by other countries.


China’s economy and financial markets are in dismal shape compared with 2017.


And it is not clear how China would retaliate: doing so during the first Trump presidency did not force America to back down.


Oxford Economics assumes that China would raise its tariffs by about 17 percentage points on average.


All in all, the once-intimate economic relationship between the superpowers could be reduced to an air-kiss.


Either way, the kind of decoupling that Mr Trump’s advisers envisage would inflict profound damage on China’s economy.


Studies by JaeBin Ahn and other economists at the IMF show what would happen if the world splits into rival economic spheres with limited flows of foreign-direct investment between them.


If such flows were to fall by half, it could eventually reduce China’s GDP by about 2%, relative to a baseline in which investment flows more freely.


Another study by Carlos Góes of the University of California, San Diego, and Eddy Bekers of the World Trade Organisation argues that tariff increases of around 30% could lower China’s income by over 5% by 2040.


Judged on trade and tariffs, it is likely that Mr Xi favours a Biden victory.


A Biden administration would probably extend import curbs on Chinese electric vehicles and further impede the flow of American cutting-edge technology to China in realms including semiconductors, artificial intelligence and quantum computing.


But it is far less likely than a Trump administration to trigger a destabilising trade shock.


Yet the America-China relationship encompasses far more than economics, and it is here that the calculus for Mr Xi may lean the other way.


He resents the Western-led world order and wants to establish China as an alternative centre of power.


Mr Trump’s tempestuous relationship with America’s allies in Europe and Asia may undermine cohesion with them on China policy if he is elected again.


His contemptuous remarks about NATO, including his recent suggestion that he would not offer American protection to allies who fail to spend enough on defence, are music to China’s ears.


It sees NATO as a cold-war relic that the West uses to preserve its dominance.


For the same reason, it relishes any tension in America’s relationships with Japan and South Korea, such as Mr Trump caused by threatening the withdrawal of American troops from those countries if their governments would not agree to big increases in their contributions to the cost of maintaining the bases.


A Trump administration might unwind the work Mr Biden has done to nurture Asian partnerships.


To China’s chagrin, he created a new grouping, known as AUKUS, aimed at strengthening co-operation with Australia and Britain in responding to the security challenge posed by China’s navy in the Indian Ocean and Pacific.


China, inaccurately, calls it “NATO-like”.


Still, AUKUS involves exactly the kind of long-term, rather than transactional, relationship that Mr Trump dislikes.


Similarly on Taiwan, Mr Trump may be preferable for China.


Mr Biden has sometimes gone beyond the conventional, ambivalent, language about America’s commitments to the island.


He has said repeatedly that American troops would defend Taiwan if China invaded, only for his aides to walk back his comments after Chinese outrage.


Mr Trump is probably far less enthusiastic about protecting the island.


In his memoir, John Bolton, who served as Mr Trump’s national security adviser in 2018 and 2019 before a bitter parting of ways, wrote of Mr Trump’s “grousing” about weapons sales to Taiwan.


Mr Trump was “dyspeptic” about Taiwan, Mr Bolton said, suggesting his boss lacked commitment to a “democratic ally”.


The views of Chinese scholars probably echo official thinking.


In an interview in state media in January, Yan Xuetong of Tsinghua University in Beijing said that the candidates would compete to show “who is more anti-China” than the other: “If we want to prevent confrontation between the two sides from getting out of control and escalating into a conflict, our country needs to take some proactive measures.


” Mr Biden’s approach to China is likely to be more predictable but better organised and enforced, and perhaps a bigger threat in the long run.


Mr Trump’s potential for chaos and excesses could create opportunities for China to outmanoeuvre America but also bring the instability China dreads.


Could there be a way out of superpower confrontation?


Wu Xinbo of Fudan University in Shanghai suggests that Mr Biden offers hope for Sino-American ties.


In an online article he describes Mr Trump as a “unilateralist”, having little need for China’s help.


“But Biden still hopes to maintain America’s dominant position in the world,” writes Mr Wu.


“As long as the United States wants to deal with many global problems, it cannot do without co-operation with China.


” Yet amid a military build-up and fraying trade ties such optimism is rare.


Mr Xi will be watching the vote counts in November closely: the two likely candidates present China with very different challenges.


But even as he waits for a result, he will know that however divided American politics may be, hostility towards China is now a bipartisan matter, and deeply entrenched.


For him and for America the election cycle is part of a longer-term struggle.


Finance & economics | Free exchange
Trump wants to whack Chinese firms.


History provides a guide

Afew months before America’s presidential election in 1980, George H.


Days earlier, Bush’s running mate, Ronald Reagan, had angered China by saying that he wanted an official relationship with Taiwan, which China claims as its territory.


America should stay out of China’s “internal affairs”, said its foreign minister—just as China would not meddle in America’s presidential race.


The prospect of a Reagan victory worried not only China’s leaders but also its exporters.


Under President Jimmy Carter, Reagan’s opponent, America had done them the favour of establishing “normal” trading relations, meaning that they faced the same low tariffs America charged most other trading partners.


Normal relations had to be approved each year by the president and Congress.


Chinese exporters, as well as the American companies that buy from them and invest in them, now face a similar threat from another loquacious and charismatic presidential contender: Donald Trump.


If he wins in November, he has threatened to escalate the trade war he started in 2018 by imposing tariffs of 60% or more on Chinese goods.


His allies have also advocated repealing normal trading relations with China, which became “permanent” in 2000.


A new paper by George Alessandria of the University of Rochester and four co-authors suggests that the way exporters responded to the Reagan threat may hold lessons for new trade wars.


Entering a foreign market is costly for any firm.


It must first establish a “beachhead”, as Richard Baldwin of IMD Business School in Lausanne has written, building distribution channels, advertising itself to potential buyers and bringing products into conformity with local regulations.


Many of these upfront costs are fixed (they must be paid even if sales are small) and sunk (they cannot be recovered if the firm packs up and leaves).


Exporting, even in an era of globalisation, is surprisingly rare.


A study of French manufacturers in 1985 found that only 15% sold to foreign markets.


The figure in a study of Colombian factories was 26%.


Even in China in the mid-2000s, a time of hyper-globalisation, the prevalence of exporting varied from 59% (in furniture-making) to 12% (in paper and printing), according to Mr Alessandria and his colleagues.


Another consequence is that exporting is persistent.


Once a company has established a beachhead, it rarely evacuates from a country.


Firms must believe that the rewards will be large enough and last for long enough to justify upfront costs.


The prospect of tariff hikes and trade wars makes such calculations harder.


Even after Mr Carter lowered tariffs on China, the country’s exporters had to weigh the chances that they would go back up.


The fear was acute in industries like toys where the pre-1980 tariffs were much higher than the “normal” tariffs that applied thereafter.


Likewise, even after Mr Trump raised tariffs on China in 2018, exporters had to weigh the chances that they would go back down.


Exporting from China to America was and remains, in effect, a bet on American trade policy.


The pattern of bets reflects firms’ beliefs about the tariffs they will face.


Although economists cannot directly observe these beliefs, they can observe the export decisions that reflect them.


By examining how trade between America and China has evolved over time and differed from product to product, Mr Alessandria and his co-authors can therefore infer what firms must have believed about future American tariff policy.


They find that the tariff cuts in 1980 took time to become credible.


For several years, exporters from China acted as if the chances of their reversal were 70% or more.


The risks ebbed later in the decade after Reagan made his own visit to Beijing, Shanghai and Xi’an in 1984.


(It was a “breathtaking experience”, he said, although it took him two stabs to snare a quail’s egg with his chopsticks.


) By the time China joined the World Trade Organisation in 2001, the probability had fallen to about 5%.


The dynamics of the trade war in 2018 look similar “but in reverse”, write Mr Alessandria and his co-authors.


Despite Mr Trump’s fiery rhetoric, Chinese exporters did not act in anticipation of his tariffs.