THE COLD PEACE– STATUS QUO

Source: BertelsmannStiftung

The West joins forces. The US, Europe, and like-minded partners form a counterweight to China’s sphere of influence.

The Western democracies (the US, EU, and their partners) confront an authoritarian power bloc led by China’s one-party state. The spheres of influence of both major blocs are clearly delineated. The US is the leading power in the West; the EU is the junior partner.

Yet, the US’s leadership role is not absolute. Europe tries to maintain its autonomy, e.g., regarding its relations with China, and expand its influence in the world. China works to establish new international institutions and to include Russia in the creation of an anti-Western bloc.

The US and Europe want to join forces with like-minded states, such as Japan, South Korea, Australia, and India, to establish new supranational structures based on democratic values. Chinese initiatives like Belt and Road try to contain these structures, for example, by strengthening multilateral institutions, such as the World Bank and the Asian Development Bank, and increasing their influence in the corridors of the New Silk Road.

World trade

World trade is marked by two competing but not wholly encapsulated trading areas with different value networks. The World Trade Organization (WTO) is helpless in the face of this bipolar development and unable to prevent the fissure from widening. After many years of estrangement, the EU is not so close to the US that it accepts the latter’s standards and values unconditionally.

The EU does not want to be merely a “tag-along” but attempts to forge its own path so it can respond more autonomously and prevent itself from being used as a pawn should there be an escalation of the Cold Peace. Europeans and Americans strengthen the transatlantic connection and found new global institutional structures that categorically exclude the competing Chinese/ Russian bloc.

These structures are the result of the new transatlantic alliance with the European Union, yet they also welcome India, along with South American and African states. The new structures are meant to provide a super-structure for the Western nations’ bilateral agreements, simplifying the plethora of rules and regulations arising from the many bilateral agreements and offering a response to Asian initiatives such as the Regional Comprehensive Economic Partnership (RCEP).

Beijing looks beyond these structures for partners for additional free trade areas. Trade between the major blocs becomes more complicated, costing China its unofficial title as “world export champion.”

Economic policy

The US, the EU, and their like-minded partners collaborate in key industries and future technologies. At the same time, each player pursues its own economic policy. Mistrusting the authoritarian bloc, the EU follows to some degree the trend towards national security evident in the US, thus banning some Chinese products from the European market.

This is one reason why China is unable to reach all its industrial policy goals. Moreover, the country continues to lack technological autonomy in many sectors of the economy. The Chinese government reacts with a rigorous, state-capitalist economic policy that lays out a clear line the country’s businesses must follow, allowing them little leeway.

European and, in particular, German companies are increasingly caught between the two fronts. Pressure mounts within the transatlantic alliance to choose between the US and China, or at least to reduce dependencies on China.

Technology and innovation

The EU and the US cooperate very successfully in several areas by combining their expertise. A major driver here is the desire to gain the greatest possible independence from authoritarian China. Europe begins producing more once again; the US dominates the data economy. Security, including data security, plays an especially important role here.

At the same time, the Europeans succeed in retaining their high data protection and privacy standards within the alliance. Successful projects such as GAIA-X allow the EU to strengthen its digital sovereignty. Around the globe, innovations are politically instrumentalized.

Yet, the blocs’ separate technological solutions generate high costs. China attempts to compete by implementing innovation programs that are controlled at a high level within the state structures. China also insists that know-how be transferred and engages in industrial espionage.

Beijing also signs bilateral agreements with other countries to create a sphere of influence in which Chinese technology predominates, and lock-in effects can be achieved.

Natural resources

There is fierce competition for energy and natural resources. A top priority for the Western bloc is to become independent of China but also of Russia’s natural gas.

As a regional hegemon, China attempts to dominate the Asian realm as a supplier of energy and raw materials to guarantee its own access to raw materials. Shipping routes for natural resources and long-haul pipelines for gas and oil are secured through a major commitment of military resources.

Terms and standards

Europe prevails now and then but must largely allow the US to take the leading role. Many industrial and technical standards from the US thus become norms in the EU. In the meantime, China promotes its own standards, ensuring they enjoy primacy within the authoritarian bloc.

Yet Beijing also uses bilateral agreements as a way of increasing its influence. Many European companies face the dilemma of deciding in favor of one side or another since they cannot readily meet both blocs’ requirements or must pay a high price if they do.

Climate protection

Environmental policy is coordinated less and less on a global scale and increasingly decided within each bloc instead. Combatting the causes of climate change becomes an afterthought, and environmental policy devolves into a “blame game” between the two blocs.

Limiting the consequences of climate change gives rise to a hotly contested market: The Chinese see an opportunity to set global standards here; the Western partners try to find responses to China’s approach, above all through the use of technology.

Implications for European and German businesses

In this scenario, all markets are relevant for most European companies. North America, Europe, and China are the most important regions. Some companies, however, must adjust to having separate production lines for regulatory reasons. The mood in the business community is subdued due to fears that political pressure could force companies to decide in favor of either the Chinese or the American market.

The European single market is still crucial for the German economy. However, the US and Asia, at approximately 30 percent each, remain equally important pillars for the business strategies of many companies.

In this scenario, companies attempt to navigate between being commandeered by politically dominant players and maintaining a presence in important markets. Even if the peace is a cold one, companies still have more leeway than in a scenario involving confrontation and conflict.

Regional free trade agreements also counterbalance uncertainties in a Cold Peace since they facilitate market access, reduce bureaucracy costs, and lower tariffs.

Their strong networks allow German companies to maintain reliable global supply chains.

Risks

The greatest risk in a Cold Peace would be an escalation of tensions between China and the US. The danger here lies in punitive tariffs, diverging standards, incomplete supply chains, and the threat of declaring political allegiance to one bloc over another.

Opportunities

The Cold Peace scenario offers the German economy greater opportunities compared to other scenarios. The Americans are willing to make greater concessions to Europeans to create a global counterweight to China.