THE G2 SCENARIO

Source: BertelsmannStiftung

China and the US recognize the added value of working closely together and dominating the world. Europe plays an important supporting role.

American democracy and Chinese autocracy co-exist largely in peace. Despite all their systemic differences, the superpowers recognize the potential offered by working closely together so they can, for the most part, shape the world as they like. Therefore, each makes political concessions to its rival, a move both portray at home as part of a larger success strategy. It is rare for either side to provoke the other since neither wants to jeopardize their economic cooperation. The EU makes do following in the wake of both major powers, becoming the world’s undisputed third power , although it is less relevant as an independent political player.

At the behest of the US and China , multilateral institutions are reformed to primarily serve the interests of the two superpowers. Both rivals use the organizations for their own purposes while preventing them from influencing their own activities to an undue extent.

The supranational institutions thus engender resentment in the rest of the world, and numerous bilateral partnerships between third states are formed. The partnerships allow countries to escape the Big Two’s immediate sphere of influence. As a G2 with opposing ideologies, China and the US dominate the world’s geopolitical framework.

Their joint influence enables them to recognize hotspots  around the globe early on and to defuse them if their shared economic interests are at stake. Europe only takes on the role of stabilizing power when the G2 sees no reason to get involved.

World trade

The US joins the China-led Regional Comprehensive Economic Partnership (RCEP), which largely quells the trade war between the G2 and positively affects global trade. The WTO sets the world’s trade policy framework, which China and the US shape to their own advantage, leaving other players few possibilities for opting out.

This is especially true since global supply chains generally function smoothly, benefiting all developed countries, particularly the EU. The US also concludes a free trade agreement with Europe to serve as a counterweight to the EU-China investment agreement. Economic interests push the focus on respecting human rights and civil rights  into the background.

Economic policy

The G2’s cooperative efforts shape global economic competition. However, in many fields, Americans and Europeans compete fiercely with the Chinese, with everyone racing to gain the lead in key technologies. Yet everyone is willing to make concessions so as not to destabilize the overall order.

China gives foreign companies an equal chance to participate in its public tenders. The US financial industry is granted access to the Chinese market. In return, Chinese technology players can again increase their operations in the US if they meet certain conditions. Export controls are kept to a minimum. Companies from the EU benefit from a level playing field in the People’s Republic.

Technology and innovation

China succeeds in catching up in key technologies since the Americans permit exports of semiconductor technology to the People’s Republic. In return, controls on US tech firms in China are relaxed, as are framework conditions, allowing the companies to gain market share. China and the US agree on basic rules for key technologies, which mainly benefit European companies since they must no longer duplicate their development activities.

With that, Europe loses its technological sovereignty because the G2 calls the shots internationally. Multilateral organizations create clear dividing lines between critical and non-critical technologies that are recognized and respected by all stakeholders. There is more trust among all players when planning and implementing international partnerships.

Norms and standards

As the largest economic powers, the Chinese and Americans set global standards, largely designed to be uniform, to the extent that national security is not directly threatened. For Europe, this means having to curb its ambitions to be the standard maker in parts of the world since the G2’s market power, and political influence are too great. Companies benefit from the mostly uniform standards.

Natural resources

Trade in raw materials remains fiercely contested. Yet growing trust between the superpowers means that the US and Europe are dependent on Chinese supplies with less suspicion. Moreover, joint G2 initiatives guarantee all players access to oil and natural gas.

Climate protection

Climate change is the focus of global collaborative efforts in the G2 scenario as well. All the major powers work together to develop market-based tools for slowing climate change, such as carbon pricing. Those who are technologically competitive in this area have a sizeable advantage over other players. The EU establishes itself as a pioneer. Its technologies and strategies prove fruitful in China and the US, among other markets

Implications for European and German businesses

In the G2 scenario, it is easier for companies to see where international relations are headed. Since there is no threat of ongoing crises resulting from geopolitical discord, the framework conditions for long-term investments are stable. The US-China alliance spares German industry the dilemma of deciding in favor of one market over the other. There is also no need to develop two production lines that operate independently of each other, making goods for China and the US.

European companies are very active globally . At the same time, the European market plays a key role in their success – especially since the G2 uses its combined power to dominate in other regions of the world. This makes it all the more important for companies to leverage their home-field advantage in Europe to lay a stable foundation for their business operations.

The Chinese market becomes more attractive because Beijing creates a level playing field for foreign investors and vendors as part of its close cooperation with the Americans.

Risks

The dominant position of the US and China means that Europe becomes much less relevant as a political and technological player. European firms must acquiesce to outside pressure. The G2 nations use Europe as the main playing field for their industrial competition, which they do not want to engage in openly in either of their home markets.

As a result, European companies experience an extreme level of competition in Europe from both China and the US and are threatened with being crushed between the two as the superpowers pursue their own interests.

Opportunities

European companies use the predictability, reliability, and stability of international relations to concentrate on their core competencies and demonstrate their competitiveness.

The G2 scenario markedly reduces the risk of a conflict with global implications between the US and China, and businesses become much more optimistic as a result. They plan for the long term and are ready to invest.