Europe Caught in the Middle as Trump Threatens China

FRANKFURT, Germany — One is a good customer, a military ally and an old friend, although lately its behavior has been erratic.

The other is also a good customer, and despite a few spats and some lingering mistrust, it’s getting to be a more lucrative and dependable business partner all the time.

Which side would you choose?

That more or less sums up the dilemma confronting Europe as it watches the escalating conflict between its two biggest trading partners, the United States and China.

The United States is Europe’s biggest market for exports like cars and other goods, not to mention a NATO ally. But China is big, too — and getting ever bigger.

The Trump administration has also threatened the institutions that govern global relationships, calling NATO obsolete and stoking trade tensions. So China no longer automatically seems like the less reliable partner.

European leaders were largely silent after President Donald Trump threatened to impose another $100 billion in tariffs on Chinese goods. But watching from a safe distance as China and the United States argue is not an option for Europe. Its economy is too deeply entwined with both.

“What can they do in terms of staying out of the crossfire?” said Adam Slater, lead economist at Oxford Economics in Britain. “Not a lot.”

Although Trump’s threats are aimed at China, Europe is certain to suffer collateral damage if the president follows through. A spiraling war of tariffs and counter-tariffs would interfere with the global flow of raw materials and components for manufactured goods, disrupting the European economy. And some European companies, like the German carmaker BMW, manufacture in the United States and export to China. Such companies would see their sales suffer if China were to slap tariffs on U.S. goods.

The mere threat of a trade war has already unsettled financial markets and made it more difficult for companies to raise money, Benoît Coeuré, a member of the executive board of the European Central Bank, said Friday. “None of this supports growth and employment,” Coeuré said at a conference in Cernobbio, Italy.

The disruption to world trade comes at an unfortunate time for Europe. Recent economic indicators suggest that the Continent’s recovery, after a decade of crisis, is losing momentum. Industrial production in Germany shrank 1.6 percent in February, according to official data published last week.

But European leaders’ biggest fear may be that Trump’s belligerent approach to trade will destroy the postwar system for resolving conflicts, which involved getting all the parties together in one room. Trump has already succeeded in forcing countries to beg for individual exemptions to steel and aluminum tariffs, bypassing the World Trade Organization, the usual forum for trade disputes.

“He has created an environment to divide countries,” said André Sapir, a senior fellow at Bruegel, a research organization in Brussels. “Maybe we will remember that 2017 was the last year of the functioning of the multilateral system.”

It’s possible Europe might enjoy a few short-term benefits as China and the United States duke it out. If, for example, China were to raise tariffs on Boeing airliners, Boeing’s European rival, Airbus, could take advantage. But positive effects of that sort are not likely to outweigh the risks.

European companies have invested far more in the United States over the years than they have in China. But increasingly, China is where the action is. Germany’s total trade with China, exports and imports together, is already bigger than it is with the United States. And China is the biggest single market for companies like Volkswagen, Europe’s largest carmaker. China is also where more German companies are putting their money.

In a poll published Thursday, 39 percent of German companies questioned said they planned to invest in China this year, up from 37 percent in 2017. The number that said they planned to invest in North America dropped to 35 percent, from 37 percent, according to a survey, by the Association of German Chambers of Commerce and Industry.

Even so, Europe remains wary of China’s intentions. Though European leaders use tamer language, they share some of Trump’s concerns about unfair competition from Chinese companies that receive government subsidies. They worry that Chinese companies are stealing European technology, and accumulating too much economic power.

In recent years, Chinese investors have snapped up European assets, including Greek ports, German machinery companies and a 10 percent stake in the automaker Daimler. The Chinese government’s “Made in China 2025” campaign, a plan to dominate cutting-edge industry, is a threat to German companies that supply precision machinery that the Chinese companies are not yet able to manufacture themselves.

Leaders in Brussels, Berlin and Paris have called for tighter scrutiny of Chinese acquisitions in Europe, though it is unclear how tough they will be.

At the same time, Europe and the United States have been through a lot together, most notably the Cold War. Both are multiparty democracies with free market economies, unlike China’s one-party autocracy. And European and U.S. historical and cultural ties go back centuries.

Still, a trade war could push Europe closer to China.

Europe’s most immediate preoccupation is to resolve its own trade disputes with Trump. Cecilia Malmstrom, the European commissioner for trade, is negotiating with Wilbur Ross, the U.S. commerce secretary, about winning a permanent exemption from tariffs on steel and aluminum imports. A temporary exemption to the tariffs expires May 1. Malmstrom and other European leaders have also made plain their unhappiness with what they see as Trump’s crusade to undermine the World Trade Organization as the arbiter of trade conflicts. They may see China as a potential ally in efforts to preserve the WTO, of which China is also a member.

“The EU believes that measures should always be taken within the World Trade Organization framework which provides numerous tools to effectively deal with trade differences,” a representative for the European Commission said in a statement.

For the moment, there is little Europe can do but hope that Trump’s bluster is just a tactic to win concessions from China, and that no trade war will break out. There are few other good options.

Sapir of Bruegel argues that, longer term, Europe should push for reforms of the trade body to respond to U.S. criticism that the organization is too slow moving, and has failed to curb unfair competition by China. Trump is unlikely to take much interest in fixing the global trade regime rather than ignoring it, Sapir said, but it’s still worth a try.

“That is the only structural solution,” Sapir said. “Otherwise, we will always be caught in between.”