It is fairy tale to suggest haters can be turned into lovers in days. But US President Donald Trump wrought such magic. In the course of 10 days, the unpredictable Republican firebrand made a U-turn from calling the European Union a “foe” to declaring that US and the EU “love each other”.
In an interview with CBS on July 15, Trump called the EU an economic “foe” and “possibly just as bad as China” on trade. But on July 25, Trump tweeted that the EU and US “love each other!” after he and European Commission chief Jean-Claude Juncker agreed to “launch a new phase” in the relationship, following their talks at the White House.
Trump’s abrupt change of attitude towards the long-time US ally came amid escalating transatlantic tensions over issues ranging from trade to defence, Iran and climate change that boiled over at the rancorous Group of 7 and Nato summits recently.
But what underscored the Trump-Juncker summit was not emotional sentiment but serious business as Washington and Brussels agreed to work to achieve an out-and-out free trade bloc, which will have “no tariffs, no barriers and no subsidies”.
If so, it was really “a big day”, as Trump put it, for world trade and for the global economy, one that will also have profound impact on geopolitics. Together, the US and the EU have the largest and wealthiest market in the world, with a population of more than 800 million accounting for more than half of world’s economic output. The US and EU also account for about US$1 trillion in transatlantic trade, also the largest bilateral relationship in the world.
The US-EU deal came just days after the signing of a landmark trade agreement between EU and Japan, which creates an open trade zone covering almost a third of global gross domestic product. It can be expected that a similar US-Japan agreement will be signed, while the US, Canada and Mexico will renew their free trade agreement.
All other developed economies, such as the UK, Australia and New Zealand, are likely to follow suit. The arrangement might also have attraction for some less developed major economies, such as India, Brazil, South Africa, and Asian export-oriented economies like South Korea, Singapore and Taiwan. A US-led and free economies-dominated new world trade system is on the horizon.
The World Trade Organisation will face its most serious challenge since its founding in 1995 as the organisation finds itself falling short of the expectations of many free economies.
These developments also constitute a serious challenge for China, as the world’s second-largest economy and largest merchandise exporter risks being excluded from the world’s largest open market.
Trump and Juncker pledged to work together to reform the WTO to address their common complaints about China, on issues such as rampant theft of foreign technology and intellectual property rights, the behaviour of state-owned enterprises, and subsidised exports of the industrial overcapacity in the country.
What underpins the free trade bloc are the shared values, trade, interests and security concerns among the developed economies, all of which contradict both China’s interests and philosophy.
After all, the US, the EU, the UK, Canada and Japan are all major free economies under the umbrella of the G7. They are also security allies with 22 of the EU’s 28 states being members of Nato, and many are also members of other US-led core institutions.
While presenting itself as a proponent of the free market and a champion of economic globalisation on the world stage, China’s communist leadership is shy of carrying out substantive reform to its party-led and state-dominated capitalism, for fear of undermining its absolute grip on power. This is also the chief source of China’s long-standing dispute with its major trading partners.
The biggest challenge is that China’s one party-ruled authoritarian political system will inevitably constrain its effort to fully embrace a truly free-trade institution.
