Brussels Briefing

Sep 28, 2023

Rivals, Not Enemies

The European Union says it sees China as a partner, a competitor, and a systemic rival. Europe’s priority now should be ensuring that Beijing does not become an enemy.

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European Commission's Executive Vice President Valdis Dombrovskis and Chinese Vice Premier He Lifeng attend a joint press conference following the 10th China-EU High-Level Economic and Trade Dialogue at the Diaoyutai State Guesthouse in Beijing, China September 25, 2023.
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How should Europe deal with China? European Commission President Ursula von der Leyen’s latest gambit is to talk tough on trade relations without committing to concrete actions. She needs to tread carefully as she looks toward a second term—which, as yet, she is not officially seeking—and tries to keep the support of French President Emmanuel Macron and German Chancellor Olaf Scholz. Neither leader comes from her center-right political party, the European People’s Party (EPP), but Scholz has a strong incentive to keep a top job in German hands while Macron may relish a second chance to play monarch-maker. Both therefore have reason to back her re-election if she plays her cards right.

The anti-subsidy investigation of Chinese-made electric cars, announced in her State of the Union address on September 13, sounds aggressive but also buys her time to weigh any next moves carefully—or step back if a softer approach turns out to be in the EU’s interests. So far the finger-pointing has followed familiar contours: After von der Leyen unveiled her probe with stirring rhetoric about distortions and unfair competition, the Chinese government called the investigation a protectionist act aimed at distorting the supply chain. In a speech in Beijing on September 23, EU trade chief Valdis Dombrovskis said the EU will follow all due process: “I can assure you that we will do this work diligently, in consultation with the Chinese authorities and stakeholders, and we will follow well-established rules in doing so.”

While some European manufacturers fear that cheap Chinese imports will box them out of their own domestic markets, others realize they need China to buy electric vehicles as well as make them. Speaking in Beijing at the EU-China High-Level Digital Dialogue, the first in three years, European Commission Vice President Vera Jourova acknowledged that “systemic rivalry” has been the most prominent element of EU-China relations in the technology arena. After all, the EU has taken steps to limit use of gear made by Chinese telecommunications giants Huawei and ZTE, and even to ban social media TikTok from official EU work-related devices. Then again, the EU needs Chinese supplies of solar panels, batteries, and commodity chips.

The EU, China, and Russia’s War

Isolation is a non-starter economically even before geopolitical factors come into play. Yet Chinese positioning toward the bloody conflict on Europe’s eastern border requires at least as much consideration as the economic sparring. “We consider how China interacts with Russia’s war against Ukraine to be a determining factor for EU-China relations going forward,” Jourova said on September 19.

Brussels needs Beijing to help in cordoning off Moscow while the fighting continues. On the one hand, China is regularly criticized for maintaining trade ties and making the yuan accessible to Russians looking to circumvent external curbs. On the other hand, some say China is working behind the scenes to cooperate where it can.

A recent back and forth underscores how difficult it can be to gauge how the EU and China are working together: In June, the EU’s 11th round of economic sanctions included three Chinese companies on its list of entities aiding Russia. News reports said eight companies had originally been in the EU’s sights, with five removed after the Chinese government agreed to put pressure on them to stop doing Russian business. But Chinese officials then denied the maneuvering.

It’s hard to tell whether China is being helpful and poor at communicating, or if the mixed signaling reflects a decidedly mixed approach. Certainly, the war in Ukraine is complicating efforts to resolve other diplomatic tensions. For example, when then-Dutch Foreign Minister Wopke Hoekstra visited Beijing in May, The Hague was preparing to put export restrictions on more of the top-tier semiconductor manufacturing equipment made by Netherlands-based ASML. Yet the Dutch diplomat’s official remarks focused on a desire for China to allow more market access to European firms. Their discussion reportedly lasted four hours—double the planned allotment—as Hoekstra tried to insist that Russia was the clear aggressor in Ukraine while his counterpart Qin Gang (who has since vanished and been replaced by Wang Yi) emphasized the “complex reality” and long history of the situation, according to Dutch newspaper De Volkskrant.

Playing the Heavy

EU member states too often cope with the disconnect between their economic ambition and security concerns by looking to Brussels to play the heavy while individual countries cozy up to China in support of local economic aims. This tension makes it unlikely that von der Leyen will be able to get new legislation through in the waning days of her current term. Member states do not agree among themselves and also want to score points with domestic voters, so it therefore can fall to Brussels to rein in the member states rather than leading them forward. Even where the European Commission takes an aggressive line with investigations, monitoring instruments, and other alarm-raising measures from its various toolboxes, follow up actions will be tricky to push through.

Germany looms large in the EU’s bid to form a coherent view, having backed the planned Comprehensive Agreement on Investment (CAI) with China at the end of 2020, then joined the EU in pulling back as the diplomatic outlook changed. Some years on, the EU’s largest economy has barely been able to put together its own agenda toward China, let alone lead the way for 26 other member states who may see Germany itself as competitor as well as teammate.

Observers say Berlin’s three-party coalition reflects at least three different approaches, further complicated by spillover effects from Washington. Security, economic, and climate concerns all butt heads. In putting out its first-ever National Security Strategy this year, followed up by a China-specific overview, Chancellor Olaf Scholz’ government at least set a reference point. But it’s hard to see how helping its exporters can row in the same direction as efforts to reduce risk—and therefore limit dependence—on other kinds of Chinese ties.

There is a growing disconnect between Germany’s short-term and long-term goals, said Francois Chimits, Brussels analyst at the Mercator Institute for China Studies (MERICS). “What the German automobile industry wants is to be able to develop cars and do R&D in China, to limit the short-term and medium-term costs of the unstoppable rise of Chinese electric vehicles (EVs) capacity,” he said. “The problem is, this contradicts the long-term interest of the German economy overall, or at least that is the impression of many.”

The EU is broadly concerned that its industrial subsidies aren’t keeping up. In addition to longstanding worries over Chinese state-owned enterprises, officials now are concerned that the United States is also taking unfair advantage with the green-technology tax breaks strewn through last year’s Inflation Reduction Act. Not only is Washington aiding domestic firms, it also has set limits on foreign supply chains that—while aimed at blocking out Chinese firms from benefitting off US largesse—have also had the effect of excluding anyone who does not have a bilateral trade deal, including the EU. While talks are underway to work out a solution for the transatlantic allies, the political overtones of the American legislation have caused some politicians to wonder if the ultimate effect will be to push Brussels closer to Beijing.

A Tricky Inquiry

One of the reasons von der Leyen’s anti-subsidies probe is so tricky is that China is investing in EU-based production as well as making things on its own shores. It will be hard to impose anti-dumping tariffs if the European investigation concludes that China has used its investments to make itself more competitive, rather than purely undercut its rivals on price.

And foreign direct investment is a factor in both directions. From a macroeconomic point of view, China’s investment in the EU is not large, while EU investments in China are bigger but still small: The inward FDI stock of China in the EU amounted to €69.9 billion in 2021, that of the EU in China to €233.6 billion, wroteElcano Royal Institute analyst Federico Steinberg and German Council on Foreign Relations (DGAP) director Guntram Wolff in a paper presented in September to EU economic and finance ministers. They counsel that any outbound investment screening or export limitations need to be implemented sparingly and rigorously to avoid gumming up the works. Defense-minded chest thumping should not take precedence over the most important security concerns. “A narrow definition of high-end dual use technology may be the right compromise between preserving security interests while avoiding large economic costs,” they wrote.

The EU’s efforts to contain risk and guard its security interests come at the same time as concerns are rising over its trade deficit with China, which reached a record high of €396 billion last year. EU trade chief Dombrovskis opened his visit to Beijing in September with a warning that political and economic headwinds could push the trading partners further apart.

In charting a course forward, however, the EU cannot ignore its long term need to coexist and ideally also work constructively with China on joint challenges like climate change and global development.  Long-term relationships will be essential economically and geopolitically. The most important thing will be to make sure a tense relationship does not turn purely combative. Europe would have little to gain from such a scenario, and much to lose.

Rebecca Christie is a non-resident fellow at Bruegel, the Brussels-based economic think tank, and the Brussels columnist for Reuters Breakingviews.

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