Breaking the EU-China 'Dialogue of the Deaf'
"If current tensions and conflicts are allowed to continue, and if economic ties are left to be influenced deeply by political factors, economic relations will encounter even more severe challenges."
Today’s edition begins with an introduction by Grzegorz Stec. Greg is the head of the Mercator Institute for China Studies’ (MERICS) Brussels office. He is a leading voice on EU-China relations as well as being a friend and former colleague of mine. – Thomas
Professor Jian's piece underscores a shift in EU-China relations. The "cold politics and hot economics" dynamic of the past years is changing, indicating that economic relations are also heading into a cooler period.
However, this change predates the EU’s adoption of its de-risking approach, which is a symptom of the challenges besieging these relations, not a cause. The EU’s policy towards China has evolved gradually from an embrace of win-win rhetoric through calls for a level-playing field and reciprocity, to developing a policy toolbox aimed at mitigating risks and market distortions as dialogue with Beijing failed to sufficiently address them. Criticism of the EU's de-risking strategy overlooks its underlying rationale: to isolate and address specific concerns without rupturing the broader relationship.
Yet, broader economic concerns persist for the EU, particularly regarding China’s state-led development now guided by its “new productive forces”. This has the potential to exacerbate uneven competition and market distortions in sectors strategic for the “fourth industrial revolution” and green transition such as electric vehicles, green tech, or semiconductors. This has prompted the EU to launch new trade investigations and deploy instruments like the Foreign Subsidies Regulation, much to Beijing's chagrin. While the two sides should search for ways to navigate ongoing frictions, they are unlikely to significantly compromise on fundamentals of their respective state-led and competition-based economic models.
The “true interdependence” described by Jian as a stabilizing measure, which has similarities with the mutually assured destruction doctrine, also faces challenges. It could only work if the two sides shared the practice of weaponizing dependencies. But while Beijing by now has a track record of such moves – as evidenced by its actions against Lithuania, Australia, and Norway or its leveraging of rare earth exports like gallium or germanium – the EU does not use leveraging dependencies as a political tool.
Also, separating politics from economics does not seem particularly plausible right now as EU-China relations lack strategic trust. China’s support of Russia’s military-industrial complex, including through dual-use exports, significantly undermines trust on the European side. All the while, Beijing likely interprets the EU’s de-risking policy moves as linked to China-US dynamics rather than as autonomous expressions of European concerns.
The fundamental challenge remains a difference in perspective towards the relationship. Beijing wants to extend the status quo of a “comprehensive strategic partnership”, while the EU takes actions to address its longstanding and increasingly pressing concerns. Although economic dynamics still provide a degree of stabilization, economic complementarity is giving way to competition.
This does not mean that the EU-China relationship is bound to morph into confrontation. But there are more economic and geopolitical friction points on the horizon. Jian’s proposal of competition-focused consultations is a start, but navigating the friction points will require concrete concessions and frank dialogue going beyond positive slogans. This will be necessary if the two sides are to go beyond simple damage control and try to develop a new constructive and realistic dynamic for the EU-China relationship.
Grzegorz Stec
Key Points
EU-China relations have entered an era of increasing economic competition.
They are currently faced with three main challenges: market access restrictions on both sides, the EU’s massive trade deficit with China and Brussels’ de-risking policy.
None are likely to be resolved for the foreseeable future.
In view of the growing tensions between Brussels and Beijing and the risks that these entail, both sides must find a way of stabilising their economic ties.
To this effect, five steps should be taken:
Positive list: Against a backdrop of growing protectionism, negative lists are no longer able to ensure the smooth development of economic relations. Both sides should consider drawing up a positive list that would help boost overall confidence and would not affect areas of cooperation that might fall outside this list. Beijing could even consider doing this unilaterally.
Judicial cooperation: To prevent competition from spiralling out of control, both sides should cooperate more closely in the formulation and/or enforcement of relevant economic rules and laws. More transparency on issues such as subsidies is also needed.
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True interdependence: Making sure that the EU and Chinese markets remain strongly enmeshed in one another is essential if relations are to remain stable and conflicts avoided. True interdependence means that one side should not be overly dependent on the other, nor should one side overly dominate certain industries.
Reducing political interference: The EU should stop letting geopolitical considerations and ideological differences get in the way of its economic relationship with China. This will end up doing more harm than good.
Cooperation in third markets: The EU and China possess complementary advantages that should be combined if “win-win results” are to be achieved in third markets. Cooperation not competition should be emphasised.
Economic ties remain the cornerstone of EU-China relations and the key to stabilising this important relationship. Both sides must be more willing to consider each other’s demands and needs and not let politics get in the way of economic exchanges.
The Author
Name: Jian Junbo (简军波)
Position: Deputy director of the Centre for China-Europe Relations, Fudan University
Research focus: Politics of the European Union; EU-China relations; Chinese diplomacy
Education: BA Nankai University; MA-PhD Fudan University (2000-2006)
Experience abroad: Visiting scholar in the United Kingdom, Belgium and Denmark
CHINA-EUROPE WATCH: HOW CAN EU-CHINA ECONOMIC RELATIONS BECOME MUTUALLY BENEFICIAL? REFLECTIONS TRIGGERED BY A BATTERY FACTORY
Jian Junbo (简军波)
Published in The Paper (澎湃新闻) on 1 April 2024
Translated by an ATA-certified linguist
(Illustration by DALL·E 3)
On March 25th, a German car battery manufacturer, Northvolt, held an official opening ceremony in the northern German state of Schleswig-Holstein. German Chancellor [Olaf] Scholz and Economy Minister [Robert] Habeck attended the ceremony and cut the ribbon. As a domestic battery manufacturer in Germany, it has obtained over 900 million euros in government funding and guarantees [Note: Northvolt is in fact a Swedish company].
Germany's substantial aid for a domestic battery manufacturer reflects the fierce global competition in this sector. The United States has introduced substantial subsidies to attract investment from electric vehicle-related manufacturers worldwide. In the global industrial chain for car batteries, China is the top industry leader. Against this backdrop, the German government has a strong incentive to do all it can to support the production of domestic electric car batteries in order to consolidate its position as an established manufacturing powerhouse.
However, behind this news lies the current state of EU-China economic relations—whether intended or not, and regardless of the ultimate prospects of this battery plant, this [development] is aimed at “challenging competitors from China’s car battery industry”, as was asserted by some German media. It can be said that to some extent it symbolises that Sino-German, and even EU-China, economic relations are entering a more competitive and challenging era.
China and the EU’s Main Concerns Regarding Their Bilateral Economic Ties
From a more macro perspective, EU-China economic relations face many functional and technical issues. But these are not just of a functional or technical [nature] and are often related to bilateral political relations. Broadly speaking, these issues mainly include:
Market access. Both sides complain about each other’s setting excessively high or inappropriate market access thresholds, which restrict further investment and export of goods. The EU believes that China should open up more sectors and industries to European capital, while China believes that the EU has introduced too many policies and legal instruments in recent years that are detrimental to Chinese investment and exports to Europe, such as the EU’s investment screening mechanism, anti-forced labour regulation, Carbon Border Adjustment Mechanism (CBAM) and its “supply chain law” currently under review. Many of these policies and regulations are not specifically targeted at China, but as [China is] one of the EU's largest trading and investment partners, they have far-reaching implications for EU-China economic ties.
The trade deficit. Since the outbreak of the COVID-19 pandemic, the EU has had a huge trade deficit with China, reaching nearly 400 billion euros in 2022. Before that, there had never been such a large surplus or deficit. And although there has long been a surplus in China's trade with Central and Eastern European countries, the total volume of trade between both sides is not large when compared with the total amount of EU-China trade, so its impact has been limited. In recent years, the significant growth in China's surplus with the EU has led to strong concerns within the bloc.
The EU's implementation of a “de-risking” economic policy towards China. From the initial “decoupling” from China to the implementation of its “de-risking” policy over the past year or so, the EU is gradually promoting and implementing [policies] with the aim of shifting supply chains that have a “critical dependency” on China away from our country. This is an economic policy aimed at China that has strong political and discriminatory overtones. It assumes that EU-China economic ties will one day suddenly rupture for one reason or another, [thereby] impacting the economic development of Europe. The implementation of this “de-risking” policy is having a serious impact on the confidence of investors and business people from both China and Europe with regards to developing economic relations with the other side. It is also changing [their] ways of doing business, such as the increasingly cited strategies of the segmentation and localisation of production operations in the manufacturing industry, whereby investments in one country or region primarily cater to that country or region’s market.
These three major concerns correspond to the three main challenges faced by EU-China economic relations. Realistically, however, finding joint ways to resolve these three major challenges seems difficult for the foreseeable future. Against a backdrop of global protectionism and mercantilist attitudes, market access thresholds are unlikely to be lowered further and may even be raised in some areas. As far as EU-China relations are concerned, it may be difficult for China to open up further certain strategic and livelihood-related sectors to European capital due to considerations relating to the country’s comprehensive security. [Similarly,] the EU, is set to adopt increasingly strict standards for foreign investment and the entry of foreign goods into the European Union based on the three major considerations of “security, human rights and environmental protection”, thereby hindering the entry of Chinese capital and commodities as well as [the development of] engineering projects.
The trade deficit problem has structural factors at play. Against the backdrop of a slowing domestic economy, Chinese companies are increasing their foreign investment and commodity exports in search of new development opportunities. The EU, for its part, [is suffering from] the overall depressed state of its member state economies. Its manufacturing industry and exports have been hit, leading to a decline in its export capacity. It was therefore inevitable that the EU would experience a [growing] deficit in its trade with China. This whole situation seems difficult to change in the short term. “De-risking” has strong geopolitical overtones and is [set to be] a long-term policy of the EU. Thus, its impact on the economic relations between China and the EU will be long-lasting.
EU-China Economic Relations Urgently Need a Fresh Start
Before the COVID-19 pandemic, there were some frictions and differences between China and the EU in their economic relations. However, both sides overcame these and became one of each other’s largest long-term trading and investment partners. [But] times have changed. EU-China economic relations are facing increasingly severe challenges. Especially from our perspective, the European Union is currently adopting too many measures that aim to hinder the healthy development of its economic relationship with China, such as the recent anti-subsidy probe into electric vehicle imports from China and the potential anti-subsidy investigation into a bid by a Chinese car [company] in Bulgaria [Note: this was about electric trains, not cars]. These actions are seriously damaging the resilience of EU-China economic ties and even the overall relationship in general.
On account of the current situation, both China and the EU have the obligation and the duty to promote jointly the development of healthier and more stable economic ties with one another. The main reason for this is that both sides need to rely heavily on each other's markets in order to grow their respective economies. There is no alternative to this [除此之外别无他途]. Being (one of) each other’s most important economic partner(s) [作为相互最主要的经贸伙伴(之一)], a damaged bilateral economic relationship will have a profound impact on the prospects of their respective economic development. If the current tensions and conflicts are allowed to continue, and if economic ties are left to be influenced deeply by political factors, EU-China economic relations will encounter even more severe challenges. This is ultimately not in the interests of either side.
With this in mind, although it may not be possible to make the difficulties they are currently experiencing go away quickly, both sides can work together to address them in the following ways:
First, introduce a partial “positive list”
For modern societies, “what is not prohibited by law is allowed” [法无禁止即可为]. This is in fact an important foundation for the protection of social freedoms whereby a “negative list” is laid out through laws. In the case of EU-China economic relations, a “negative list” was originally used so as to lay the foundation for the two sides to be able to trade with [and invest in] each other freely. However, nowadays, a large number of economic exchanges are either intentionally or unintentionally prohibited. Relying solely on a “negative list” is no longer able to ensure free economic exchanges between the two sides, nor is it able to provide [sufficient] confidence that the two sides will be able to engage with one another normally. Thus, to prevent the deterioration of bilateral economic ties, a “positive list” for this economic relationship [should be] established through joint consultation and negotiation. This would not affect cooperation that falls outside the list and could boost confidence as well as provide opportunities for both sides to engage in substantive cooperation. As far as China is concerned, if it were not possible for China and the European Union to produce together a “positive list” in the field of bilateral investment and trade, China could draw up such a list for the EU in accordance with our country’s actual needs and national interests. [This would help] uphold a high-quality business environment that is open to the EU as well as consolidate and safeguard interdependent economic ties between the two sides.
Second, engage in judicial cooperation in areas of competition
With China’s rapid economic development over the past few decades, competition between the two sides in industrial chains and technology has become increasingly fierce and their overall economic complementarity has gradually decreased. Therefore, to prevent harmful and ineffective competition in many areas and sectors of their industrial chains, both sides must engage in judicial cooperation in [these] areas of competition. This includes coordination in the formulation and enforcement of relevant regulations and laws as well as international judicial cooperation.
According to the current development trend, as China exports high-quality goods (specially manufactured goods) to Europe, the EU’s investigations and countermeasures against the anti-competitive aspects of Chinese products are likely to increase. This will seriously affect the healthy development of economic relations between the EU and China. In the long run, this will also be detrimental to European companies’ competitiveness and will disrupt the balance of the entire global economic market. Therefore, it is essential for China and the EU to engage in bilateral discussions about the competitive landscape surrounding their products and investments. They should encourage [their respective] markets to adopt a mutually transparent approach on relevant matters (such as subsidies and product pricing) and optimise their competitive environments. [Efforts should also be made to] foster EU-China economic relations through policy guidance and bilateral consultations, all within a fair, transparent and straightforward framework.
Third, seek true interdependence [真正的相互依赖].
Interdependence reflects international economic relationships in the era of globalisation. However, with the deepening of globalisation, some countries have become more dependent on others and the industries of some countries have gained overwhelming competitive advantages over the industries of others. The above situations all undermine and hurt true interdependence, which is an important prerequisite for the healthy and stable development of economic ties between countries. Once interdependence is broken, the stability of bilateral economic relations will enter a fragile stage. Thus, if China and the EU truly want to have a stable and healthy economic relationship and prevent it from entering such a stage, they should work together towards building true interdependence.
This means that neither side should have a lasting dominant position in the other’s market through their supply chains, nor should certain industries be detached from the tightly intertwined industrial chains, [which would] break the mutual integration of their respective industrial chains. In short, EU-China economic ties can neither form one-sided dependence, nor reduce their level of dependence below what is necessary. Instead, both sides should maintain true interdependence to keep the EU-China economic relationship in a stable operating state.
For both China and the EU, it is about striking a balance: aiming for a competitive edge while also being mindful to leave room for each other to excel in specific sectors. This approach fosters a relationship where each side can find aspects of themselves in the other, while also profiting from the other side’s market. Breaking interdependence would end up killing the goose that lays the golden eggs [竭泽而渔] or sparking intense rivalry. It is only through bolstering each other and embracing true win-win scenarios that economic ties can thrive and last.
Fourth, minimise the interference of political factors in market competition
From a macro perspective, the internal politics of the EU are significantly influencing the development of EU-China economic relations. Viewing these relations through the perspective of geopolitical competition and using policies to shape bilateral exchanges have turned economic ties into an instrument for achieving the EU’s political objectives. This has already significantly distorted the prospects for the development of a positive economic relationship [between the two sides]. The current predicament facing EU-China economic ties is not just the result of technical factors and simple market factors. It is also related to political intervention.
In their economic relations, both sides should therefore uphold the principle of “render to Caesar what is Caesar’s and to God what is God’s” [凯撒的归凯撒,上帝的归上帝]. They should not allow their differing political views, positions and actions to affect normal bilateral economic and trade relations. This has become a significant issue that both China and the EU should face and consider. From China’s perspective, Europe’s highly politically motivated plans such as its “de-risking” policy, “investment screening mechanism” and “due diligence” requirements for enterprises, are harmful to the EU-China economic relationship. Reducing the harmful impacts of politically charged policies and working towards minimising political restrictions on future economic ties should be a key priority for the European Union. It could also serve as an agenda of joint consultations between China and EU.
Fifth, make cooperation in third-party [markets] a reality
From the EU’s geopolitical perspective, third-party markets represent potential (or emerging) battlegrounds and targets to vie for between China and Europe. However, such competition from a geopolitical standpoint is not conducive to the development and prosperity of Europe in the long run, nor does it improve the global economic environment. It may even trigger international tensions in the political and security fields. Only by advancing cooperation in third-party [markets], achieving mutually beneficial outcomes and promoting the continued development of economic globalisation will it be conducive to the economic prosperity of all countries as well as their development and growth. Based on this assessment, China and the EU should work together to implement third-party [market] cooperation rather than engage in vicious competition or even struggle.
Leveraging their respective technological strengths and industrial capabilities, China and the EU can engage in collaborative efforts across various fields, such as third-party infrastructure development, green energy, the development and use of natural resources, poverty reduction, development aid and finance. Such cooperation can contribute to realising mutual benefits and win-win outcomes for China, Europe and third parties.
From a strategic perspective, EU-China economic ties stand at the heart of their bilateral relations. These ties serve as the cornerstone for maintaining the overall stability of this relationship. Moreover, they play a crucial and irreplaceable role in promoting prosperity in both China and Europe. Today, the EU-China economic relationship is encountering various new and old obstacles, especially the interference of political factors, which is seriously undermining normal market exchanges between the two sides. In light of this, China and the EU should attach great importance to the development of their economic relationship. They should especially concentrate on eliminating mutual grievances, lowering the cost of bilateral economic exchanges and identifying new growth points for cooperation. This is of extraordinary significance for both sides.
If the current situation is allowed to develop unchecked, particularly if this bilateral economic relationship is approached solely from one's own perspective without considering the interests of the other party, the sustainability of these ties will be at risk. Moreover, it will also bring more severe challenges to the development of the overall EU-China relationship. Joint efforts by both parties to resolve issues through coordination, consultation and negotiation will help economic relations navigate their way out of their current difficulties. It is hoped that EU-China economic relations will emerge from their current predicament and rebuild a high-level interdependent relationship. This rejuvenation would contribute to the healthy and stable development of the global economy.
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This piece contains some interesting ideas. One thing I would add to the "main concerns regarding China-EU bilateral economic ties", however, is intellectual property theft. Several European countries, including Germany, France, the UK, and the Netherlands have called out Chinese economic espionage over the past year, highlighting it as a serious impediment to improving economic relations.
"China’s support of Russia’s military-industrial complex, including through dual-use exports, significantly undermines trust on the European side."??
How so? China broke no agreements with the EU or anyone else when it refused to be dragged into (yet another) European squabble.
Not only did China not break its agreements with Ukraine, it has been such a steadfast friend that Kiev regularly acknowledges the fact.