Mikko Huotari is the executive director of the Mercator Institute for China Studies. Sébastien Jean is a professor of economics at the National Conservatory of Arts and Crafts.
After a long period of uncertainty, the European Union and China have once again engaged in high-level economic and trade dialogue, just before the summer break in Brussels.
It is good that both sides keep space for discussion and that the EU also obtains concessions. Nevertheless, the ground is rapidly changing in EU-China economic relations, and European stakeholders need to be prepared for many more challenges ahead.
Record trade flows and the continued expansion of the footprint of European companies in China are currently hiding deep cleavages and changing patterns in EU-China relations: by pressuring European companies in response to the opening of a office in Taiwan by Lithuania, China undermined the integrity of the single market and common trade policy; by sanctioning parliamentarians, academics and research institutes for allegations of “disinformation”, it deliberately opposes the democratic values of Europe; and by proclaiming a “limitless” strategic partnership with Moscow despite its war of aggression against Ukraine, it is making security choices that contradict those of the EU.
Meanwhile, a slowing economy and a more restrictive approach to global integration at home make Beijing a much less reliable counterpart, as party leaders now renew their push for control of strategic sectors, continuing self-reliance and seeking to outsource globalization on China’s terms. as much as possible.
All of this matters for Europe — and will do so even more in the years to come. In 2021, China was again the EU’s main trading partner for goods, accounting for more than 10% of its exports and more than 22% of its imports. When indirect links are also taken into account, there is no EU country for which trade with China is inconsequential.
Despite the uncertainty that European business federations regularly highlight, Euro-Chinese foreign direct investment continues to flow; the German automobile and chemical industries seem to be further deepening their presence in China; and Chinese investment in Europe is also slowly returning – with a significant shift towards creative investment this time.
Continuing on this path would not be good for the European economy or alignment with the EU. Trade relations are increasingly unbalanced and differences in economic ties between member countries make European unity an elusive goal. China is also building strong positions in key industries of the future, rapidly catching up in high-tech sectors, despite all the weaknesses in its economic structure.
Thus, moving forward, Europe faces three critical challenges to strengthening its economic strategy vis-à-vis China: (1) persistent difficulties in leveling the playing field, (2) obstacles to the definition of a positive cooperation program and (3) growing political tensions, combined with significant vulnerabilities and risks of rupture.
As European stakeholders engage in a China in which market distortions remain unmatched in scale and pervasiveness, new forms of market orientation in strategic industries and the tools of market capitalism A more financialized state will pose new challenges for foreign companies and traditional trade policy instruments. Promoting multilateral solutions remains the first best solution here, but limited success calls for other instruments to build leverage and defend interests.
To do this, it will be useful to develop the European “toolbox” — including the international instrument for public procurement and the anti-subsidy instrument — but the challenge now lies in the integrated and effective implementation of these new tools, which will require significant capacities, political support from European capitals and cooperation with like-minded partners.
Meanwhile, in the current circumstances, reviving the Comprehensive Agreement on Investment (CAI) should no longer be a priority. Its ratification would not only require that the human rights situation in China go beyond the current mutual sanction, but the agreement must also be assessed in light of the current circumstances and integrated into a much more comprehensive program of cooperation. , which the two parties failed to negotiate. for years now.
New “arenas”, such as human rights and green and digital transitions, will also have an increasing impact on EU-China economic relations and will require new responses.
The defense of human rights is a legitimate objective of trade policy, and its implementation will require proportionality, better sharing of information between like-minded countries and internal coordination to develop new “due diligence” frameworks. within reason”.
A European carbon border adjustment mechanism should also be applied as soon as possible, but it will also require calibration, and policymakers will have to devote resources to building strong green technologies to compete with China.
European companies and regulators will also face a “digital fortress” in China, shaping a data economy that prioritizes state sovereignty and localization. Nevertheless, the EU’s entanglement with Beijing will continue and will require further efforts to protect personal data and ensure interoperability for industrial purposes – subject to reciprocity, security and confidentiality.
Finally, the EU should also complement its current approach, which focuses on reciprocity and fair competition, by placing economic security and sovereignty at the heart of its strategy vis-à-vis China. Beyond the necessary improvement of the bloc’s surveillance, research and intelligence capabilities, this change in focus will involve long-term work to reduce vulnerabilities, facilitate diversification and consolidate or build strong positions in sectors strategic. It also means that public sector support for deepening corporate exposure to China should be reduced.
China is not Russia. But Russia’s war in Ukraine is a wake-up call, and it should have consequences for EU-China relations.
Trade relations with China are not only increasingly politicized, there is also a growing risk that Beijing will exploit asymmetries more often. And major disruptions in Chinese government behavior, a crisis in China’s periphery — including Taiwan — or escalating tensions with the United States are all real possibilities.
However, we do not believe that this requires cutting economic relations, which would lead to exorbitant prices and jeopardize the basis for future cooperation. But it means making economic interdependence with China more secure.