China's deteriorating its relations with the European Union need to be watched

Containers are unloaded from the Hapag-Lloyd container ship Chacabuco at the HHLA Container Terminal Altenwerder on the River Elbe in Hamburg, Germany March 31, 2023. [REUTERS]

EU-China relations have been deteriorating for years. From the honeymoon period of engagement, the tone radically changed in 2019 when the EU introduced its trilogy of relations from China, which moved beyond engagement to competition and even rivalry. What was already alarming from China‘s perspective, namely that the European Union can see China as a rival, has only gotten worse since the Covid pandemic and, especially Russia’s invasion of Ukraine. China is increasingly perceived as a potential threat to European prosperity but also to its security. For the former, China has become Europe‘s largest competitor in third markets and increasingly even into the single market. Such aggressive competition is the result of a complicated mix of strong competitiveness, but also massive industrial policy underpinned by subsidies. It is also the result of the Chinese market not offering enough opportunities to its own companies, let alone foreign companies, due to the extremely subdued consumption and the lack of investment opportunities. For the latter, China’s support for Russia in its aggression against Ukraine, at the beginning more vailed but increasingly obvious through large exports of dual technology, is another key issue that the EU has taken quite some time to realize but has ended up accepting.

The deterioration of EU-China relations has an important underpinning, namely China‘ increasingly state-led economy but also the more frequent use of its leverage after having developed strategic dependences with most countries in the world and certainly the EU. Lithuania is probably the clearest example of retaliation as China stopped all imports from Lithuania after a disagreement on the name of the new Taiwan representation in this country. More recently as China has responded with its own subsidy/dumping investigations to the EU’s introduction of countervailing duties on electric vehicles (EVs) produced in China. Finally, China has stepped up its push of anti-Western foreign policy which appears to have as final intention to debunk the global liberal order and set up a China-centric one, although China generally calls it asymmetric multipolar world. The expansion of the BRICS with a de-dolarization agenda is a good example but also the introduction of three global initiatives for development, Civilization and Security ― which aim at moving the Global South away from a way ruled by the principles of a liberal world order.

Based on the above, the constellation of EU actors, from EU institutions to the Member States, are starting to accept that there is no return to the old modus operandi of EU-China. China has changed and so has the EU‘s attitude towards its increasing assertiveness. At the same time, China’s growing size ― economically and politically ― coupled with waning European economic and political weight in the global arena, implies that the EU has more leverage now than it will ever have. Such leverage is the single market as China‘s largest export market is still the EU.

The EU, with its new institutions after elections took place last summer, needs to reset relations with China in a way that it can use its leverage to obtain a number of objectives. The most obvious one is de-risking which was high in the old Commission‘s agenda and will remain important, if not more, with this new Commission. Reducing dependence on Chinese imports, especially those critical for the EU’s energy and digital transition has become a key objective which will need to combine friend/near shoring with reshoring. In addition, for those European countries which still depend heavily on China as an export market, diversifying export market is becoming a must, especially given China‘s underwhelming imports and its structural deceleration. The EU will also need to further improve its economic security (and security more generally) but neither of these two objectives can be achieved without partnerships. This is by no means limited to the US, especially if Trump wins the next presidential elections. The EU needs to knock on other countries’ doors, especially those with similar problems and objectives. Japan and South Korea are obvious cases in point but also Australia. The G7 has so far proven to be a good point of discussion for issues of common interest such as the resilience of supply chains but also the coordination of export controls to reduce the transfer of dual technology, crucial for (economic) security. Extending such measures to like-minded countries like South Korea and Australia would help. The second venue of partnerships with emerging and developing economies as they remain very important markets for European products but also sources of relevant critical raw materials four our digital and green transition. At the same time, their needs are mounting, as well as their right to pursue a sustainable development model, so any offer needs that the EU may want to make for such partnership will need to count with sufficient funding and technological transfer. Again, such offer will be more relevant if it comes from a partnership of countries which also calls for additional cooperation between the EU and South Korea, as well as Australia and Japan.

All in all, for the EU there is not return to the good old time of naïve engagement with China. The EU now is aiming at co-existing with China while protecting its interests and values. Coexistence should allow collaboration for global challenges but collaboration should not come with a price tag. At the same time, de-risking from China to reduce the EU‘s critical dependences will require partnerships. South Korea is perfectly placed for such partnership with the EU.

* This is a reprint. This article was published by Herald Insight Collection.

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