Competitor, Rival but Partner No More? EU-China Economic Relations and the European Elections

CSDS POLICY BRIEF • 16/2024

By Francesco Giovanni Lizzi

31.5.2024

Key issues

• Recent China-European Union (EU) economic relations have made evident that some issues, such as a non-level economic playing field and Chinese overcapacity, are not solvable in the short term.
• The European elections will be essential in determining whether the EU’s economic security agenda vis-à-vis China will evolve or follow the same path, and the positions of the political parties and recent declarations by Spitzenkandidaten offer some insights.
• Future areas of the EU-China bilateral debate may involve the green transition and tariffs, also given the forthcoming American elections.

Introduction

After years of a strong emphasis on the common interests that both China and the EU share in the stability of their relationship, March 2019 witnessed a sharp turn in the European Commission’s framing of China-EU relations with the publication of the Strategic Outlook. Previously, the EU’s approach was informed by a strong European liberal-institutionalist vision of the world that celebrated trade and investment flows as a positive-sum game – thus echoing Beijing’s “win-win cooperation” rhetoric. However, the Commission headed by Jean-Claude Juncker tapped into a January 2019 Report by the German Industrial Federation (BDI) to draft the Commission’s Outlook. Indeed, the BDI document defined China as a systemic competitor that distorts markets and prices through state intervention in the economy and restricts competition to the detriment of non-Chinese companies. Accordingly, in the Strategic Outlook China is considered a partner for cooperation and negotiations on major global issues such as climate change, a technological and economic competitor and a systemic rival with its own values.

This change in discourse towards China represented the pinnacle of a process rooted in President Juncker’s State of the Union Address in 2017, where he proclaimed that Europeans ‘are not naïve free traders’. Such rhetoric followed the acquisition of the German robotics company Kuka by the Chinese Midea in 2016 and the sale of the Piraeus port to COSCO in the same year. The United States (US)-China trade war also contributed to this shift, as both sides constantly asked Europe to choose sides. March 2019 also represented a pivotal moment for EU-China economic relations with the creation of an EU-wide Foreign Direct Investment (FDI) screening mechanism, a tool designed to serve Brussels in defending Europe’s strategic autonomy and economic sovereignty. Indeed, the FDI screening mechanism helped the European Commission analyse over 420 FDIs into the EU in 2022 alone.

These rather sharp tones set the discourse for the agenda of the Von der Leyen Commission. In December 2019, the President announced the formation of a “geopolitical Commission” to boost the EU’s role on the world stage and, in early 2020, the Commission announced a set of tools to limit European dependence on the Chinese telecom giant Huawei, while also boosting its domestic 5G industry. While these measures were a far cry from a hard ban on Huawei, they still represent a big step for Brussels and national capitals toward safeguarding networks from any perceived risks linked to Chinese companies, especially at a time when the EU seeks to reshape relations with Beijing.

This renewed attention to the risks posed by Europe’s interdependence with China was nonetheless set aside when it came down to conclude and approve, in principle, the Comprehensive Agreement on Investment (CAI). At the end of 2020, still in the middle of the coronavirus pandemic, negotiations that had previously stalled for years saw a sudden acceleration thanks to direct intervention from Chinese President Xi Jinping. His offer of concessions regarding market access came just before a potential shift in US policy towards a more collaborative approach with allies on China. In fact, there was a strong opposition to an accord from the Biden administration. Referring to the planned agreement, the US National Security Adviser Jake Sullivan urged ‘early consultations with our European partners on our common concerns about China’s economic practices’. At this crucial moment, the then German Chancellor Angela Merkel seized the opportunity, leveraging her final days in office, all while Germany held the Presidency of the Council of the EU, to push for a preliminary agreement which was jointly announced by Chancellor Merkel, European Commission President Ursula von der Leyen, European Council President Charles Michel and President Xi Jinping. The investment agreement was indeed part of a strategic outreach to China that Merkel made a cornerstone of Germany’s six-month Council presidency. ‘I believe that it is right and important to strive for good strategic relations with China’, said Merkel in a videoconference with Xi.

Despite these words, the CAI was ultimately put on hold after significant opposition in the European Parliament and from the US. Indeed, under President Von der Leyen EU-China relations have undergone a substantial mutation, especially in the economic domain. Several milestones have characterised this complicated relationship from the announcement of a “geopolitical commission” to the failure to conclude the CAI and the implementation of the EU’s economic security agenda. In this regard, it is necessary to reflect on the future of EU-China economic relations and to better understand how, in advance of the European elections, the EU’s main protagonists frame the EU-China relationship. To this end, this CSDS Policy Brief offers an overview of China-EU economic relations with a distinct focus on the positions of the Parliament’s groups. It delves into the recent declarations of their Spitzenkandidat and their party manifestos ahead of the forthcoming June European elections.

A downward slope after the Parliament’s sanctions and the pandemic 

After the rapid conclusion of the negotiations at the Council of the EU level, the CAI was put forth for ratification in the European Parliament, which has always been vocal in its lack of support for the Agreement. The Parliament has objected to the CAI for a number of reasons. First, the absence of an investment protection clause was criticised. As the Parliament argued, this meant that the ‘comprehensive agreement became a partial one’ as it failed to achieve a genuine level playing field for EU businesses and workers and it did not ensure reciprocity in market access. Second, human rights objections were voiced by the Parliament, especially in relation to the national security legislation for Hong Kong and the human rights violations in Xinjiang. The European Parliament’s 2021 resolution on the crackdown on the democratic opposition in Hong Kong mentioned that the EP ‘will carefully scrutinise the agreement, including its provisions on labour rights and reminds the Commission that it will take the human rights situation in China, including in Hong Kong, into account when asked to endorse the CAI or future trade deals with the PRC’. Third, individual Members of the European Parliament (MEPs) submitted parliamentary questions to the Commission in 2020 on matters including: the impact of issues raised by the pandemic on the CAI’s substance, the CAI’s coverage of climate change provisions, the EU’s economic leverage in the face of national security legislation for Hong Kong, whether the CAI is a stepping stone to a Free Trade Agreement and market access restrictions in China. In addition to these caveats, however, the definitive deadlock in the CAI negotiations materialised after the EU imposed sanctions on four Chinese officials and one entity following large-scale human rights abuses in Xinjiang. This was part of the first broader package of listings under the EU Global Human Rights Sanctions Regime. Beijing retaliated with its own sanctions by targeting some MEPs – the very people who were supposed to ratify the CAI – thus freezing the ratification process.

Since this time, Sino-European economic relations have taken a downturn. Shrinking market opportunities in China have made it increasingly challenging for European companies to compete effectively. Furthermore, China’s strict zero-COVID policy and growing state control within the market have led to a decline in the European presence in China and intensified the European Commission’s probes into Chinese public procurement mechanisms, as made evident by the recent investigation of the Chinese procurement market for medical devices. At the same time, the economic effects of the coronavirus pandemic were also visible in the European framing of China, as highlighted by the frequent plenary discussions on the topic at the European Parliament. For instance, in June 2020 a plenary debate focused on ‘Protecting European strategic sectors from foreign takeovers in a post-COVID world’, and it developed in 2022 with further debates on the resilience of critical entities (November 2022) and the protection of strategic infrastructure from China’s influence (December 2022).

This evolution shows that previously held aspirations for deeper economic ties with China have been replaced by concerns about dependence, the weaponisation of critical infrastructural nodes – such as ports, 5G networks, semiconductors and Electric Vehicle (EV) technologies – and a renewed attention towards risk management, as aptly described by a study requested by the European Parliament’s Committee on Foreign Affairs (AFET) on the concept of “derisking”. While President Von der Leyen did not define derisking in her speech at the Mercator Institute for China Studies (MERICS) in March 2023, there have been attempts to define the issue more specifically. In this sense, the study for AFET sheds light on what derisking may mean when applying the concept in an economic security framework. The European Economic Security Strategy sets out a common framework for achieving economic security by promoting the EU’s economic base and competitiveness, protecting against risks and partnering with the broadest possible range of countries to address shared concerns and interests. These three elements have led the authors of the AFET report to distinguish between “offensive”, “defensive” and “collaborative” derisking. Offensive derisking refers to proactive measures to diversify supply chains and boost industrial competitiveness to improve resilience. Instead, the defensive version involves deploying an outbound investment screening mechanism focused on high-tech sectors such as quantum, artificial intelligence (AI) and advanced semiconductors. Finally, collaborative derisking entails a mastery of friend-shoring, that is, tightening economic relations with like-minded partners and sourcing inputs from reliable suppliers to secure access to critical production inputs.

Given the size of the European Commission’s challenge to implement this tripartite definition, it remains to be seen whether derisking survives in the next Commission. In general, there will be a need to see whether the next President of the Commission revives the current economic security agenda, especially as far as derisking is concerned.

What is to come of China-EU economic relations?

These questions lead to the plausible future of China-EU relations, which will be shaped by the outcome of the European elections in June 2024 and the choice of the future President of the Commission. The future political composition of the Parliament will be crucial, especially as, if recent polls are to be believed, Europe may witness an increasing number of MEPs being elected on the right of the hemicycle. The positions of each political party vying for a seat in the Parliament can be partially characterised by the Spitzenkandidaten and how they see EU-China relations. For example, the European election “Maastricht Debate” held on 29 April 2024 shed some insights into the positions of the Spitzenkandidaten on the China issue. This was especially true for the current Commission President Von der Leyen (European People’s Party – EPP), Bas Eickhout (Greens), Anders Vistisen (Identity and Democracy – ID), Marie-Agnes Strack-Zimmermann (Alliance of Liberals and Democrats for Europe – ALDE) and Nicolas Schmit (Party of European Socialists – PES). The debate covered climate change, EU democracy and foreign and security policy.

Although Vistisen asserted that the war in Ukraine is being used to change the treaties and abolish member states’ veto power inside the Council, Eickhout blamed ID for being too permeable to Chinese and Russian influence. A stronger ID presence in the Parliament may provoke further Chinese media influence under the ID umbrella, thus potentially spilling over into the trade and investment domain. According to Adam Ni, publisher of the newsletter China Neican and recently interviewed by the Financial Times, Europe’s far-right groups provide fertile and receptive grounds since some European groups may willingly cooperate with Moscow and Beijing to emulate some aspects of their models. The case of Jian Guo, a German citizen of Chinese origin, arrested in late April and accused of spying for China, is telling. Guo was a parliamentary assistant for Maximilian Krah, an MEP and the Alternative for Germany’s (AfD) lead candidate for the forthcoming European parliamentary elections. This is at odds with a statement made by the President of the ID group, Marco Zanni, in April 2023, who warned of the EU’s overdependence on China and Beijing’s influence exerted through the involvement in critical infrastructure such as ports, logistics and telecommunications.

Alternatively, a Commission guided by the Greens could sharpen the European position on China even more. Eickhout, for instance, supported – albeit in exceptional cases – the formation of European industrial champions to compete globally against China (and the US), thus hinting at the need for flexibility in European competition laws. Other prominent green representatives have also set the direction of the Group’s position on the China issue. This is the case of MEP Reinhard Bütikofer, Chair of the Delegation for EU-PRC relations, but who is not re-running in the elections. In a recent interview for 9dashline, he stated that the Parliament is determined to recognise China-EU systemic rivalry, while assessing that the ‘Commission is on a similar trajectory’. The words of Annalena Baerbock, Germany’s Green Foreign Minister, also provide insights to the Greens’ position. During a debate in August 2023, Baerbock stated that China posed a challenge to the ‘fundamentals of how we live together in this world’ and that Germany would not promote new confrontation between blocs, but would diversify its trading partners and derisk. The Green’s position is well encapsulated in their electoral manifesto, where they ‘advocate for an active, clear-eyed, and common EU policy on China. The EU must implement a robust human rights policy that starts with de-risking our supply chains and increasing our self-sufficiency’. Interestingly, the Greens link the concept of derisking to a stronger human rights policy, thus putting a value-based foreign policy to the forefront of their campaign ‘in a world with increasing climate instability and political tensions’. However, they also recognise that ‘interdependence is a key factor for a peaceful international system and a global just transition’, thus highlighting that a complete de-linking from China is not a desired outcome.

In the case of a possible second Von der Leyen Commission, a “more of the same” approach should be expected. During the Maastricht Debate, Von der Leyen stressed the need to continue the economic security agenda while opening to tighter cooperation with the European Conservatives and Reformists (ECR). In this sense, it is interesting to observe that the ECR party manifesto states that navigating China-EU relations requires a ‘nuanced stance, recognising both the need for engagement and the imperative to address human rights violations, while advocating for stronger ties with Taiwan and other like-minded partners’ and prioritising a derisking approach. There are then some similarities with the European People’s Party (EPP) manifesto, where a strong emphasis is accorded to the balance between competition with ‘our economic competitors, such as China and the US’ while at the same time ‘defending strategically important European sectors against unfair practices’. The EPP manifesto essentially reflects the position of the current Commission and its economic security strategy by highlighting the need to protect ‘strategic infrastructure such as ports, telecommunication and energy facilities as well as our most innovative companies’, while partnering with ‘like-minded partners in a Union of Democracies to remain competitive vis-à-vis dominant competitors such as China’.

Interestingly, the ALDE candidate Strack-Zimmermann did not appear outspoken in her approach to China during the Maastricht Debate, despite ALDE being the only party having a defined China strategy alongside the EPP. In fact, she seemed more circumspect about a possible ban on TikTok and stated that ‘we have to see what happens’. This approach also emerges in her views on China as an actor in the international arena, as she sees China as a possible mediator in the war between Ukraine and Russia. In her view, China is a good choice because it is interested in the stability of Europe for economic reasons and has reliable relations with Moscow: ‘In this respect, China could play a role’, she argued at Maastricht. However, ALDE’s manifesto highlights the importance of reducing the ‘dependency on regimes that do not share our European values using a de-risking and diversification principle’. Interestingly, ALDE is the only group keeping the name of the CAI alive in their manifesto:

‘The EU must conclude ongoing negotiations, start new talks with other partners and speed up the ratification of all trade agreements and investment protection agreements […] with the exception of the investment agreement with China. The Comprehensive Agreement on Investment (CAI) agreed with China can only be revisited once […] the agreement provides real commitments and results from China on human rights, democracy, labour, environment, market access and intellectual property protections for European companies’.

A big absence at the Maastricht Debate was the voice of PES’ Spitzenkandidat Nicolas Schmit. While he did not reference China in his interventions, some insights may be found in the PES’ manifesto, which states that the Party aims to ‘rebalance our relations with China, promoting our values and protecting our interests, and further cooperating to address pressing global issues’. There is an interesting focus on the cooperative side of the Sino-European relationship here, which is not mentioned by other parties and was already present in the draft version of the PES manifesto where China and the US were put on the same “cooperation level”. However, there is no reference to derisking or the economic security agenda, and the concepts of “interests” and “values” regarding China-EU relations are left unaddressed.

Conclusion

In conclusion, the task facing the future President of the European Commission appears daunting. As mentioned, since 2019 the Commission and the European Parliament have adopted a harder stance on China, especially after adopting the Strategic Outlook. However, it must also be noted that in 2023 China was the third-largest partner for EU exports of goods (8.8 %) and the largest partner for EU imports of goods (20.5 %), despite all of the calls for stronger derisking. Therefore, the next Commission President will have to face one of the toughest questions in the recent history of Sino-European relations: do all interdependences with China come to harm? In this sense, the policy issues which will influence China-EU relations will not dimmish. On the contrary, the current fractures in the international arena will make it difficult to iron out the long-standing problems in the relationship, especially the absence of an economic level playing field and the Chinese stance on the Russia-Ukraine war. These two particular issues might be exacerbated in the coming year or so.

The first point of contention involves the green transition and the critical raw materials needed to implement it, which are mostly sourced outside of the EU. The EU will in fact never be self-sufficient but it aims to diversify its supply, thus putting its derisking strategy at great risk. Currently, for certain critical raw materials, the EU is solely dependent on one country: China. In fact, China currently provides 100% of the EU’s supply of heavy rare earth elements.

The second point of contention involves the issue of the recently imposed American tariffs on EVs, and the possibility of the EU to take a similar measure. Will tariffs against China become the norm in Europe as well? While it is not certain that the EU will alter its policies since there will be no surge of Chinese EVs diverted from the US market, it must be underlined that a great deal of the current economic security agenda takes inspiration from the American approach vis-à-vis China. A role will therefore be played by the next American elections. Some continuity in US foreign policy may be expected, especially the strategic rivalry with China, no matter which candidate wins the forthcoming presidential election. On the one hand, Trump might re-instate an ultra-hawkish position towards China, launch a potentially greater China-US trade war and force his ideas on Europeans, thus leading to a fusion between the European economic security and strategic autonomy agendas in the wake of an unpredictable American ally. On the other hand, President Biden’s re-election may re-ignite the “friendshoring side” of the American economic security paradigm, hence relying more on European economic partners to counter its Chinese strategic rival.

All in all, the future President of the European Commission and the new European Commission should succeed in presenting the Union’s future economic strategy towards China as a single package. That would, therefore, require a sustained effort, which at the moment looks unattainable, given the earlier mentioned difficulties with the outbound FDI screening mechanism. The presence of a single package, combining both the economic security framework and a renewed China strategy, especially fostering alignment processes among European institutions, member states and relevant stakeholders, would also be needed to propose bolder measures. Only time will tell how the new European Parliament and European Commission shape up the EU-China agenda.