Reinvigorate a multifaceted EU-China relationship: dialogue and perspective

‘One-sided dependencies with China’ dominates the EU’s supply chain resilience strategy. What's the bigger picture?

Zichen Wang

Mar 30, 2023

I attended an online discussion about China-EU relations in 2023 recently and was impressed by remarks given by Dr. Weinian Hu. I subsequently invited Dr. Hu to write a short essay based on her talking points, which she gracefully agreed to. I also attach the remarks by Linlin LIANG, Director of Communication and Research at the China Chamber of Commerce to the European Union (CCCEU), in the online discussion - Zichen.

***

Weinian Hu (胡巍年) is an associate fellow at the Centre for Private and Economic Law, Vrije Universiteit Brussel, Belgium. Her research interests include EU-China trade relations and multilateral EU-Asia relations, with a focus on international trade law, patent law, and intellectual property rights protection.

In addition to her academic pursuits, Dr. Hu acquired extensive international experience by working with a global bank in China, an inter-governmental organization in Singapore, a non-governmental organization in Malaysia, and a leading think tank in Belgium. She also served as a consultant and team leader for the European Union for coordination of the Asia-Europe Meeting (ASEM), the multilateral political dialogue process between the Asian and the European regions.

Dr. Hu holds degrees from Chinese, British, and Belgian universities.

Since the outbreak of the Covid-19 pandemic, EU-China relations seem to be dominated by the single issue of ‘human rights’ (e.g. Xinjiang). ‘Systemic rival’ appears the only surviving definition of China – in the eyes of the EU. This narrow approach does not reflect the complexity of the bilateral relationship.

1. The EU-China relationship is multifaceted.

In accordance with the EU’s Strategic Outlook (2019), China is defined ‘simultaneously, in different policy areas’ EU’s ‘cooperation partner, negotiating partner, economic competitor, and systemic rival’. The Outlook also reiterated that the EU is committed to a ‘comprehensive strategic partnership’ with China, as is China with the EU. To depict such a relationship, we can look no further than the EU-China Bilateral Dialogue Architecture. Based on specific subject matters, the Architecture consists of around 70 dialogues encompassing the pillars of Political, Economic, and Sectoral, and People-to-People Dialogue.

Of course, frictions between the two occur from time to time. But, in the meantime, candid discussions were conducted by using the various dialogues as platforms. Stubborn economic irritants were being addressed (e.g. state-aid control and fair competition review). Controversial issues like human rights have been in discussion since 1995.

The current one-issue advocates make very general negative headings about EU-China relations. They distort the meaning of ‘comprehensive strategic partnership’ that both sides have committed to, despite being ‘systemic rival’ in certain policy areas.

2. The EU-China engagement should be conducted with perspective.

For sure, the speed and priorities of China’s economic reform in the past might not have met the EU's expectations. China’s economic operation could be opaque, for example, in relation to the state’s role in foreign direct investment (FDI).

As the WTO has not provided solutions, to a degree, it is understandable that the EU sought to erect certain unilateral trade tools in order to safeguard the order of its Single Market. Nonetheless, proportionality and regulatory restraints should be observed. Trade and investment risks coming from China should not be overblown.

According to the EU FDI Screening Annual Report 2022, Chinese investments accounted for merely 2.3% of all foreign acquisitions in 2021 (down from 3.4% in 2020) and 6% of the greenfield investments (down from 7.1% in 2020). The US was the EU’s top foreign investor in 2021, accounting for 32.3% of all acquisitions and 39.4% of the greenfield investments, followed by the UK with 25.6% and 20.9%, respectively. While the EU’s FDI Screening Regulation is largely aimed to scrutinise the State’s involvement in Chinese investments, China is only a small investor in the EU.

Equally, these days ‘one-sided dependencies with China’ dominates the EU’s supply chain resilience strategy. However, this kind of dependency affects around only 6 percent of EU trade, and 94 percent is unproblematic. The EU should conduct its relationship with China with perspective.

Since 2020, the EU has imposed a series of heavy reporting requirements on investors from 3^rd countries, including FDI screening, corporate sustainability due diligence, forced labour, and foreign subsidies. Excessive heavy bureaucracy discourages all foreign investments, also the Chinese. The EU market risks losing its attractiveness.

3. Dialogue works.

Thanks to dialogue and cooperation, over the past decades, China has adopted EU-styled regulations in some policy areas; and the ‘Brussels effect’ is boosted. For example,

1) the EU has extended its Single Market principle of ‘freedom to provide services’ and the rule of ‘the state of destination’ towards China – the world’s biggest aviation market. China adopted the destination-based flight route setup in the EU-China bilateral air services agreement;

2) the EU-styled emission trading system (ETS) was adopted by China, thereby the ETS now covers estimated 17-18% of global CO2 emissions, compared to 9% before;

3) the EU sui generis geographical indication (GI) protection system was incorporated in China's GI system;

4) the EU’s principle of including legally binding non-trade objectives, i.e. environmental and labour protection, in trade agreements was acknowledged by China, as seen from the provisional text of the EU-China Comprehensive Agreement on Investment.

The list continues. Recently, the EU has been helping China to reform the latter’s electricity pricing system for environment protection purposes. China has placed great trust in the EU to make electricity more expensive in China .

Conclusion

The EU relies on the US for its security. For the EU’s prosperity, many countries contribute to it.

From a trade point of view, successful collaboration with China and the US (more than 20% of EU exports going to the US, and China accounts for 20% of EU imports) is important for achieving both the EU’s trade and investment goals and its external objectives.

For a geopolitical EU to rise above the multiple crises the world is experiencing now, engagement and perspective are imperative. The EU cannot afford to dismiss its relationship with China, arguably the single most influential driver of geopolitical change today. (Enditem)

The following remarks were made by Linlin LIANG, Director of Communication and Research at the China Chamber of Commerce to the European Union (CCCEU) in Brussels.

The CCCEU represents some 1,000 Chinese companies operating in the EU. We do observe that, since the end of last year, a lot, really a lot of business re-engagement have been taking place, not only business sector, we have also seen visits of Chinese Ministries, provinces, regions and cities to Europe, and the other way around, and international tourism sector is gradually recovering as well.

For China-EU business outlook, trade, investment, and the current discussion on diversifying are very important. Concerning trade, China-EU trade continued to grow in 2022 more than 20% compared with 2021. On the other hand, China and the EU appear to be redirecting their trade to other partners. For China, ASEAN's trade importance has been on the rise; for the EU, despite a 39% increase in EU imports of goods from China from January 2021 to December 2022, the EU’s imports from other non-EU partners grew by 72.4%.

For investment, as we all know that our trade has greatly dwarfed bilateral investment. In 2022, EU investment in China grew by 92.2%, according to China’s Ministry of Commerce. For Chinese FDI in the EU, what is happening on the ground is that there has been a shift from M&As to greenfield investment. For instance, last year, the world's largest battery manufacturer CATL announced a 7.34 billion euro investment in Hungary.

We still believe in the China-EU Comprehensive Agreement on Investment, or CAI, CAI has the potential to serve as a ground-breaking treaty aimed at expanding market access for investors from both the Chinese and EU perspectives. However, in the near future, the likelihood of its ratification by the EU appears to be low.

On diversifying, we do notice that the EU has claimed that the bloc is not seeking to decouple from China but to diversify its supply chains and reduce its dependence on the country. Accordingly, it is trying to re-shore its supply chains and raw material production and seeking export bans on critical technologies such as chip printers.

While these efforts aim to reduce the risks associated with so-called “over-reliance” on China and promote greater resilience and competitiveness, they also carry the potential for decoupling the two economies, which would be very harmful to our business relations.

For China-EU business relations this year, there are some challenges, including the geopolitical shift of the EU and business politicization. Let me elaborate a bit on this point.

The EU has launched a series of unilateral economic and trade tools, for instance, 5G security toolbox, FDI screening, FSR, anti-coercion instrument, dual-use export controls, international procurement instruments, and supply chain due diligence, the list is long, and it is making the trend of the EU inward-looking and protectionism more obvious.

According to a survey conducted by the CCCEU and Roland Berger in 2022 involving 150 Chinese companies and organizations, 38% of respondents indicated that their business operations had suffered negative effects due to the prevailing political climate in the EU.

For opportunities for China-EU business relations, we think that the China-EU summit will be a boost to business confidence. The chamber also communicated with the Chinese ambassador to the EU, Mr. Fu Cong, that we hope the business sector could also get involved.

On top of that, we think the ongoing twin green and digital transitions in the EU and China are very promising areas for cooperation.

In 2022, the CCCEU proposed in its annual flagship report nearly a hundred practical suggestions for China-EU development and cooperation. All in all, deepening China-EU mutual trust is pivotal, and in practice, we call on the EU to provide Chinese companies with a fair and open business environment based on clear rules. (Enditem)