Major trading partner and ‘systemic competitor.’ Europe has a China problem | Popgen Tech

London
CNN Business
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Europe is becoming increasingly dependent on China for trade, and many of its top companies are keen to invest in the world’s second-largest economy despite the disruption caused by Covid-19 restrictions.

But a sour relationship with an increasingly unpredictable Beijing, regret over the price Europe has paid for getting too close to Russia, and rising geopolitical tensions have some EU officials considering whether the bloc should start reducing its exposure.

This is a calculation that the president of the EU Council, Charles Michel, weighed on Thursday when he visited Chinese leader Xi Jinping for talks aimed at strengthening diplomatic ties.

At the meeting in the Great Hall of the People in Beijing, Xi told Michel that China is “ready to strengthen strategic communication and coordination with the European side,” according to Chinese state broadcaster CCTV.

A lot has happened since the last time an EU president – appointed by the leaders of the 27 EU member states – met Xi in person four years ago.

The Covid-19 pandemic, Russia’s invasion of Ukraine and sanctions between China and EU lawmakers have strained relations ever since. The United States, which imposed controls on semiconductor exports to China in October, is reportedly pressuring Europe to take a similar hard line.

Michel’s spokesman, Barend Leyts, said in a statement last week that Michel’s visit provides a “timely opportunity” for Europe and China to engage on matters of “common interest”. He did not specify what topics would be discussed.

But some in Europe are becoming wary of close relations with China. The bloc has been badly burned this year by its historic dependence on Russia as its main energy supplier, and diversification has shot up the political agenda.

NATO Secretary General Jens Stoltenberg told a conference in Berlin on Wednesday that the “dangerous dependence” of some countries on Russian natural gas should make the alliance “evaluate” [its] dependencies on other authoritarian states, especially China.”

Those concerns bubbled up last month when German Chancellor Olaf Scholz flew to Beijing with a delegation of top business leaders to meet Xi, a move intended to bolster Germany’s second-largest export market to the US.

The block is in a similar band.

“Any problems you have at the political and strategic level [between the EU and China]they tend to spill over to the economic level,” Ricardo Borges de Castro, associate director at the European Policy Center, told CNN Business.

Both sides have invested heavily in their partnership. The total value of goods trade between China and Europe reached €696 billion ($732 billion) last year, up almost a quarter from 2019.

China was the third largest destination for EU goods exports, accounting for 10% of the total, according to Eurostat data. China is Europe’s largest source of imports, accounting for 22% in 2021.

“The European market’s importance as a destination for Chinese exports is roughly double that of the Chinese market for Europeans,” Jörg Wuttke, president of the EU Chamber of Commerce in China (EUCCC) wrote in a September report.

Overall, the relationship is simply “too big to fail,” according to Borges de Castro. Europe is not seeking to disengage from the lucrative Chinese market, he added.

“I don’t see [the EU’s strategy] as a disengagement strategy. I think the EU strategy is a diversification strategy for the moment… the lesson [from Russia] is that you cannot have a single supplier,” he said.

Machinery, vehicles, chemicals and other manufactured goods account for the vast majority of goods traded between the two powers, according to Eurostat.

“European companies have done very well here and the overall long-term outlook is very positive,” EUCCC Secretary General Adam Dunnett told CNN Business, adding that he expects European company revenues to continue to grow in China over the next decade.

There are areas where Europe depends on Beijing, namely for the supply of rare earth metals needed to make hybrid and electric vehicles, and wind turbines. Europe’s solar panels are also mostly manufactured in China.

But those dependencies should not be exaggerated, Dunnett said.

“If you look at some of the broader things that China exports to the EU, like furniture and consumer goods, a lot of those things you can get elsewhere,” he said.

Still, the United States could put more pressure on Europe to pull away from China, Borges de Castro noted. In early October, Washington banned Chinese firms from buying its advanced chips and chip-making equipment without a license.

Benjamin Loh, the head of Dutch chip maker ASM International, told the Financial Times on Wednesday that the US was “putting a lot of pressure” on the Dutch government to take a similarly tough stance.

The pressure may already be starting to show. Last month, Germany blocked the sale of one of its chip factories to a Chinese-owned technology company over security concerns.

Economic ties between Brussels and Beijing, while mutually beneficial, have weakened in other ways in recent years.

Last year, Chinese direct investment in the European Union fell to its second lowest level since 2013, just behind 2020, according to analysis by the Rhodium Group, a research firm. It has fallen nearly 78% since 2016.

“The level of Chinese investment in Europe is now at a decade low,” Agatha Kratz, director at Rhodium Group, told CNN Business, citing Beijing’s strict capital controls and increased scrutiny by EU regulators.

EU investment in China has also become more concentrated. Between 2018 and 2021, the top 10 European investors in China, including those from the United Kingdom, accounted for nearly 80% of the mainland’s total investment in the country, Rhodium Group data shows.

And just four German companies — automakers Volkswagen ( VLKAF ), BMW and Daimler ( DDAIF ), and chemical giant BASF ( BASFY ) — accounted for more than one-third of all European investment in those four years.

An investment deal between Beijing and Brussels was scrapped last year after EU lawmakers slapped sanctions on Chinese officials over alleged human rights abuses, prompting China to retaliate with its own penalties.

The deal, agreed in principle in 2020 after years of talks, was designed to level the playing field for European companies operating in China, which have long complained that Beijing’s subsidies hurt them.

EU diplomats said in April that a “growing number of irritants” were straining relations, including China’s tacit acceptance of Russia’s war in Ukraine. They described China as “a partner for cooperation and negotiation, an economic competitor and a systemic competitor.”

The most pressing issue for European businesses in China, according to Dunnett, is its strict zero-Covid policy.

“For the last year it has been the Covid carousel, [the] Covid rollercoaster,” he said. “Every time you think [it was] about to open, something pulls us back,” he added.

Over the weekend, thousands of protesters took to the streets across China in a rare series of demonstrations against the country’s strict Covid control measures. Some restrictions have since been lifted in Shanghai and other major cities.

Beijing’s uncompromising approach is helping to further dampen foreign investment in the country, particularly among smaller companies, Raffaello Pantucci, a senior fellow at the Royal United Services Institute, a security research group, told CNN Business.

“The general business environment in China is seen as more difficult to navigate, and while companies still feel they need to get involved given its size and potential, increasingly small to medium-sized companies are giving up,” he said.

— Laura He and Sophie Jeong reported.