2023: EU decoupling from China?
2023: EU decoupling from China?
18 January 2023
In 2022, debates about Europe’s (over)dependence on China — for instance, in terms of medical equipment and technological goods — grew increasingly urgent amid Brussels’ deteriorating relations with Beijing and the US-China trade conflict.
9DASHLINE asks a select group of experts whether the EU should (at least partially) decouple from China and, if so, how this could be done.
LOSING ACCESS TO CHINA’S MARKET IS NOT AN OPTION
AGATHE DEMARAIS — GLOBAL FORECASTING DIRECTOR, ECONOMIST INTELLIGENCE UNIT (EIU)
The concept of ‘strategic autonomy’ has become a buzzword among European policymakers. Rising tensions with China over human rights abuses and concerns about unfair Chinese market practices are fuelling this trend. Despite the hype, the truth is that the EU cannot decouple from China: for Europe, pursuing such a strategy would be a sure way to shoot itself in the foot.
If it were to decouple from China, the EU would lose its biggest trading partner for goods. The consequences of this would be dire for European export-oriented firms, as China is their third largest export market. Losing access to a market of 1.4 billion consumers is simply not an option for many European businesses.
Goods shortages would become commonplace in Europe, as EU imports from China are twice the size of those from the US (the EU’s second-largest source of imports). The competitiveness of European firms is too low to replace all imports from China, notably for basic manufactured staples. As such, decoupling from China would weigh on growth and fuel consumer inflation.
Besides, a European decoupling from China would probably provoke Chinese retaliation. Beijing has an ace up its sleeve with rare earths. China controls the vast majority of known rare-earths deposits. It could curb the access of European firms to these crucial raw materials. Without them, the development of electrical vehicles, military gear, and semiconductors would stall in Europe.
From a broader perspective, EU decoupling from China would send a signal of European weakness to the rest of the world. Such a move would suggest that Brussels was giving in to Washington’s demands instead of pursuing its own objectives. Perhaps counterintuitively, a decoupling from China would therefore be at odds with European calls for strategic autonomy.
NO QUICK SOLUTIONS
DR MORITZ RUDOLF — RESEARCH SCHOLAR IN LAW AND FELLOW, PAUL TSAI CHINA CENTER, YALE LAW SCHOOL
The time of European naivety when dealing with Beijing is over. The People’s Republic of China (PRC) is a Party-State, whose long-term visions significantly contrast with the liberal order. It has also become increasingly challenging for European businesses to operate in China. Beijing’s disorganised easing out of the zero-Covid mode has created an additional level of uncertainty.
It is unrealistic to wish away the PRC and the relevance of the Chinese market. While there is hardly a global challenge solvable without China, a new kind of coexistence with Beijing should be re-negotiated. The increasingly populist debate on China is counterproductive. It turns China into a dystopia and the PRC leadership into cartoon villains. Despite being highly entertaining, it is not helpful, as it does not solve any of the problems of the bilateral relationship.
Rather than decoupling, the EU should focus on diversifying and recalibrating its existing relationship with China. Notably, the diversification of production lines may take years. There are no quick solutions, especially when identifying and operationalising alternatives. Therefore, recalibration should be the current priority. It is necessary to sharpen the toolbox, for example, to protect critical infrastructure from Chinese investments, but we need a clear definition of what does and does not fall under this category.
Recalibrating the relationship with the PRC should primarily be a technical debate conducted on a case-by-case basis, bringing in judicial, technical, economic, and China expertise. The wheels have already been set in motion, but Europe is still in a capacity-building mode. Filling knowledge gaps of how to deal with the PRC (both in the private and the public sector) should occur rather sooner than later.
MITIGATING THE SYSTEMIC TENDENCY TOWARD A ‘SECOND COLD WAR’
DR MAXIMILIAN MAYER — PROFESSOR, RHEINISCHE FRIEDRICH-WILHELMS-UNIVERSITÄT BONN
Europe's world political dilemma grows with each passing day. Russia's invasion of Ukraine demonstrates that Europe is completely dependent on US security provisions as long as its nation-states are incapable of building a truly joint defence capability. Faced with China's hegemonic competition in East Asia, the Biden Administration has simultaneously worked to enlist US allies and partners in its policy of technological containment against Beijing. However, the US strategy toward China has come at a double cost to Europe.
Aiming to radically slow down China's technological development, Washington not only implemented policies to prevent interdependence with China in emerging technologies (cutting-edge chips, 5G, artificial intelligence, etc.), but also introduced industrial policies based on an expanding national security imperative, undermining the WTO, and, as a side effect, discriminating against European companies.
Although European CEOs and politicians are starting to consider how to diversify imports and exports away from China, any significant diversification is still difficult and will take time. Despite its growing authoritarianism, China remains a critical trading partner for Europe. German automotive and pharmaceutical companies, in particular, continue to rely heavily on the Chinese market. Therefore, a scenario of economic sanctions against China in the event of a military conflict in the Taiwan Strait would have a disastrous impact on the European economy.
Given the increased risks and facing such a dilemma, European diplomacy should focus on two tasks: increasing efforts to convince China and the United States to avoid further geopolitical and ideological escalation, and building networks of technological and trade partnerships with middle powers in a similarly precarious position, such as South Korea, Vietnam, Indonesia, Israel, Japan, and India. These partnerships are minilateral, pragmatic, theme-specific, and serve two main objectives: shaping a stable political environment for economic diversification and creating a multipolar strategic space to contribute to mitigating the systemic tendency toward a “second Cold War”.
EUROPE MUST AVOID NEW GREEN SUPPLY CHAIN DEPENDENCIES
DR LUKE PATEY — SENIOR RESEARCHER, DANISH INSTITUTE FOR INTERNATIONAL STUDIES (DIIS) AND LEAD SENIOR RESEARCH FELLOW, OXFORD INSTITUTE FOR ENERGY STUDIES
A broad-based decoupling between Europe and China is neither likely nor desired, but a selective approach is finding traction in many European capitals. In 2023, the European Union’s launch of a new anti-coercion instrument and Germany’s release of its China strategy will keep the decoupling debate in Europe going strong. Yet it may be the questions of how Brussels crafts its response to America’s new industrial policies and whether it strikes a deal with Washington that will ultimately bring the EU to fully confront select strategic dependencies on China.
The EU’s economic problems with Washington are very real and pressing, but they do not make challenges from China go away. Just as Washington’s new industrial policies may draw European multinationals to develop new production in the United States in the years ahead, Beijing has long compelled European manufacturers to offshore industrial and technological capabilities to China.
Europe’s inaction in enhancing its industry competitiveness has come with a price. Beijing has long advanced its efforts to become self-sufficient in critical and advanced industries. But the EU and its Members States often chose not to confront the long-term consequences of these policies. Strong responses to how Beijing’s subsidies and state support distorted the European common market were pushed aside in hopes of protecting the special interests of select European industries, such as German automakers, in the Chinese marketplace.
However, those decisions sacrificed the strength of the European solar and other industries and made European consumers more dependent on Chinese-dominated green supply chains. Ironically, it is electric vehicle production from German carmakers that may come to represent the next wave of Chinese green exports to the EU. If Brussels fails to react, European welfare may not only miss out on the new jobs, income, and taxes that this new economic activity brings, but also develop new green dependencies on China.
For too long European decision-makers have looked to the Chinese marketplace as a critical driver of industrial competitiveness and economic welfare. But it is the European common market, in its vast size and diversity, that anchors and powers most of Europe’s trade, investment, and industrial activity. As the debate over decoupling from China goes on, it is vital for European leaders to assess diversification opportunities in India and Southeast Asia, but also maintain and deepen European economic and technological integration.
MUTUAL INTERDEPENDENCY BENEFITS EUROPE
DR ANGELA STANZEL — ASSOCIATE, ASIA DIVISION, GERMAN INSTITUTE FOR INTERNATIONAL AND SECURITY AFFAIRS
The impact of the Russian war in Ukraine is proving how important it is for the EU to re-examine its geostrategic dependencies on one country alone — and, in particular, on China. The current trend seems to point towards the EU becoming increasingly dependent on China and in turn China becoming much less dependent on the EU. The only conclusion appears to be to decouple from China partially in areas that are strategically vital to the European economy. This is the case, for instance, in the area of critical raw materials that are crucial for the EU’s green and digital transitions and where a high dependency on China remains.
To decouple at least partially in this area, the EU needs to seek alternative partnerships and provide the investment needed to acquire and produce raw materials and critical metals elsewhere. However, apart from certain strategically crucial areas, it is also important to maintain mutual interdependency. Europeans have an interest in China remaining dependent on the European market as to have a voice and influence in Beijing. It would also raise the costs for China if there were a parallel scenario to the war in Ukraine in the Indo-Pacific, namely an escalation in the Taiwan-Strait conflict.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform. Image credit: European Union, 2022.