February 4, 2023

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Huge trading partner and “systemic rival”. Europe has a China problem

London Eureka News Now Business —

Europe is increasingly reliant on China for trade and many of its top companies are eager to invest in the world’s second largest economy despite the disruptions caused by Covid lockdowns.

But a sour relationship with an increasingly unpredictable Beijing, regrets at the price Europe has paid for getting too close to Russia, and rising geopolitical tensions have led some EU officials to consider whether the bloc should start making its move reduce presence.

It’s a calculation EU Council President Charles Michel is weighing on Thursday as he visits Chinese leader Xi Jinping for talks aimed at strengthening diplomatic ties.

Much has happened since the last face-to-face meeting of an EU president appointed by the heads of state and government of the 27 EU member states with Xi four years ago.

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

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

However, some in Europe are becoming increasingly suspicious of close ties 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.

Those concerns were simmering last month when Chancellor Olaf Scholz flew to Beijing with a delegation of senior business leaders to meet Xi, a move meant to prop up Germany’s second-biggest export market after the US.

The block is in a similar bind.

“All the problems you have on a political and strategic level [between the EU and China]they tend to spill over to the economic level,” Ricardo Borges de Castro, deputy director of the European Policy Centre, told Eureka News Now Business.

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

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

“The importance of the European market as a destination for Chinese exports is about twice as high as that of the Chinese market for Europeans,” wrote Jörg Wuttke, President of the EU Chamber of Commerce in China (ECCC) in a September report.

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

“I do not understand [the EU’s strategy] as a decoupling strategy. I think the EU strategy at the moment is a diversification strategy… the lesson [from Russia] is you can’t have a single vendor,” he said.

According to Eurostat, machinery, vehicles, chemicals and other manufactured goods make up the majority of goods traded between the two powers.

“European companies have done very well here and the overall long-term outlook is very positive,” ECCC Secretary-General Adam Dunnett told Eureka News Now Business, adding that he expects European companies’ revenues in China to increase over the next decade will continue to rise.

There are areas where Europe is dependent on Beijing for supplies of rare earth metals needed to make hybrid and electric vehicles and wind turbines. Most of Europe’s solar modules are also manufactured in China.

But those dependencies shouldn’t be overdone, Dunnett said.

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

Still, the United States could put more pressure on Europe to withdraw 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 chipmaker ASM International, told the Financial Times on Wednesday that the US is putting “strong pressure” on the Dutch government to take a similarly tough stance.

The pressure can already be felt. Germany last month blocked the sale of one of its chip factories to a Chinese tech company over security concerns.

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

According to analysis by research firm Rhodium Group, Chinese direct investment in the European Union fell last year to the second-lowest level since 2013, only behind 2020. Since 2016, it has fallen nearly 78%.

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

EU investments in China have also been concentrated. Between 2018 and 2021, the top 10 European investors in China, including those from the UK, accounted for almost 80% of the continent’s total investment in the country, data from Rhodium Group shows.

And only four German companies – car manufacturers Volkswagen (VLKAF), BMW and Daimler (DDAIF) and chemical giant BASF (BASFY) – accounted for more than a third of all European investments in these four years.

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

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

EU diplomats said in April that a “growing number of irritants” were damaging ties, including China’s tacit approval of Russia’s war in Ukraine. You have described China as “a partner in cooperation and negotiation, an economic competitor and a systemic rival”.

According to Dunnett, the most pressing problem for European companies in China is the strict zero-Covid policy.

“Last year it was the Covid carousel, [the] Covid roller coaster,” he said. “Every time you think [it was] just before opening up, something is pulling us back,” he added.

Thousands of protesters took to the streets across China over the weekend in a rare series of demonstrations against the country’s tight Covid controls. Some restrictions have since been lifted in Shanghai and other major cities.

Beijing’s no-holds-barred approach is helping to further dampen foreign investment in the country, particularly among smaller companies, Raffaello Pantucci, a senior associate fellow at the Royal United Services Institute, a security research group, told Eureka News Now Business.

“The general business environment in China is seen as increasingly difficult to navigate and while companies still feel the need to engage given the scale and potential, more and more small and medium-sized enterprises are giving up,” he said.

— Laura He contributed to the coverage.