Trade and geopolitics
Finding the middle ground: EU-China relations
Published 06 December 2022
Despite criticism from those who believe Germany should limit its engagement with non-democratic partners, Scholz's stopover at China, as well as Singapore and Vietnam in the same month, sends a message to Europe: diversify toward developing new trade ties, especially in the Indo-Pacific region.
Relations between the European Union and China have had better days. Gone is the era when Angela Merkel, former chancellor of the EU’s largest state, used to frequently visit Beijing with large business delegations in tow.
These days, skepticism toward China is in fertile ground, spurring increasingly hostile attitudes toward Beijing’s policies. Yet the answer to the questions that China is posing to the maintenance of the global trade system lies perhaps counterintuitively in more, not less, globalization. Germany’s predominantly materialistic approach toward China has long caused frustration among those in the EU who believe engagement should focus more on issues such as human rights. The outsize role of the Chinese market for European exports and investments as well as imports including of critical commodities are increasingly causing concern across Europe.
Flying in storm clouds
The recent visit to Beijing by Merkel’s successor, Olaf Scholz, again raised eyebrows. Some called it Germany’s “lingering love affair with dictatorships.” Others warned of Germany’s potential overdependence on China.
The visit came at a delicate time. Scholz was the first Western leader to visit China after the Communist Party’s 20th Party Congress. Scholz also had just overruled six German ministries to allow Chinese state-owned shipping giant COSCO to acquire a minority share in the operational lease of one terminal in Germany’s largest port of Hamburg. Amid and perhaps due to this tense atmosphere, Germany’s economy ministry prohibited the pending sale of Germany’s Elmos chip manufacturer to Silex, a Swedish subsidiary of China’s Sai Microelectronics.
Germany is seeking to renew economic ties with China even as Europe-China relations have been deteriorating for years.
The disputes include EU complaints at the World Trade Organization over Chinese trade policies in intellectual property, technology, and other sectors, Beijing’s human rights record, and economic coercion against EU members. China earlier this year sanctioned Lithuania after Vilnius permitted a Taiwan representative office.
China’s indirect support for Russia in the invasion of Ukraine, which exposed Europe’s dependence on Russian gas, is deepening concerns on the continent over the Middle Kingdom’s foreign policy.
Handling an increasingly assertive, totalitarian, and powerful China will therefore likely be the primary question of international relations for the remainder of this decade and beyond.
A missed opportunity
In 2021, the EU enacted sanctions on human rights grounds against China for the first time since Tiananmen, targeting four senior Chinese officials and one entity for human rights violations in China’s western region of Xinjiang. Somewhat unexpectedly, Beijing, reciprocated with countersanctions on 10 European individuals and four entities, including European parliamentarians such as the China hawk Reinhard Bütikofer. As a result, the EU-China Comprehensive Agreement on Investment (CAI) was put on indefinite hold by the European Parliament despite having reached an in-principle agreement. In short, unless Beijing lifts its sanctions, which Beijing would only do if the EU lifted its sanctions, the CAI is not going to come into effect.
That is a shame. From China’s perspective, the CAI would have increased the hitherto comparatively modest European direct investment into China and worked toward the multipolarity (read: less US-centric world) that China envisions.
For the EU, the CAI would have improved investment conditions in China. Although implementation might have fallen short of expectations, the CAI almost certainly would have helped to level the playing field for EU firms vis-à-vis Chinese state-owned companies. The agreement also prohibits forced technology transfers, removes joint-venture requirements, and lowers equity caps for EU investments. It could have provided Europeans with a modicum of influence over labor and environmental standards in China.
More, not less, globalization
The deterioration of EU-China relations is coming against a backdrop of setbacks to globalization.
For all its shortcomings, since the 1960s, globalization has lifted hundreds of millions, perhaps billions, out of extreme poverty. Tariff reductions, economic openness, and lower transportation and communication costs enabled efficient global supply chains, cheap manufacturing, and dispersed research and development capacity. Globalization improved mutual understanding and forestalled autarkic trade blocs developing during the Cold War. Indeed, many pre-Second World War problems in the global economy of the 1930s derived from the drive to become nationally self-sufficient. Globalization increased people-to-people connectivity and gave states a direct stake in one another’s prosperity – an unquestionably pacifying dynamic.
The rising tide of decoupling among the world’s largest economies, most visible under slogans such as re-, near-, and friend-shoring, is not the answer. Scaling back globalization would incur immense economic costs and very substantial welfare losses. It would further increase inflation and international political polarization. It is in the West’s interest to retain a modicum of dialogue, exchange, and influence, especially in times of crises.
The economic imperative for cooperation with China remains as relevant as ever. China is the world’s second-largest economy, larger in gross domestic product (GDP) than the EU-27 combined. China is the EU’s second-largest trade partner and Germany’s largest. And while still lagging other partners, mutual inbound and outbound foreign direct investment (FDI) is sizable, too.
How can Europeans find a balance between these factors? Somewhat counterintuitively, the answer is more, not less, globalization.
A new agenda for EU-Asia policy
To strike a new balance, China should embrace the responsibilities that come with being a great power. International order, from which the Chinese immensely benefited, requires a pro-active and responsible Beijing. Public opinion and governments in the West are increasingly unwilling to tolerate a China that enjoys the privileges of a globalized world without what they view as commensurate reciprocation.
Furthermore, the Chinese Communist Party should accept that a strict separation of economic and political relationships, and of trade and normative considerations such as human rights, is naïve. The world has no meaningful resources to change China’s domestic politics. But Beijing should at the very least accept that trade and engagement in an interconnected world oblige a participant to give up some degree of sovereignty.
For Europe, the key is to diversify toward developing more partners. Scholz’s visit sends the right message at the right time, despite the criticism from those who believe Germany should not engage, or at least have limited engagement with, non-democratic partners. The visit signaled both Germany’s keen interest, indeed imperative, to have a sound working relationship with Beijing as well as Berlin’s keen intent to diversify beyond China. Importantly, in the same month, Scholz visited Singapore and Vietnam. The theme of his visits was the same: Germany needs and wants to trade with China, but is looking much more actively for new partners in the region.
The case for doubling down on Indo-Pacific engagement could hardly be clearer: the region accounts for 60% of global GDP and is home to four of the EU’s top 10 trade partners (China, Japan, South Korea, and India). Together, the EU single market and the Indo-Pacific represent 70% of global trade in goods and services and 60% of FDI; the EU is the biggest investor in the region and in 2019, annual inter-regional trade stood at 1.5 trillion euros. The EU has four bilateral trade agreements in place with the Indo-Pacific (Japan, Vietnam, South Korea, and Singapore) and a range of strategic and connectivity partnerships.
Despite the WTO’s problems, plurilateral trade frameworks – smaller groups of negotiating economies within the WTO – are still at work. The EU should work hard to lay the groundwork for deepening trade ties with Indo-Pacific economies such as India, Vietnam, and Indonesia to better position themselves in the EU’s supply and value chains.
In the Association of Southeast Asian Nations (ASEAN), the EU has some work to do. Everyone in ASEAN acknowledges the strong European support for the ASEAN economic community. However, the EU’s approach can sometimes be inconsistent, moralizing, and even hypocritical. For example, the EU decided to partially withdraw Cambodia's preferential market access rights due to human rights concerns in the country, such as rolling back democracy, banning opposition parties, and holding political prisoners. But, in the same month, the EU signed off on a fully-fledged free-trade agreement with Vietnam, where such accusations could apply too. The EU-ASEAN Summit in December 2022 is a good opportunity to raise such issues and take aim once again at reviving negotiations for a region-to-region FTA.
Further, the EU should seek accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – a fairly open agreement creating a rules-based trade environment. The CPTPP could become the core element of the EU’s Indo-Pacific strategy, positioning the single market deep into the regional trade agenda. As a recent European Parliament resolution agreed, CPTPP accession would not only be economically beneficial, but it would also diversify supply and value chains, reduce dependencies, and enhance the EU’s capacity to shape standards in the region. This is a daunting task. But the EU already has in place bilateral trade agreements with all CPTPP economies except Brunei.
Lastly, in terms of redressing asymmetric dependencies, relative percentages matter. European economies should never again be as dependent on a third party for 40% or more of their needs of a critical resource, as was the case with Europe’s reliance on Russian gas or rare earth imports from China. To prevent this, the European Commission should launch a monitoring system that can issue early warnings to member states. Instead of pressuring companies to then exit certain markets, EU governments should jointly create financial incentives to increase diversity and resilience of value and supply chains across the Indo-Pacific region.
This would pave the way for a broader regional approach rather than obsessions with economies of scale in large markets such as China. Likewise, the EU should produce critical infrastructure legislation. Instead of making arbitrary case-by-case decisions, legislators should designate certain sectors, such as 5G or public transport infrastructure, as “critical” and prohibit all international third-party (except EU) investments in these sectors.
In short, the idea is to diversify more toward the Indo-Pacific region, by enacting new rules at home and reaching out to new partners abroad. Instead of becoming increasingly isolated, the EU should become independent and engaged.
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