EU-China Relations Have Been – and Will Remain – a Rollercoaster

Thursday, April 27, 2023

In recent years, relations between the European Union and China have shifted from a focus on partnership and engagement to an emphasis on competition and systemic rivalry. Alicia García-Herrero of Natixis Corporate and Investment Banking, the think tank Bruegel and the Hong Kong University of Science and Technology argues that dip in the relationship has been due in large part to economic fundamentals and not just differences in values, with the downward trend likely to continue.

EU-China Relations Have Been – and Will Remain – a Rollercoaster

Drifting apart: Macron of France (left), European Commission President Ursula von der Leyen (right) and Chinese leader Xi in Beijing, April 6 (Credit: Pool)

After a long period of engagement since China entered the World Trade Organization (WTO) in 2001, its ties with the European Union (EU) took a distinct turn in March 2019 when the European Commission published an EU-China “Strategic Outlook”. The document described China as simultaneously “a cooperation partner”, “a negotiating partner”, “an economic competitor” and “a systemic rival promoting alternative models of governance”. This signaled the beginning of a new era of economic relations marked as much by competition and rivalry as by the longstanding idea of partnership which had dominated the relationship for two decades.

Many analysts, especially EU experts in China, blame the United States for the EU’s shift away from engagement, dismissing the idea that the EU may have its own reasons for a more cautious approach in its relations with Beijing. Others justify the move by arguing that China’s leadership has been diverging away from the EU’s values. They acknowledge that, by upholding its principles even as it engages the Chinese, Europe could well incur major economic costs, given their expanding trade and commerce.

A much smaller group, in which I find myself, would observe that the increasing wariness of the EU’s position on China has been driven by economic fundamentals and not just value-based and political ones. That is to say that European countries today benefit much less from China than they used to. This includes the largest beneficiary of recent years, namely Germany.

It's the economics: The EU has been running a growing trade deficit with China since the pandemic

It's the economics: The EU has been running a growing trade deficit with China since the pandemic

Consider these four factors:

First, since the pandemic started, the EU has run a growing trade deficit with China, which is bound to increase as it hinges on large imports of key products for the EU’s energy transition, which has only accelerated since Russia’s invasion of Ukraine in February 2022. The result of this rapid increase in imports for products which China dominates globally (with about a 90 percent of global export share in the case of solar panels and batteries for electric vehicles and more than 60 percent for wind turbines) is a much higher degree of EU’s critical dependence on China.

Second, China’s imports have remained stagnant since the Covid-19 outbreak started and even now after the reopening when China abruptly abandoned its zero-covid policies. This is even more true for imports from the EU, especially Germany, as China has clearly moved up the value ladder and is substituting imports of intermediate goods such as machinery, auto components and chemicals with their own production. Not just market forces are behind this shift – China’s industrial policy is aimed at promoting self-reliance.

Third, European investment in China has suffered from three years of zero Covid as well as from a much tighter regulatory environment, especially as far as data localization and national security are concerned.

Fourth, China’s outbound investment into Europe has become much more targeted at strategic sectors, whether it is technology or critical infrastructure.

For all these reasons, European policy makers are moving away from what had long been a rather naïve economic engagement with China.

Ukraine President Volodymyr Zelensky reports to his people on his conversation with Chinese leader Xi Jinping (from 1:53), April 26 (Credit: President of Ukraine on YouTube)

While the downward trend in relations seems apparent, the way in which it is happening is not a precipitous descent but more like a rollercoaster ride, with the lowest point reached after Russia’s invasion of Ukraine and the highest after French President Emmanuel Macron’s recent mutual-respect tour of China. Still, Macron was widely criticized both at home and across Europe for what was considered a throwback to naïve engagement with China without due consideration for the situation in Ukraine as well as Taiwan. That makes clear the direction that EU-China relations are heading.

It would take more balanced EU-China economic relations and a fair resolution of the Ukraine conflict for there to be any durable improvement. On that note, the bilateral discussion between Chinese leader Xi Jinping and Ukraine President Volodymyr Zelensky on April 26 could offer some hope for better EU-Sino relations. But the context of the long-awaited call is notable – it was likely made in response of a major gaffe by China’s ambassador to France who in a televised interview questioned the sovereignty of nations that had been part of the Soviet Union, among which are EU member states including the Baltic countries.

EU-China relations are clearly going through sharp gyrations but the trend is clearly not positive. It has been so since 2019 and especially since the pandemic and Russia’s invasion of Ukraine. This reality is not as related to the US and Washington’s acrimonious ties with Beijing as some analysts may think. But it is an unmistakable signal of the EU’s awareness of the diminishing economic benefits of its relations with China, beyond other important political and value-based considerations.

Opinions expressed in articles published by AsiaGlobal Online reflect only those of the authors and do not necessarily represent the views of AsiaGlobal Online or the Asia Global Institute


Alicia García-Herrero

Alicia García-Herrero

Natixis Corporate and Investment Banking, Bruegel and Hong Kong University of Science and Technology

Alicia García-Herrero is a senior fellow at the European think-tank Bruegel. She is also the chief economist for Asia Pacific at Natixis, and a non-resident senior follow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also adjunct professor at the Hong Kong University of Science and Technology (HKUST). Finally, she is a member of the Council of Advisors on Economic Affairs to the Spanish Government and an advisor to the Hong Kong Monetary Authority’s research arm, the Hong Kong Institute for Monetary and Financial Research (HKIMR), among other advisory and academic positions. In previous years, Alicia held the following positions: chief economist for emerging markets at Banco Bilbao Vizcaya Argentaria (BBVA), member of the Asian Research Program at the Bank of International Settlements (BIS), head of the International Economy Division of the Bank of Spain, member of the Counsel to the Executive Board of the European Central Bank, head of emerging economies at the Research Department of Banco Santander, and economist at the International Monetary Fund (IMF). Alicia has maintained a part-time academic life throughout her career as visiting professor at the School of Advanced International Studies (SAIS) at John Hopkins University, at the China Europe International Business School (CEIBS) in Shanghai, and Carlos III University in Madrid, among others. Alicia holds a PhD in economics from George Washington University and has published extensively in refereed journals and books (her publications can be found in ResearchGate, Google Scholar, SSRN or REPEC).

Alicia is also very active in international media (Bloomberg and CNBC among others) as well as social media. Alicia was included among the Top Voices in Economy and Finance by LinkedIn in 2017 and was ranked sixth on the Global Social Media 100 list by Refinitiv in 2020.

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