In early December President Xi Jinping and Charles Michel, the President of the European Council, met in Beijing to discuss the European Union’s economic and political relationship with China. Xi urged the EU to “jointly oppose decoupling, and jointly oppose politicization and weaponization of trade and technology.” This comes as investment from the West in China is beginning to decline following U.S. led efforts to decouple from the manufacturing giant. These efforts have included sanctions, increased tariffs, and trade embargoes for critical technology. The world is now wondering if Europe will follow in the U.S.’ footsteps and become less reliant on China as a trading partner. Key indicators of this new relationship come from Beijing’s fear of a Western economic block that excludes China, Europe’s new perspective on their relationship with China, and how the Chinese-EU trade relationship is evolving.
The Threat of a U.S.-EU Trading Block
Following the U.S., the European Union is China’s second-largest trading partner, and foreign direct investment with European companies such as BMW, Volkswagen, and Glencore are making billions in revenue from China. In addition, a U.S.-EU trading block would represent a combined $38.73 trillion in combined GDP, dwarfing China’s $18 trillion in 2021.
A trading block between these two superpowers could see decreased reliance and demand for Chinese manufactured goods and decreased investment in China. There would likely be an increase in firms seeking to either re-shore their manufacturing power or move it to other nations such as India and Vietnam. This would shrink foreign investment in the mainland and decrease their total exports.
As China’s economy contracts from the collapse of Evergrande, the stall in the real estate sector, and the economic slowdown from Zero-Covid lockdowns have created an increased demand for investment from domestic and international sources. This can be seen through Xi’s meetings with Charles Michel and German Prime Minister Olaf Schultz and subsequent press releases. Both Germany and the United Kingdom have increased their foreign investment (FDI) in China by 95.8% and 40.1% respectively, while FDI into China from other European countries and the U.S. have decreased.
A Friendship Without Limits and Retention of Trade
The next driving factor is Europe’s new perspective on its relationship with China after the invasion of Ukraine. A year ago, many Europeans believed that war would never again come to the continent and that the intertwined economies of the world would prohibit short-sighted invasions. However, President Vladimir Putin proved them wrong by ordering the invasion of Ukraine in February of 2022. The U.S. led a coordinated effort with its partners in NATO and the EU (the West) to enact sweeping and severe sanctions on every sector of the Russian economy except energy. These sanctions appear to be affecting the Russian economy and particularly their ability to wage war, leading Russia to need to deplete its reserves of critical military infrastructure such as missiles and tanks.
During the Winter Olympics, prior to the invasion, Putin and Xi held a summit in Beijing where many theorized that Putin revealed his intentions. After this summit, China and Russia declared their friendship without limits. While the West enacted its sanctions, many hoped that China would assist them in enforcing the rules-based world order, however, China rejected participation in the sanctioning of Russia. Instead, Beijing has attempted to wait on the sidelines, enjoying trade with both Russia and the West, dampening the effects of the West’s sanctions, while also increasing the amount of oil they are purchasing from Russia.
This dampening effect and refusal to condemn Russia for the invasion of Ukraine have led to a buildup of resentment in Europeans that had hoped for a quick and peaceful resolution to the conflict. This has caused the EU to reevaluate its relationship with the manufacturing superpower and wonder about its risk exposure if China invades Taiwan. These factors combine to encourage the EU to begin diversifying from China.
A ‘Win-Win’ for China Only
Despite Xi Jinping’s wishes, it appears that the EU is beginning to follow in the U.S.’ footsteps and has begun reevaluating its economic and political relationship with China. When former President Trump started the trade war between the U.S. and China, the EU did not agree with or participate in it. However, they have begun reconsidering their stance following China’s unofficial support of Russia and apparent disregard for the rules-based world order.
Throughout the invasion of Ukraine and the COVID-19 pandemic, China has proven that they do not believe in a ‘win-win’ relationship with global trading partners. They only believe in a China-first trade policy. This is highlighted by their pandemic Wolf Warrior Diplomacy regarding medical aid and personal protective equipment (PPE). Despite being one of the largest suppliers of PPE during the pandemic, they only sold or traded it with multiple diplomatic concessions.
Even while encouraging foreign firms to invest and manufacture in China, they seek to censor and influence these firms for that access, such as the NBA during the Hong Kong protests in 2019. If a company wants access to the Chinese markets, they need to follow the CCP’s rules.
The combination of these risk factors has started to shift European firms to diversify away from China with new manufacturing capabilities in countries such as Vietnam and India. This is a slow process and not a consensus yet, as we can see with Germany’s increased FDI in China. However, Germany has started to become accustomed to the transactional nature of trade with China. While visiting Beijing to discuss German investment in China, PM Olaf Schultz was able to convince Xi to release a statement condemning the nuclear threats that Russia had been making. The EU will continue to diversify away from China to manage risk but will continue trading with them in a similar manner that China trades with the world.