The cost of Non-China: Reading the tea leaves

This opinion piece was first published by Encompass.

As the Chinese Communist Party (CCP) National Congress meets in Beijing for its five-yearly session in the ‘Great Hall of the People’, the European leaders are gathering in the ‘Europa’ building in Brussels for a regular summit. The EU27 will have China on the agenda, and there is a grey rhino brewing: The uncertain future of EU-China relations. Everyone knows they are getting worse; few seem to know what to do about it.

EU-China is a ‘too big to fail’ relationship, and few want to imagine the worst-case scenarios because they are too unpalatable, difficult to deal with or risk turning into self-fulfilling prophecies. But strategic preparedness demands that EU institutions and European leaders think ahead to avoid being hit in the face by reality, as it turned out to be the case with the block’s strategic dependence on Russian fossil fuels.

Today and tomorrow, European leaders should be asking themselves the following questions: What if there is a break in relations with China? What would be the implications for Europe in case of a hard decoupling from the Chinese market? In more simple terms: What is the cost of non-China for the EU?

A negative trendline…

The EU is gradually coming to terms with a more assertive China. This is not new, but part of a steady evolution that is shaping ties between Beijing and Brussels as well as between China and individual European countries, including the UK.

Over the last few years, relations between the EU and China have deteriorated, and it is likely that they will continue to do so. In March 2019, the EU adopted a new strategy labelling China a “partner,” “an economic competitor,” and “a systemic rival.” Beijing rejected this approach from the outset by raising doubts about being named a systemic rival. Still, mounting problems in the relationship confirmed that ties are changing for the worse.

COVID-19 has done nothing but accelerate this process: While it hardened Europeans’ views on China, Beijing’s wolf warrior diplomats’ overtly confrontational posture towards European governments, politicians and private individuals – on issues ranging from the management of the health crisis to Xinjiang, Hong Kong and Taiwan – widened the political divide.

In 2021, tensions between the EU and China reached a new level with the tit-for-tat sanctions over China’s human rights violations in Xinjiang and the subsequent freezing of the EU-China Comprehensive Agreement on Investment (CAI) in the European Parliament. This was also followed by a downgrade of diplomatic relations between China and Lithuania because of disputes over relations with Taiwan. The fact that Beijing chose to economically coerce Vilnius and impose trade restrictions made matters worse and ‘europeanised’ the spat, with the EU complaining to the World Trade Organization.

To make matters worse, China’s ambivalent position on Russia’s war on Ukraine and its failure to condemn Moscow’s illegal aggression and violation of a sovereign country’s territorial integrity turned the April 2022 EU-China summit into a “dialogue of the deaf” in the not so diplomatic words of the EU foreign policy supremo, Josep Borrell.

And there is no improvement in sight. This week, EU Ministers for Foreign Affairs reaffirmed the 2019 strategy adding the adjective “tough” to “competitor.” EU leaders are likely to follow suit at their summit today and tomorrow, confirming that political relations with China continue to plummet.

… but a ‘too big to fail’ relationship

Economic ties between the EU and China remain strong despite growing political fault lines and well-identified problems of doing business in China – from intellectual property violations and difficult market access to a lack of a level playing field. Bilateral trade is also rising, and China is the EU’s largest trading partner in goods (not in services) to the tune of almost €2 billion daily.

What is more, several EU member states, topped by Germany, the Netherlands and France, have significant economic interests and investments in China: Almost 17% of German exports go to China, and the country’s automotive-industry relies on the Chinese market for considerable shares of revenue. It is no coincidence that Chancellor Scholz is planning a trip to Beijing in the first week of November 2022 – the first by a German chancellor since the outbreak of the coronavirus. And he is taking with him a business delegation.

Yet, the (geo-)political headwinds of the last years, sharpened by the pandemic and Russia’s war on Ukraine, also have important negative spill-over effects to the economic realm, as the freezing of CAI and Lithuania’s trade bullying illustrate. These come on top of growing concerns about China’s investment strategies in Europe that, for a larger part of the 2010s, focused on acquiring important stakes in critical infrastructure such as harbours, airports, and energy and utilities. More recently, China’s interest in Europe is shifting from M&A and focusing on greenfield investments, particularly in areas such as fintech, AI and e-commerce. This change is unlikely to be seen positively, given concerns of technology theft.

The EU-China economic relationship may be too big to fail, but Brussels has been strengthening its economic security arsenal to face off Beijing’s growing geoeconomic ambitions – from investment screening to measures countering trade bullying. While not intended to do that, these defensive measures signal a change of tone in the EU, and they make a decoupling scenario more plausible.

Reading the tea leaves

If one reads the tea leaves carefully, the EU-China decoupling may already be underway, riding the downward spiral of relations.

China has been in isolation since the outset of the pandemic, and it is likely to continue largely closed to the outside world. President Xi Jinping just reaffirmed China’s zero-Covid stance in his speech at the opening of the 20th CCP National Congress last Sunday. Beijing’s emphasis on self-reliance and self-sufficiency is also likely to be further pursued in several policy domains as Washington raises the stakes in taming China’s rise and Brussels becomes increasingly wary of the Chinese regime.

Despite the economic ties, European companies report that they are being pushed to “reduce, localise and silo” their businesses in China and that the country is becoming unattractive for investments. Indeed, almost 1 in 4 European businesses ponder delocalising their investments from China to elsewhere. While these may still be reversible weak signals, they should be taken seriously.

Apart from what is already happening to EU-China relations, there are broader long-term lessons to learn from the present moment. Russia’s war of aggression on Ukraine demonstrated, literally, from one day to the next, that energy dependency on an almost single supplier is a strategic vulnerability and a liability for the EU’s geopolitical ambitions. Mutatis mutandis, the question now is: Under the existing downward trends in the relationship, is the EU ready to maintain the current levels of (inter)dependency with China which are of a much more profound and diverse scope than just energy?  

Avoiding non-China?

Entertaining a breakdown of relationships with China is difficult because it counters a basic assumption: The level of economic interdependence is so high that an EU-China split seems impossible and certainly too costly. Yet, imagining that a hard rupture is possible can go a long way in preparing for such a scenario and perhaps even help avoiding it.

Besides thinking about the potential social, political, and economic costs of an EU-China breakdown, it would be important to also map out the pathways by which such crash could come about, especially in a context of heightened US-China rivalry where Europeans may be pressured to take sides.

EU leaders this week have the obligation to start thinking seriously about the future of EU-China relations. While no one should be planning a breakdown, preparing for it is basic common sense, good anticipatory policymaking, and probably the best way to avoid it.


Ricardo Borges de Castro is Associate Director and Head of the Europe in the World programme at the European Policy Centre.