Resetting the next phase of EU-China relations post-COVID

Desperately seeking mutual trust and understanding

As the coronavirus ravages economies globally and major powers find solace in protectionism, rapid recovery seems far off. But as key trading partners, the EU and China are determined to establish a stronger relationship and find common purpose. Both are aiming for a sustainable recovery, seeking ways to manage their economies and taking a renewed look at the interdependency of global supply chains.

But will they be able to achieve these goals, given the fraught international environment and major stumbling blocks in policy, commerce and technology?

On 29 September 2020, expert participants from across Europe and China debated ways forward at Friends of Europe’s virtual Policy and Practice Roundtable ‘Resetting the next phase of EU-China relations post-COVID’. The debate was held under the Chatham House Rule.

Ready for dual circulation

“Post-COVID, China is looking at new ways to open up. That includes boosting the nation’s domestic demand, or internal circulation, alongside our decades-long international focus on foreign trade and investment,” said one speaker.

He asserted that China’s new ‘dual circulation’ strategy will have huge potential. The strategy, first mentioned in early 2020, aims to concentrate on domestic economic development, with China’s consumption driving the integration of the domestic market with international markets.

The speaker believed that this new strategy, alongside China’s opening up would create space for deeper economic cooperation between China and the EU. “The EU and China complement each other in many areas. We foresee great progress in the service sector, which still only represents 14% of our trading relationship. China’s goal is almost 24%, on a par with international levels,” he said.

New digital and green opportunities

Deeper cooperation in the digital and green sectors is a priority for both China and the EU, and aligns neatly with the EU Recovery Plan. “Look at the two newly launched high-level dialogues, covering digital plus the environment and climate. They show excellent cooperation on issues other than the economy,” said one speaker.

Increased cooperation in these areas could not have come at a better time. Another speaker noted that China’s digital market is growing fast, accounting for almost a quarter of the country’s overall economy in 2018. “The EU and China should push forward by partnering on digital trade and an economic alliance, especially by opening up our markets,” he added.

These views were echoed by a European speaker: “We welcome the new EU-China High-Level Dialogue on Digital, as well as China’s focus on the digital economy, because there has been little dialogue on these issues between the two sides.” However, new rules and regulations are also needed for third countries – to cover companies involved in China’s Digital Silk

Road, an element of the Belt and Road Initiative (BRI).

“We should create a Digital Connectivity Forum, to cover areas like 5G, data flows and privacy, and to address concerns raised recently by European policymakers about Chinese actions in the digital domain,” she suggested. “I fear digital de-connectivity in Europe and elsewhere, typified by the ban on Chinese mobile apps and Huawei telecom networks, so let’s focus on connectivity issues.” As investment talks between the EU and China have yet to be finalised, holding extra digital talks could also build more confidence between the partners.

Other participants hailed strong cooperation in green areas, including the new High-Level Dialogue on Environment and Climate. A Chinese speaker highlighted the EU target of becoming carbon-neutral by 2050, and China’s recently announced goal of doing the same one decade later: “These targets mean big transformations in our economies and society. We can do this by working jointly on a green recovery and sustainability that will benefit everyone.”

Such joint work is already underway. One example is a new financing agreement recently signed by the European Investment Bank for a €350mn forestry project in China.

Let’s address the sticking points

Despite the desire to move forward with current talks, guided by the Comprehensive Agreement on Investment, sticking points remain. Many in the debate referred to “suspicions” or “mistrust” about the economic or political motives of each partner, similar to notions which have emerged in the US-China trade dispute.

“Several people today called for pragmatism and for us all to move forward, but that’s tough given the arguments among our politicians about diplomacy, international standards and rule of law,” observed the moderator. These issues stand in the way of boosting EU-China goods commerce, now worth a staggering €1.5bn daily.

A speaker underlined China’s role as a key trading partner, but called for the country to open up more market access for the EU, alluding to the European Commission’s classification in 2019 of China as a “competitor” – especially in high-tech – and as a “systemic rival” in certain areas.

“The EU’s multifaceted view of China affects our policies towards the country. However, we do see China as an essential partner to solve global challenges such as WTO reform and climate change,” she added. Other European concerns revolve around production overcapacity in China’s steel sector, and the nation’s ‘Made in China 2025’ strategy for high-tech, which could destabilise world markets.

A two-way street

China meanwhile has its own concerns about the EU, not least European perceptions about Chinese culture and ways of thinking. A Chinese participant reacted to a comment that EU-China relations have deteriorated significantly recently, and specifically that this relationship will not improve without real dialogue on big political issues such as Hong Kong or human rights in China.

“We have two different political models. But there are many ways we can cooperate to put aside political differences and to maximise our economic interests,” he said. “Ultimately, the EU and China are two huge markets and both have important cultures. We need better communication between the two sides to resolve our differences.”

A European participant asserted that there could be no reset of EU-China relations at the current moment due to growing mutual distrust. The pandemic has shown the EU its own supply chain weaknesses, hence the drive for more European autonomy in some sectors, as well as a decoupling or minimisation of European dependence on China. The European Commission calls this an ‘Open Economy Strategy’, based on the EU pursuing its own interests independently, but not in isolation.

How to overcome these differences? “The best way to remove mutual distrust is for the EU and China to complete current negotiations and to make concrete progress,” remarked another European participant.

Walking the talk

Investment negotiations between the EU and China aim to rebalance market access, improve the level playing field, and achieve meaningful sustainable development results. A speaker noted that European Parliamentarians are keen to see genuine commitments by China to labour, the environment and climate actions: “It’s a heavy agenda, but we all hope to conclude these talks by the end of 2020.”

“Our public coffers are empty and the world’s economic stability is endangered by this pandemic,” concluded the moderator. “We must rethink our models and relationships and find some common ground – ideally through compromise and open minds, backed by the EU’s hard-earned values.”