The Europe-China relationship: dependencies, divergence and decoupling

Trump’s 2016 election as US president shocked Europe; during his presidency, he pointed his finger at China, talking about trade deficits and imbalances, unequal trade practices and Chinese exploitation of Western free economies. Interestingly, we needed Trump to tell us this. At Davos in 2017, we were relieved when Xi Jinping promised to be the torch carrier of globalisation. He told us exactly what we wanted to hear, even though we soon woke up to atrocities in Xinjiang, the erosion of freedoms in Hong Kong – with 1,600 democracy activists in jail and who knows how many in exile – and the militarisation of the South China Sea, despite Xi’s promises to Barack Obama.

These are marvellous examples of China testing the responses of the weak West. China has been very successful in all the forementioned actions and beyond. Then came the pandemic and Russia’s invasion of Ukraine, and the EU finally woke up to realise that interdependencies are not a guarantor but a vulnerability risk to its securities and preparedness.

The EU now aims to ‘de-risk’ in critical areas and build European economic security, but its dependencies are so deep that Europe often mirrors its core interests through a lens of how China could react, potentially weaponise dependencies or retaliate. In the space of economy and trade, China retaliates asymmetrically, having detained foreign businesspeople, installed exit bans and raided foreign businesses. These are not exactly the model actions of an investable country.

Geopolitically, we have now entered an era of protracted systemic instability, which is characterised by the rise of autocrats and the decline of democracies. China is installing its global order, slowly but surely, in the United Nations and other international organisations, as well as through its bilateral ties, to keep the Chinese Communist Party (CCP) safe. We are seeing a growing trend of de-Westernisation led by China and Russia, increased securitisation, a return of industrial policies and emerging international alliances, especially within the bifurcating blocs. We are witnessing supply chain reorganisation, ‘friend-shoring’ and de-risking. Engagement with China did not make the country a responsible global stakeholder.

The role of China

In Chinese political discourse, self-reliance is not a new phenomenon. Self-reliance was already mentioned in CCP documents in the late 1930s; it later justified Mao’s isolationist policies in the 60s and 70s; since then, it had almost disappeared from the political discourse until September and November 2018, when Xi Jinping started to reference self-reliance in his speeches.

Xi called for a “whole-nation approach” to achieve self-reliance by reducing China’s dependence, particularly concerning imports of critical technology components. However, this was not the story he wanted to share with the outside world. At the China International Import Expo in 2018 and again to a foreign audience, Xi defended globalisation by arguing that countries need to pursue an open policy and oppose protectionism and unilateralism. Soon after, he spoke at a China First Heavy Industries plant – a symbolic location – and called for self-reliance: “Internationally, advanced technology and key technology is more and more difficult to obtain. Unilateralism and trade protectionism have risen, forcing us to travel the road of self-reliance.”

This original quote was soon deleted from Chinese sources because it gave the impression that Xi admitted that China had used dubious means – coercion and theft – to obtain foreign intellectual property. Self-reliance policies have since progressed into the country’s dual-circulation model and semiconductors have become the central focus of China’s self-reliance drive.

Europe’s response

Europe has been mirroring China’s decoupling and drive for self-reliance through its pursuit of strategic autonomy, de-risking and economic security, but is it capable of following through and responding?

There is growing appetite in the EU to assertively de-risk and decrease dependencies. Three signals indicate that Europe’s de-risking is progressing: Western businesses are pulling out billions of profits from China instead of investing them back in the Chinese market; China is increasingly directing its own trade away from Western markets; and foreign direct investment (FDI) outflows surpass inflows to China for the first time.

However, the integration of a coherent EU foreign policy remains a well-known challenge, and this weakens the EU globally. The three attributes of strength, power and size, which could be used to its advantage, are watered down by internal fighting and member states that are guarding their industries’ interests in China.

In a well-known example, the EU tried to impose tariffs on Chinese imports of solar panels from 2010 through 2014, but China separately threatened various EU countries and the then-EU trade chief Karel De Gucht was forced to backtrack. It was a clear warning: if don’t stand together unified, we will lose. Now, Europe is facing the same situation with the green transition, especially when it comes to wind, electric vehicles (EVs) and batteries – all areas in which the EU is terribly dependent on Chinese critical minerals, materials and components. Will decarbonising subjugate our national securities? There are also warnings that go beyond dependencies, namely that China-dependent EV infrastructure would pose similar security threats as Huawei gear in 5G networks.

Dependencies, divergence and decoupling

In 2020, the European Commission published two studies, one on critical raw materials for strategic technologies and sectors in the EU and another on mapping the EU’s import dependencies on third countries. These studies found that China dominates the supply of raw materials and, on average, accounts for 45% of all raw materials needed to produce strategic technologies.

Some of these dependencies cannot be easily replaced by other sources, if at all, giving Beijing enormous leverage that can easily be weaponised. In retaliation to chipmaker ASML, China restricted the exports of key materials in the semiconductor industry: germanium, gallium and, more recently, graphite, which are used in the production of chips, LEDs, solar panels, microprocessors, solar cells or military applications such as dark vision goggles.

However, China’s restrictions concerning these three materials are expected to have limited impact in the long term. Former importers are already taking steps to diversify and increase domestic mining and processing capabilities; these actions may prove to be a needed kick towards recycling and the circular economy. According to some studies, the circular economy could replace 70% of critical material dependencies in Europe alone. But this requires investment.

China is ever more willing to weaponise both imports and exports, even in areas directly connected to the fight against climate change, to serve its geopolitical and strategic purposes. This behaviour increases distrust and intensifies geostrategic competition and even bifurcation of the world into two camps. However, this is seen in Beijing as the binary opposite. European restrictions on exports in certain high-technology areas are perceived as Europe having no agenda of its own.

European security interests are disregarded simply as dictations by the United States, which wants to prevent China’s rise. The fact that China needs these technologies to fulfil its self-reliance targets and become the world’s leading technological superpower by 2050 is left unsaid. For China to obtain its targets, tapping into foreign high-tech is imperative.

History shows us that it is all about gaining the needed resources. Vice Premier He Lifeng and other Chinese leaders who bargain with the West to give them access to high-tech products are following the same pattern.

The CCP was always going to decouple from the democracies that are China’s systemic rivals. This is not only Xi Jinping’s doing, even though he has accelerated the long trend of diversifying China’s suppliers and self-sufficiency in order to avoid becoming dependent on one supplier. Once the party had acquired enough power, resources and money, it was always going to decouple. Reforms were intended to bring in more resources for China to become self-sufficient. Similarly, when private entrepreneurs like Jack Ma became too powerful, it was only a matter of time before the party reined them in.

Considering the ongoing EU-China summit, European Commission President Ursula von der Leyen is now using the EU’s leverage to introduce plans that restrict the flow of sensitive technologies to China, as well as to launch the anti-subsidies probe into electric vehicle (EV) imports to the EU. China’s economy is in a dire situation, and this is the moment for Europe to build a position of strength without anticipating a possible retaliation from China.

The upcoming 12th sanctions package may include export curbs on Chinese entities that are sending dual-use items to Russia. China is clearly circumventing ongoing sanctions, trusting that the EU is too dependent and too weak to respond. But China is not in a strong position itself, and for Europe to ignore the Russia-China quasi-alliance and cooperation can lead to fatal policy decisions that undermine nothing less than our societal fundamentals, democracies and European security.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.