The EU and China: what’s on the agenda?

In recent weeks, rumours of an upcoming summit between the European Union and China have been floating around Brussels. The time would seem right. A new government in Germany, which is arguably the EU member state with the closest economic and political relationship to Beijing, has just come into office. We are past the COP26 in Glasgow and the G20 in Rome, important international rendezvous where the willingness of Beijing to engage on global issues like climate change, COVID-19 and macroeconomic stabilisation could be gauged. We are also past United States President Biden’s Alliance of Democracies summit, which China saw as being directed against itself, and condemned vigorously, even organising a counter-event of its own.

Moreover, the EU has finally launched its much-awaited Indo-Pacific Strategy and it is high time for EU leaders to explain it to Chinese President Xi and his top officials. A year has also passed during which relations between Brussels and Beijing have been on hold and the EU-China Comprehensive Agreement on Investment frozen in the European Parliament, due to disputes over human rights, Hong Kong and Taiwan and the sanctions both sides have imposed on each other. So it is time to talk. Yet as the European Commission and the European External Action Service (EEAS) prepare for the next EU-China summit, albeit most likely a virtual one, they are aware of the delicate balancing act that EU policy towards Beijing has to reflect these days.

On the one hand, there is a strong desire not to let EU policy become merely a chorus or an adjunct of the line followed by Washington. At President Biden’s Summit of Democracy this week, European leaders expressed support for the notion that democracies need to work closer together and offer each other more solidarity and support in, for instance, building resilience or standing up to political, economic or military bullying by the authoritarian states. There was also interest in ideas for strengthening democratic institutions at home, particularly by fighting corruption and strengthening the rule of law and the independence of the judiciary.

Yet EU leaders are generally wary of a black and white division of the world into democratic and authoritarian regimes, with the conclusion that you can do business with the first but not with the second. They point out that there are many half-democracies or partial-authoritarian states in the grey zone where EU interests have to be defended, as well as values, and diplomacy has to be able to operate.

Moreover, they will stress that cooperation with Beijing in particular is both essential and possible on some of the big international issues, such as climate change in the wake of COP26, the Iran nuclear file, or global supply chains and energy corridors which have been disrupted by COVID-19. As the world stands on the brink of more lockdowns and border closures due to the spread of the Delta and Omicron variants, coordinated economic measures between the West and Beijing become all the more important to prevent the global economy from tipping into recession. That is why the EU is particularly interested to pursue talks in Beijing on a stimulus package that could help to draw in more EU imports of goods and services. So while agreeing on the need to re-invigorate the democracies, European leaders will want to maintain an ‘open door’ policy to dialogue with Beijing and balance competition with as much cooperation as possible. For instance, although the US and Australia have decided on a diplomatic boycott of the Winter Olympic Games, and with the UK evoking the possibility of doing the same, there has been no such indication thus far that EU governments will follow suit.

The EU is acutely aware of its dependence on trade with China, its largest trading partner. According to the EU-China Business Association (EUCBA), 60% of the companies it surveyed report that they are seeking to increase their activities in China. Before the COVID-19 downturn in the global economy, EU-China trade was growing at 30% a year. The 400mn Chinese citizens who belong to the middle class were valuable customers for EU cars and luxury consumer goods. Yet recent investment in both directions has slowed. COVID-19 has drastically reduced Chinese tourism to Europe, and the EU’s new foreign direct investment screening mechanism, the purpose of which is to prevent foreign control of or intellectual property transfers from strategic EU companies, has slowed the flow of incoming Chinese investment.

Yet the EU and China have still managed to make some progress on harmonisation of rules and standards. For instance, they recently approved an agreement on the taxonomy for ‘green finance’, or those instruments used to promote carbon neutral technologies. China has also been involved in a nuclear fusion project with France and Germany. In short, the EU has no economic interest in the global decoupling of trade that is advocated by many policymakers in Washington. Beijing has also made some moves towards Brussels. For instance, it reduced its list of restricted import products from 94 to 33 and offered to open its market for medical equipment and telecoms, which have been longstanding EU demands.

Yet on the other hand, the pressures on the EU to take a tough line with Beijing at the summit are growing.

Firstly, there is the case of Lithuania. With a population of 2.8mn and GDP of US $63bn, Lithuania has upset Beijing, with a massive GDP output of US $15tn for its 1.4bn population, by allowing Taiwan to open a trade office and representation in Vilnius using the title of ‘Taiwan’ rather than the customary ‘Taipei’, as is employed elsewhere across the EU. Lithuanian MPs also participated with their Baltic counterparts in a visit to Taipei recently for a democracy conference. Lithuania has left the annual 17+1 dialogue between China and the countries of central and eastern Europe. As a result of these frictions, Beijing has now delisted Lithuania from its customs clearance procedures, meaning that Lithuania can no longer export its goods to China. In response, Vilnius has turned to the European Commission for help and appealed for EU solidarity. It has also said that it will take its dispute with Beijing to the World Trade Organization, although it is unclear which particular trade rule has been violated here. Yet Lithuania will certainly want to use the EU-China summit to take up its case.

This brings us to a related issue: the proposed EU anti-coercion instrument. This is one of a range of autonomous measures that the EU is seeking to develop to respond to what the EU considers are unfair trade practices. These include the dumping of cheap or subsidised products, the use of forced labour, production that harms the environment and aggressive tactics to win procurement contracts in the European Single Market. The European Commission is due to publish the prototype of this anti-coercion instrument this week for discussion in the EU Council of Ministers and the European Parliament. The EU is seeking to expand its toolbox of retaliatory measures, including disinvestment, trade restrictions and blocks on foreign government participation in EU public procurement. The hope is that by having these measures at its disposal, and pre-approved by EU member states for use by the European Commission, the EU will be able to deter unfair trade practices as much as retaliate against them.

The anti-coercion instrument first made its appearance in Brussels during the Trump administration when the EU was seen by Trump as a “threat to US national security”, and Trump repeatedly threatened to impose unilateral tariffs on German cars, Scottish whisky, or French wine and food products. Today, however, China is the main focal point of this instrument. The EU has been closely studying Australia’s experience of dealing with China. Moreover, it is also interpreting international law to mean that international trade agreements can be declared null and void if one of the parties is using coercive measures. The precedent in this respect was the Arab oil embargo against European countries in 1973 and 1974 to stop them supporting Israel.

There will be some intense debates within the EU before the anti-coercion instrument is adopted. Will the EU be ready and able to defend its decisions in front of WTO panels? Some member states doubt that Beijing will be deterred and will retaliate against EU sanctions, as it did recently by imposing travel bans on several EU political figures and the EU’s Political and Security Committee after the EU took action against four Chinese officials and one state entity allegedly implicated in the repression of the Uighurs. These sceptical member states have suggested that the EU set up a solidarity fund to compensate member states impacted by Chinese trade restrictions to help them find new markets. Absorption of the costs and damage is seen to be preferable in the long run to starting new trade wars. There is also the question of how far EU collective solidarity will extend if only one member state is affected.

EU businesses are worried that they will get caught up in the crossfire of Brussels-Beijing trade disputes. The alcoholic spirits trade association, spiritsEUROPE, has already called on the European Commission to consult business and publish an economic impact assessment before going ahead with any retaliatory measures against China, or any other key trading partners. There are also calls for the anti-coercion instrument to be used only if the coercive acts are made public, of which many are not. Finally, there is a debate on who will yield the anti-coercion instrument on behalf of the EU and in which circumstances. Bernd Lange, MEP and Chair of the European Parliament’s Committee on International Trade, has suggested that the EU develop “a whole bouquet of measures” to keep Beijing guessing as to the EU reaction. He also suggests that the EU member states delegate to the Commission the authority to act on their behalf so that they cannot appear divided.

The anti-coercion instrument will no doubt be a controversial issue on the agenda of EU-China talks. Yet there will be others as well.

One will be the ratification of the Comprehensive Agreement on Investment (CAI) seemingly blocked indefinitely in the European Parliament. The Chinese side would like to have a roadmap from the EU as to how the ratification process can be brought forward. The Chinese ambassador to the EU, Zhang Ming, has argued that the EU should not overload trade facilitation agreements with a host of political factors that should be addressed in separate channels. Whether Brussels will accept this view remains to be seen given the pressures from the European Parliament. Perhaps the EU and Beijing could agree on a reciprocal and coordinated removal of the sanctions to clear the way for CAI ratification. Yet EU leaders will need to sell such a pragmatic deal to the European Parliament, as well as persuade public opinion, both of which may be keen on seeing actual improvements in human rights in China, or concrete actions by Beijing, before unfreezing the CAI.

China will no doubt argue that the EU’s foreign direct investment screening mechanism is hurting the EU’s economies by depressing Chinese investments. It will also repeat well-known demands that the EU treats Chinese companies fairly and subject to open market competition rules. This applies to heavy US pressures on EU countries and the United Kingdom to strip Huawei 5G telecoms equipment out of their core networks and opt instead for non-Chinese technologies. Several European intelligence chiefs, most recently Richard Moore of MI6 in the UK, have given stark public warnings of the security dangers of too much reliance on Chinese technologies. Beijing will also almost certainly take up the EU-US Trade and Technology Council (TTC), which is now up and running, and want to have Brussels’ perspective on what the TTC is designed to achieve in terms of setting global technology standards.

The EU for its part will stress its pet themes of intellectual property protection and the rule of law in upholding business contracts. It will push for full market access and transparent business tax regimes, as well as lobby against subsidies and competition distortions in state-owned enterprises. The EU will also question China about its approach to the reform of the WTO. This year marks the 20th anniversary of China’s accession to the WTO and its full entry into the global market economy. The EU will test Beijing’s willingness to embrace reforms that seek to protect the environment and labour rights or to harmonise corporate tax regimes and clamp down on tax havens. The EU will also be interested in China’s willingness to open up its public procurement and protected sectors such as health, telecommunications, financial services and insurance.

The EU will push Beijing on climate change. In the EU mind, China emerged from COP26 with a mixed record. It signed a joint declaration with the US but also backed India in avoiding a commitment to halt coal production as opposed to winding it down. Beijing made no new commitments regarding the achievement of carbon neutrality by 2060. The EU would like this to be 2050 as with many of the industrialised countries. Certainly, before COP26, China promised not to invest in the future in new coal-fired power stations abroad, but its use of coal domestically has increased due to power shortfalls and blackouts. So the EU will push Beijing to engage more in some of the COP26 individual agreements, such as to eliminate methane emissions, or on deforestation or climate finance for the developing countries.

Given Beijing’s investments in green technologies such as solar panels, smart grids and electric vehicles, there will be a strong EU interest as part of its own European Green Deal in cooperative projects to take green innovative technologies, such as batteries and the use of hydrogen-based fuels, forward. The EU will also be interested in how China’s foreign direct investment can shift from supporting fossil fuel energy projects to focusing more on future-oriented green technologies.

The EU has also recently launched its Global Gateway infrastructure financing initiative which is seen in Brussels as an alternative to Beijing’s Belt and Road Initiative. Yet there is also interest within the EU institutions as to how  both the European Green Deal and the Global Gateway investment programmes could be made compatible, complementary and even perhaps joint in the future. Transport corridors in the Western Balkans, digital infrastructure, or green technologies and circular economy recycling projects have been mentioned in this connection.

Finally, geopolitics will be unavoidable. The EU side will want to explain the thrust of its Indo-Pacific Strategy unveiled last September. It will stress that this is a comprehensive and multi-layered strategy for broad regional engagement and not a strategy primarily to contain China. China will no doubt complain about the activities of some EU countries, notably the Baltics or the Czech Republic, in engaging with, or issuing statements of support for,  Taiwan, and meanwhile condemning  China’s recent military flights into Taiwan’s Air Defense Identification Zone (ADIZ), or its live fire and military coastal exercises. This latter point is seen by many EU politicians as tantamount to preparations for an invasion of the island.

While EU member states all respect the One-China policy, there is growing attention paid to Taiwan as well as interest in securing a greater role for Taipei in the multilateral system, for instance, World Health Organization membership and stepping up trade and political and civil society exchanges. The EU for its part will discourage China from dealing with the military regime in Myanmar and instead engage with ASEAN in persuading the military junta there to hand power back to the elected civilian politicians. Brussels will also want Beijing to apply pressure on North Korea to desist from more provocative missile tests, cyber-attacks and other forms of hybrid warfare, and to return to negotiations on nuclear disarmament within the 6+1 process. China’s willingness to work with the EU on climate change and on the broader diplomatic front would certainly help to re-establish some of the trust which has been broken over the human rights issues and the Chinese security law in Hong Kong.

In sum, there is a rich, albeit difficult, agenda for Beijing and Brussels to deal with. Now we simply need the organisation of the summit to see if both sides are willing and able to move; and to carve a distinct space for the EU-China relationship somewhere between the current clash of the democracies versus the authoritarians.