Growing Strain in EU-China Trade Ties

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The relationship between the European Union (EU) and China has long been characterized by a complex interdependence marked by both cooperation and competition. Trade has played a central role, with China becoming the EUs largest trading partner in goods and a significant recipient of foreign direct investment. However, recent years have witnessed a growing strain in this relationship, owing to the recent shifts in global geopolitics, economic imbalances, and disparities in regulatory frameworks between these two parties. The increased politicization of trade policies has added complexity to the current situation, potentially leading to new conflicts. Such conflicts would harm both parties, hindering their economic development and impeding the achievement of their respective goals. Therefore, maintaining open lines of communication through continued discussions is crucial to addressing and resolving these differences.

Diplomatic ties between the EU and China were officially established in 1975, but it was only after China acceded to the World Trade Organization (WTO) in 2001 that their trade partnership gained significant momentum. Over the past two years, EU-China trade has experienced substantial growth, surging from a modest 4.6 percent year-on-year increase in 2020 to an impressive 20 percent year-on-year growth in both 2021 and 2022.

The economies of the EU and China are closely intertwined, engaging in a substantial daily trade of goods amounting to €2.3 billion. However, despite this significant growth, the EUs trade deficit with China experienced a notable spike, reaching nearly €400 billion in 2022. The EU attributes this trade imbalance primarily to China, citing restricted market access for foreign companies operating in China and substantial subsidies provided by Beijing to its producers in key sectors such as electric vehicles, solar panels, batteries, and wind energy.

In response, the EU has launched several anti-subsidy investigations against China.For example, a recent anti-subsidy investigation targeting Chinese electric vehicles (EVs) was launched by the EU, despite strong objections from China. There is a possibility of a similar investigation being conducted in the medical devices sector and wind turbine, potentially resulting in increased import tariffs or other trade-restrictive measures. The European Commission has also confirmed it would levy provisional anti-dumping duties on some plastic imports from China. During the 10th EU?China High-Level Economic and Trade Dialogue last year, the EU raised concerns about market barriers affecting European products, issues related to cross-border data flows under the Chinese anti-espionage law, and export controls.

Furthermore, the EU has advocated for more stringent measures and control over the transfer of critical technologies. The bloc accuses China of forcing technology transfers through government-imposed laws, making it a prerequisite for companies to operate in the country. This alleged practice creates an environment of unfair competition and is seen as a direct violation of international trade laws. However, the Chinese government has rejected such claims where it accused the EU of trade protectionism which will create dents in the positive momentum of bilateral trade cooperation.

This hardline policy on trade from the EU towards China cannot be discounted from recent developments in global politics. This was evident in a significant speech by the President of the European Commission, Ursula von der Leyen, made before her visit to China. She emphasized that “security and control now take precedence over the principles of free markets and open trade.” This resolute stance was alsoreiterated during the EU-China Summit in December 2023, where she raised several politically sensitive issues, including the Russia-Ukraine war, concerns about Chinese companies evading sanctions against Moscow, developments in the Taiwan Strait and the South China Sea, human rights concerns, and sanctions against members of the European Parliament.Simultaneously, EU member states have felt increasing pressure from the US in countering Chinese activities, especially in managing Chinese technological advancements.

The result is visible as the EU has taken a policy of “de-risking” which not only talks about economic de-risking but also diplomatic de-risking. In a statement released in June 2023, the EU expressed its commitment to reducing critical dependencies and vulnerabilities in supply chains, implementing de-risking and diversification measures where needed. Regarding diplomatic de-risking, President Von der Leyen explained that this approach enables the EU to take a firm stance on issues like Russia while keeping trade channels open and fostering dialogues on global concerns.

The trade partnership between the EU and China is intricately interwoven, and any disruption could have consequences not only for their economies but also for their political relations. The EU, in particular, has a significant dependence on China for essential raw materials, such as rare earth elements (REEs), vital for clean energy technologies and electronics. Reports indicate that Europe relies on China for 98 percent of specific rare earths crucial in manufacturing technology for wind power generation, hydrogen storage, and batteries. If any conflict disrupts between these two, the accessibility to these resources could be jeopardized, posing a threat to European manufacturing industries and impeding its transition towards clean energy.

It is important to recognize that the EU consists of 27 countries, each with diverse opinions on collaborating with China. For instance, bilateral trade partnerships sometimes overshadow the broader concerns of the EU as a collective entity. An illustrative example is President Macrons emphasis on strengthening China-France trade and business ties during his state visit to China last year. Even, the French president brought a group of business leaders with him on the trip, including officials from French multinationals Airbus and Alstrom.

The EU-China trade relationship, once a model of cooperation, faces turbulence fueled by shifting geopolitics, economic imbalances, and regulatory gaps. The EUs hardening stance, emphasizing security over free markets, risks cultivating conflict, jeopardizing both sides access to critical resources, clean technologies, and investment. While complete decoupling seems unlikely, open communication, multilateral cooperation, and addressing systemic issues like market access are crucial to navigating this complex dance. Success requires balancing security concerns with economic interdependence to avoid a trade war that could destabilize global progress and deepen tensions.

– Muhammad Estiak Hussain is a Research Assistant at the KRF Center for Bangladesh and Global Affairs (CBGA).

Published in Daily Observer [Link]