Recent events have led experts and policymakers to anticipate a looming global divide, where market democracies will confront market autocracies. However, the interpenetration of market economies from both camps is so significant that any attempt to sever ties or even a sharp change in direction could itself be a seismic event. Nonetheless, as the experience of the past two years has shown, the political stakes could be so high that such seismic shifts become inevitable. The painful rupture with Russia, where decades of energy cooperation had to be terminated by revolutionary means, has raised questions for the EU about the possible scenarios for its relationship with another key partner — China.
However, the spike in geopolitical tension triggered by Russia's invasion of Ukraine served only as a trigger. According to experts from the Observer Research Foundation (ORF), the EU's attitude towards China in the EU had begun to change earlier. Among the key factors they cite are political concerns: human rights abuses in Xinjiang, repression in Hong Kong, and the tense situation in the South China Sea. This trend was compounded by logistical disruptions during the COVID-19 pandemic. However, the war in Ukraine and China's clear intention to support Russia politically and economically make it impossible to ignore the problem any longer.
The essence of the new European policy towards China was articulated by the President of the European Commission, Ursula von der Leyen, in the spring of 2023: to ‘minimise risks, but not to sever ties' ('De-risk — not de-couple'). A complete rupture would entail destructive consequences for both sides. While Russia was merely a crucial energy supplier for the EU, China is one of the union's principal trading partners. In fact, the EU's trade volume is only higher with the United States and the United Kingdom. According to recent data from Eurostat, China leads in terms of the volume of EU imports, accounting for about 20% in 2023, surpassing the United States by approximately one and a half times (13.7%).
However, the trade imbalance is another cause for concern. EU-China trade was balanced only in the early 2000s, but by the end of the decade, the union's trade deficit with China had reached €100 billion, and by the beginning of the pandemic, it had exceeded €150 billion. In 2022, it peaked at €356 billion, decreasing to €291 billion in 2023. However, this reduction was primarily due to the fact that 2022 saw a peak in purchases of telecommunications equipment (the largest category of Chinese exports to the EU) as part of a regular cycle, as noted by Alicia García-Herrero, Senior Fellow at Bruegel.
This imbalance itself is a manifestation of a deeper politico-economic problem. According to experts from the Centre for European Reform (CER), China has deftly circumvented WTO rules on state subsidies for years. The majority of Chinese investments are directed towards state-owned enterprises that receive government support. Distinguishing between quasi-state investments and private ones in many cases proves difficult or simply impossible. Consequently, as China became a key supplier for Europe in certain markets, it systematically replaced European imports by developing domestic production through subsidies, notes Alicia García-Herrero from Bruegel. A striking example is the automotive industry. Over the past five years, Chinese manufacturers have increased their share in the European electric car market from 0.5% to 9.3%, as calculated by Schmidt Automotive Research. This is because they are, on average, a quarter cheaper than their European counterparts. Last autumn, the European Commission initiated an investigation to determine whether BYD and other Chinese companies are achieving this through state subsidies.
The growing trade deficit and similar accusations of unfair competition sparked the trade war initiated by the United States against China in 2018. Under Joe Biden, this conflict has persisted. For Europe, which seeks to adhere to WTO norms, this confrontation has placed it in a challenging situation, according to experts from the Centre for European Reform. China supports domestic production through subsidies, while the United States does so through tax incentives. Europe does neither, making its producers less competitive. In markets where they initially held strong positions (such as automotive manufacturing), they are losing ground slowly, while in new markets, they are losing out more quickly. For instance, in the field of new energy, the development of which is intended to reduce Europe's dependence on autocracies for fossil fuel supplies, the EU has already become dependent on China (→ Re:Russia: From Gas to Electricity). China has become its primary supplier of solar panels. A similar situation has arisen with lithium-ion batteries and other energy storage equipment obtained through alternative means.
Thus, in addition to human rights disputes, there are questions about the differences in the fundamental principles of different ‘capitalisms’. China presents an outstanding example of state control over commanding heights in the economy. However, Global South countries also tend towards a model of greater interpenetration between business and politics. Both China and these countries believe that such interaction is the only way to limit the historical dominance of the West in international markets.
In a report published in the middle of last year, Alicia García-Herrero from Bruegel points out that the EU's dependence on China is not limited to trade. Chinese companies hold stakes in seaports in more than ten European countries. For instance, COSCO Shipping, the world's largest shipping company, owns the port of Piraeus in Athens. State-owned companies like SGCC have stakes in power grid companies in 11 countries. Huawei's base stations and other equipment are used for providing 5G communication services in 19 countries. Experts from the Observer Research Foundation note in their report that some EU countries value Chinese investments too highly, posing a threat to the development of a common European policy: they highlight Hungary, which they call a 'Chinese Trojan horse', and Greece.
This level of dependence rules out any possibility of a quick rupture in EU-China relations. However, as was the case in relations with Russia before the invasion, as Putin's authoritarianism strengthens, the question of whether mutual trade is a tool for containment and integration of Russia (or China) or an opportunity for strengthening political influence in the opposite direction arises. Countries that are more dependent on China are forced to adjust their political rhetoric. And it is not just about Viktor Orbán; France is also taking a cautious stance. For example, Emmanuel Macron has suggested that the Taiwan issue is not very important for Europe. However, this undermines the Euro-American military-political partnership.
Nevertheless, the peak in Sino-European relations has already passed, and they will gradually cool further, predicts Alicia García-Herrero. Besides the fact that the EU and China will diverge politically and ideologically, their cooperation is becoming increasingly less beneficial for the EU. García-Herrero identifies the main challenge for European policymakers as reducing dependence on China in the energy sector by supporting domestic producers and fostering innovation.
Experts from the Centre for European Reform also doubt the possibility of an acute conflict: a rupture between the EU and China would severely impact the standard of living in most countries, and European policymakers are unlikely to go that far. They also note that, unlike the United States, it is not in the EU's interest to create serious problems for the Chinese economy. Consequently, the EU could support the US when it comes to the pivotal issue of restricting chip supplies to China, and also, in its own interests, take measures to protect European car manufacturers. At the same time, it is already pointless to compete with China in the production of solar panels and other equipment necessary for the 'green' transition — it is better to take advantage of the fact that China produces these in sufficient quantities and sells at a low cost.
One scenario for Europe and the US to navigate the current situation is to shift investment flows and production to other developing countries in Southeast Asia. However, such a scenario makes the escalation of military-political tension by China more likely.