Internal divisions endanger EU’s ‘de-risking’ strategy towards China

On June 18, the EU signed with Chile a memorandum of understanding to deepen cooperation on sustainable raw materials value chains. The Latin American country is the world’s second largest producer of the metal that is vital for the production of electric vehicle batteries.

Five days earlier, the EU had concluded a similar cooperation arrangement with Japan. The two deals follow those already inked with Canada, Ukraine, Kazakhstan, Namibia and Argentina on the supply of critical metals.

The stated aim of the EU is to reduce its excessive reliance on China for materials that are key for its economy. This fear is not unjustified. On July 3, Beijing announced it would introduce controls on exports of strategic metals used in the microchip industry, for which the European Commission immediately expressed concern. The Chinese punch to the European bloc came after the Dutch government announced new curbs on exports of some chip-making equipment on June 30, a move clearly aimed at Beijing.

On the same day, the European Council, which represents the 27 EU governments, said the bloc would continue to reduce its dependence on and vulnerability to China’s economy and supply chains, and to “de-risk and diversify where necessary and appropriate,” although it did not intend to “decouple” from Beijing.

The two declarations apparently went in sync, but the Netherlands’ decision is not linked to the EU’s strategy to boost its economic security, which is still in the making, but rather is due to U.S. pressure on allies to restrict supplies of high-tech components to China.

In its annual Strategic Foresight Report, released on July 7, the European Commission (the bloc’s executive body) says China is “focused on economic influence and diplomatic assertiveness, aiming at a systemic change of the international order.”

In remarks on the 2023 Strategic Foresight Report, EU Commission Vice-President Maroš Šefčovič said: “we need to recognise that the time when liberal democracy was the model of obvious choice is over. Liberal democracies are increasingly being challenged by autocracies as the governance model best suited to deal with growing social-economic issues.”

However, the EU is struggling to devise a coherent and shared strategy to deal with China’s global ascendancy as great power competition between Beijing (its second-largest trading partner) and Washington (its strategic ally) is escalating to dangerous levels.

The European Commission recently proposed a new approach to protect EU economies and strategic sectors from geopolitical risks coming from autocratic countries like China and Russia. The EU Commission wants to introduce stronger export controls, reinforce the existing EU-wide mechanism for screening inbound investments and create a tool to monitor outbound investments.

In early June, the EU institutions had instead reached a political agreement on a new anti-coercion instrument to be used against trade boycotts like those imposed by China on Lithuania since 2021.

The EU has already in place directives to shield European markets from China’s dumping practices and its export subsidies to Chinese companies. However, as much as Europe is beefing up its toolkit for trade and investment protection, the problem remains its enforcement, given that this falls within the competence of member countries. For instance, they have the last word on whether or not specific investments should be allowed on their territory.

Former Soviet nations vs. Germany Inc.

Concerned and irritated by China’s ambiguous position over Russia’s invasion of Ukraine, the EU’s eastern nations (save Hungary) are disappointed by their peers in Western Europe, which appear unwilling to take a stronger stance on Chinese market’s distortions, trade manipulations and coercive attitudes. Germany and France, which are keen to safeguard their industries’ interests in China, are the primary targets of the former Soviet satellites’ complaints.

Speaking to The China Project, Lithuanian lawmaker Matas Maldeikis distilled the divide between the eastern and western flanks of the EU over the bloc’s China policy. Maldeikis, who is head of the Taiwan friendship group in his country’s Parliament, does not believe the new EU rules, if approved, will be effective against China’s market practices and, more in general, geopolitical assertiveness. “If after all these sanctions imposed on Russia, [Moscow] still gets most of what it needs with different schemes, I have no doubt China will have no problem bypassing these controls,” he said.

EU foreign policy chief Josep Borrell himself recently admitted that the EU’s restrictive measures against Russia were not extraterritorial and that the Union could not force third countries to stop being involved in trade triangulations with Russian entities, which is Moscow’s well-established way to circumvent European sanctions.

Maldeikis emphasized that the major obstacle to the approval and implementation of the new set of regulations would be big German business firms. “[Chinese trade] sanctions against Lithuania and how China operated by pressing German business was the clear signal that the Chinese know who is the most influential in EU corridors  and who you should call if you need to press the EU. Not Brussels, but Berlin,” said the Lithuanian politician.

Recent trade and investment decisions by single EU governments shed a light on how European nations continue to move autonomously on this front. In May the German government green lighted a controversial deal that would give China’s shipping company COSCO a minority stake in a container terminal at Hamburg port.

By contrast, on June 15, the Italian cabinet used its “golden power” instrument to limit the powers of Chinese state-owned firm Sinochem Group as a shareholder of Italian tire maker Pirelli — Rome justified the move by saying it was taken for national security reasons.

The Italian government’s intervention is in line with the U.S. attempts to prevent China’s technological advance, much like in the case of the new Dutch limits to the export of semiconductor components, including ASML Holding’s cutting-edge lithography machines for manufacturing semiconductors.

Maldeikis pointed out that the planned EU regulation on economic security would at least “send clear signals to markets in the West that China has become a toxic topic even in Europe.”

But that will inevitably have a cost for the bloc, as China’s fresh trade restrictions demonstrate. How the EU will react to Beijing’s retaliations to the de-risking strategy, overcoming or not internal divisions, will define part of Europe’s future path to more political integration.