Europe and China: between cooperation and confrontation

© Pixabay/Steven Yu

China was the first country to escape the vortex of the COVID pandemic. Beijing reported positive economic figures again in the second quarter. The Chinese economy could even close the year with growth of around two percent. German and European companies in the country are also gaining new hope. However, cooperation between the EU and the world's second largest economy is increasingly complicated by growing conflicts of interest and political factors.

 

In the end, the talks between the EU and China in mid-September produced few tangible results. A personal meeting of the EU heads of government with China's leader Xi Jinping in Leipzig did not take place as planned due to COVID. Instead, only German Chancellor Angela Merkel, EU Commission President Ursula von der Leyen and Council President Charles Michel met with the strong man in Beijing via screen. In concrete terms, the two-hour exchange ended with the signing of an agreement on the mutual protection of geographical indications for foodstuffs. In future, Munich beer and Parma ham will be recognised as geographical trademarks even in the furthest corners of the giant empire. However, the groundwork for this agreement had already been laid the year before.

Still no breakthrough in EU-China Comprehensive Agreement on Investment

In terms of climate protection, however, the EU representatives could not persuade the leading country in coal-fired power plant construction to make any definitive concessions. Chancellor Merkel, as Chair of the EU Council Presidency, will probably also not succeed in getting the EU-China Comprehensive Agreement on Investment (CAI) signed and sealed. This would have been the coronation of her longstanding successful China policy. Since the beginning of her chancellorship in 2005, the volume of trade with China has more than tripled from 62 billion euros to 206 billion euros last year. Even with this positive balance sheet and after seven years and over 30 rounds of negotiations, the CAI is still not ready to be signed. Despite small steps forward, the differences between the two sides on the issue of state-owned enterprises and the competition-distorting subsidies associated with them remains particularly large. After all, state-owned enterprises are the backbone of China's hybrid economic system. 

Nevertheless, both sides are still expressing willingness to conclude the CAI before the end of the year. The agreement is intended to significantly improve market access for EU companies and, according to Commission President Ursula von der Leyen, to replace the existing asymmetry with a new balance. To achieve this and create a level playing field, the restrictions mentioned in the Chinese negative list and the joint venture constraints in several sectors would have to be further reduced. The discrimination of European investors competing with domestic companies should also finally be resolved. Before the end of the year,  BDI will publish a paper outlining the most important elements of an agreement from the industry's point of view. 

Economic partnership between systemic competitors

As early as the beginning of 2019, in our policy paper on China, BDI raised the question of how Germany and Europe should deal with this special partner, who is also a systemic competitor. Concrete demands related firstly to the EU Single Market and third markets. The second point was to take stock of the instruments needed to establish fair competition within the Single Market with Chinese and other non-European companies. This step was carried out together with the Bertelsmann Foundation and finally resulted in the study "Beyond Investment-Screening", a joint publication of Bertelsmann with the think tank Merics and the Rhodium Group. In a third step, BDI is currently working on a comprehensive catalogue with recommendations for all areas of competition policy. This applies primarily to anti-dumping and anti-subsidy measures, but also to the area of investment screening. Same goal here too: a level playing field within the EU.

A rethinking in Europe's economy and politics has been taking place ever since. In March of last year, the EU Commission took up BDI's arguments in its strategy paper on China. The Commission states that China is not only a partner - for example in issues such as climate protection - but also a competitor and "systemic rival". China is becoming increasingly opposed to Western values and fundamental freedoms and seeks to promote an alternative model.

At the same time, a change of heart took place in European capitals in the wake of the Corona pandemic and China’s intransparent handling of the crisis and aggressive foreign policy. Moreover, human rights issues have increasingly come into focus in recent months.

In addition to the discussions about internment camps in Xinjiang and forced labour by Uighurs and other ethnic minorities, Beijing further undermined the trust of the international community when, in summer of this year, Hong Kong's autonomy was substantially curtailed by rushing through the National Security Law.

USA vs. China: Europe between the fronts  

Against the backdrop of the economic and geopolitical conflict with the USA, China is facing important decisions in these weeks. The decision on the CAI will also depend on the outcome of the American presidential election in November and China’s resulting interests. Before that, however, the Central Committee of the CCP will discuss the next five-year plan for the period 2021 to 2025 at its General Assembly at the end of October. This includes the new economic concept of “dual circulation”: China seeks to reduce the vulnerability of domestic production and sales to external shocks by means of a closed internal market and an open external economic circle. Gaps in supply chains and modern technologies are to be closed. According to official statements, this does not involve a decoupling from foreign investors. But things will look totally different with regard to competition for German and European companies on the Chinese and world markets if China really becomes a world leader in all of the important future technologies.

Europe must start to look more inwards. The EU is by all means capable of exerting pressure, as was demonstrated by the publication of the White Paper on Subsidies in June of this year. Therein, the Commission sets out proposals for dealing with subsidised companies from third countries in order to contain market distortions. The measures are aimed specifically at takeovers of European companies and participation in public procurement. In this way, the EU is making clear that it will no longer accept asymmetries and market distortions in relation to its economic partners and wants to restore a level playing field for European industry.