Many European countries have primarily viewed relations with China as an economic opportunity. Following its entry into the World Trade Organization (WTO) in 2001, China was seen as a source of cheap manufacturing imports and as a destination for investment in manufacturing industries. While the extent of the latter differed significantly between countries, the former was true across Europe, and in line with views of other developed countries. As China developed, however, it also provided the lure of potentially the largest market of middle-class consumers for European businesses. At the same time, the implicit assumption behind much EU policy in recent decades was not only that China would converge economically with the West, but also that this would facilitate political convergence.
Market access
European businesses and policymakers have long been frustrated by limited market access in China. Many sectors have either not been open to foreign companies or only accessible through joint ventures with local partners. In the latter case, this often involves the forced transfer of technology as the price of doing business. There have also been related complaints over the protection of intellectual property in China and over requirements for participation or surveillance in companies by the Chinese Communist Party.
These concerns are fundamentally about a lack of reciprocity. The European market has been almost fully open to Chinese exports and investment, while this has not been the case in China. This is not a matter of specific barriers thrown up against European companies in China; it reflects China’s development and growth model that depends on building up domestic industrial capacity in part by initially limiting foreign competition. This largely explains why relatively little progress has been made towards rectifying this.
European governments frequently highlight ‘promise fatigue’ when it comes to the Chinese government approach to reciprocity. Beijing has often promised to open up new sectors of the economy or to reduce barriers to foreign firms, including joint-venture or licensing requirements that effectively shut them out. Generally, the follow-up has been disappointing from the European perspective.
This has not stopped the EU from pursuing further market access in China. The business sector, possibly the most important constituency for policy on China in many member states, has taken a similar approach. Businesses have become more vocal about the need to protect against market distortions arising from Chinese economic practices. Yet they continue to see potential in the Chinese market and tend to argue against a confrontational approach. They continue to invest in China, including a number of high-profile investments in 2020 including in electric mobility, and argue against economic decoupling. This is broadly in line with the approach of American businesses. Neither the impact of COVID-19 nor the trade war waged by the Trump administration on China have led them to consider moving manufacturing activity out of the country. In fact, US financial firms have increased their business activities there.
Businesses have become more vocal about the need to protect against market distortions arising from Chinese economic practices. Yet they continue to see potential in the Chinese market and tend to argue against a confrontational approach.
Chinese competition
The operating environment for companies in China is not the only issue for the EU. Governments also worry about the impact of Chinese operations in Europe and increasing competition from Chinese firms, often on what many policymakers and business representatives judge to be an unfair basis. This ranges from technology transfer through acquisitions of European firms to distortions of the single market through non-market support for firms with Chinese ownership and dumping of Chinese products. In recent years, a slowdown in Chinese FDI and the beefing up of investment-screening mechanisms throughout Europe have slightly reduced the urgency of this issue. Nevertheless, China has moved up the agenda for many European countries as it is increasingly seen as an economic competitor.
European policymakers describe 2016 as a watershed, since then China has been an issue of growing importance. Around this time it became increasingly clear that China was not content with remaining a low-end manufacturing base and aimed to compete in high-end manufacturing through its Made in China 2025 policy. Previously it had been mainly Southern Europe’s economies that experienced the downsides of China’s integration into the global trading system as, like certain areas of the US, they shed jobs as they struggled to compete, for instance, with textile imports. China’s pronouncements made clear it also aimed to outcompete the Northern European economies in their areas of strength, including Germany’s industrial base.
Chinese ambitions and major achievements in new fields such as artificial intelligence have fed into existing insecurities in Europe about its own position. According to the European Commission, 70 per cent of the global economic impact of artificial intelligence is likely to be concentrated in North America and China.
Perceptions of unfair practices add to European worries over the increase in competition from Chinese firms moving higher up the value chain. These have faced accusations of gaining unfair advantages due to state support – through exports of subsidized goods and through financing advantages – as they increasingly ventured into international markets. The EU sees this as a potential distortion of the level-playing field and of the single market. Governments also worry about Chinese firms, often potentially with state support, buying European companies to acquire technological know-how.
Politics complicating mercantilism
Political disagreements between the EU and China complicate their economic relationship and this worsened as tensions between the two increased in the first half of 2021. European political leaders and civil society actors have long voiced concerns over the lack of democracy and respect for human rights in China. Developments in recent years have intensified these concerns as the treatment of ethnic minorities in Xinjiang and the crackdown in Hong Kong made headlines in the West. These issues may prevent both sides continuing along the well-trodden economic track as European civil society and parliaments have become increasingly vocal in their criticisms of Chinese actions. The perceived mishandling by China of the initial phase of the COVID-19 pandemic also led to a rise last year in unfavourable views of China across Europe. As a result, several European firms have come under public and political pressure over their operations in China. Relations between European countries and China worsened further in 2021 following the imposition of sanctions by the EU on a number of Chinese individuals connected to alleged human rights violations in Xinjiang. China responded with countersanctions, leading to the ratification of an already agreed investment agreement between the EU and China being put on hold (see below).
China’s use of economic measures in response to what it perceives as political snubs has also affected European views of economic cooperation and competition with the country. It has complicated relationships between China and, among others, Norway, Sweden and Australia in recent years. Even Germany has been affected, with the Chinese ambassador warning in 2019 of ‘consequences’ if it chose to exclude Huawei from its 5G rollout. Wanting to avoid being punished by China might have led many EU countries to hold back from a more confrontational stance.
The interplay between economic and security policies creates further complications. This has been on full display in recent years in the discussion over whether to allow Huawei to participate in the rollout of 5G mobile telecom networks in Europe. A significant number of countries, often under pressure from the US, have decided to ban the company from doing so, usually on security grounds. Although this was never made explicit, there are industrial policy considerations involved as well, with two of Huawei’s main competitors being European firms. This spilled over into the CAI negotiations, with China reportedly having asked for certain market access to not apply to EU countries that have banned the company from their 5G rollouts.
