Since economic interests drive EU policymaking towards China, especially in trade and investment, some member states are more prominent and engaged in the process than others. The EU, and in particular Germany, continues to see potential benefits from China’s economic rise. The EU’s overall economic policy response to the challenge China presents effectively consists of a set of defensive and mercantilist economic policy measures, which are guided by a broader geopolitical vision of the EU as a neutral actor between the US and China.
Pursuing strategic autonomy
The combination of a mercantilist approach to China, including attempts to gain small concessions from it on market access, and a focus on protecting the integrity and strength of the single market is in part informed by the geopolitical assessment made by European leaders. A long process by the US of shifting its foreign policy focus from Europe towards Asia, symbolized by the ‘pivot’ under the Obama administration, was followed by the Trump administration’s actions that deeply undermined European trust in the transatlantic relationship. The latter included threats from Trump to withdraw the US security guarantee for Europe and a low-level economic conflict through the imposition of tariffs. These, and in particular the threat of tariffs on German cars, confirmed for Chancellor Angela Merkel that ‘the era in which we could fully count on others is somewhat over’. Meanwhile, for France, which has always seen the EU as a lever for its own influence in the world, this reinforced the importance of building a more independently capable EU in geo-economics and security.
This has led the EU to pursue ‘strategic autonomy’, which the European Council in 2016 defined as the ‘capacity to act autonomously when and where necessary and with partners wherever possible’. Related to this is the idea of ‘economic sovereignty’, or the capacity for the EU to wield economic power. While economic sovereignty is more relevant in the area of trade and investment, it is often used interchangeably with strategic autonomy and has less influence in terms of guiding policy. France has always approached strategic autonomy more from the security perspective than Germany, which is mainly driven by economic considerations.
A strategically autonomous EU would sit as a neutral third pillar between China and the US within the global order. In the economic sphere it would in effect attempt to be a very big and more powerful Switzerland, remaining neutral and maintaining good economic relations with all sides. This does not mean it would be equidistant between the US and China – the EU is closer to the US than to China ideologically, politically and economically – but it does mean avoiding becoming mixed up in the geopolitical great-power competition between them. In crude terms, China would be the world’s economic superpower and the US would remain the security superpower while the EU would be a regulatory superpower. By contrast, the UK largely sees a two-pillar world and has aligned more closely with the US confrontational approach to China policy, including on the issue of Huawei and in response to the crackdown in Hong Kong.
A strategically autonomous EU also means attempting to benefit economically from integration with China and the US. Economic decoupling from China, as raised by the Trump administration, has never been a goal for the EU or any member state. The CAI was negotiated to some degree in the context of strategic autonomy. It exemplifies the features of EU debates on China policy, with France emphasizing the strategic autonomy angle and Germany focusing on market access.
The idea of Europe as a neutral third pillar between the US and China permeates almost all areas of the EU’s international economic policymaking. A prime example of this goal to achieve economic sovereignty is the attempt to increase the international role of the euro. This is aimed firstly at the US and the power it has due to the international role of the dollar. But it is also in view of China’s attempts to internationalize the renminbi, including through a digital currency, which the European Commission and the European Central Bank are now also investigating.
The China toolbox
In response to its market access and competition considerations the EU has in recent years built up a toolbox of mainly defensive economic policies. Although not explicitly in response to China, its framework for screening FDI, which became operational in late 2020, features prominently among these measures. The main aim of the framework is to enable better information sharing on foreign investment screening, which is still done through national instruments, and it allows the European Commission to submit an opinion in certain cases. Another modest instrument is the 5G toolbox introduced in early 2020 in response to member states adopting differing lines towards the inclusion of Huawei in their respective 5G rollouts. The toolbox incorporates measures that member states can use to ensure a coordinated approach to the security of 5G networks but does not exclude Huawei involvement. In mid-2021, the European Commission put forward a proposal for a regulation to tackle distortions of the level playing field that arise from subsidies provided by foreign governments to firms operating within the single market. These specific instruments all complement existing trade defence instruments such as anti-dumping and anti-subsidy measures. The EU also considers its efforts to reform multilateral systems, such as the WTO, as part of this approach. As in the past, it hopes to use these mechanisms to exert pressure on China to comply with the rules of the multilateral trading regime.
The challenge posed by China has also influenced thinking within the EU on how to structure the single market. For instance, in early 2019, France and Germany put forward a proposal for more investment in new technologies and for changes to competition rules to enable the creation through mergers of larger firms to compete with industrial giants from China and the US. This has not led to concrete steps yet but indicated a change in EU attitudes. Overall, the economic policy response to the China challenge is mainly internally focused and lacks the aggressive character of the measures taken by the Trump administration or even the only slightly less confrontational approach of the Biden administration. For example, beyond existing restrictions on exports of dual-use items, the EU does not see restrictions of high-tech exports as part of its China strategy. Whereas the US has attempted to limit Huawei’s access to semiconductor technology through export controls, it took US pressure for the Netherlands to retract an export licence for the sale to a Chinese firm of highly advanced equipment critical to semiconductor production. This goes some way to explaining why the set of instruments and measures aimed directly and indirectly at China has not led to significant tensions. However, as the toolbox grows it could lead to further political spats following those in the first half 2021.
