The many small measures in the EU’s toolbox should partly protect the single market from distortions resulting from China’s economic model. However, in most cases their impact is likely to be limited. For instance, investment-screening relies on member states to use their national policy mechanisms, which some lack beyond tools aimed at industries such as defence. Deep divisions remain within the EU over the direction of its industrial policy, with the Franco-German proposal for reform yet to be followed up. The introduction of the 5G toolbox did not lead to a common approach, with some countries having effectively banned Huawei from their 5G networks while others, notably Germany, look set to effectively allow it. A new instrument to counter foreign subsidies might be effective but would, at best, counter a relatively small problem. Efforts to reform the multilateral trading system through the WTO and use this to influence Chinese economic and trading practices are also likely to prove difficult, as similar efforts have been largely unsuccessful for decades and face structural obstacles. Even if many of these measures achieve their intended effect, they would still constitute a strategy reliant on incremental policy changes.
Even if the EU’s efforts towards achieving economic sovereignty prove more successful than they have so far, the strategy itself might prove to be a risky one.
Meanwhile, efforts to strengthen the EU’s economy, and thereby increase its resilience to foreign interference, will run up against the same political hurdles that have hampered economic reform for a long time. The internationalization of the euro is a prime example in this regard. This has been an EU goal since well before China became a significant issue, but requires changes to economic policy that have so far proven impossible, including the supply of a sufficient amount of safe financial assets, particularly government bonds. In other policy areas, including industrial policy and fiscal policy, similar political and other hurdles complicate the effort to achieve economic sovereignty. The EU’s willingness and ability to achieve a meaningful form of strategic autonomy or economic sovereignty thus remains in question. Already in the defence sphere the EU is under threat from the low level of spending and the preference, especially of eastern member states, to continue working through the NATO framework. Even if the EU’s efforts towards achieving economic sovereignty prove more successful than they have so far, the strategy itself might turn out to be a risky one.
The main risk comes from whether the US and China will grant the EU the leeway to not make a choice between them. Up until now the EU has largely been able to triangulate between the two countries, some small spats and frustrations notwithstanding. Particularly if the dispute between the US and China deepens into something akin to an economic cold war, both might use different pressure points on the EU in attempts to force it into alignment. The EU is unlikely to have the economic or security strength to fully maintain neutrality. China has already in the past used economic measures in political disputes and further European economic integration will increase its leverage. Last year, despite having a free-trade agreement with China, Australia was the victim of politically motivated trade sanctions. In March, in retaliation for EU sanctions on Chinese officials over alleged human rights abuses in Xinjiang, China imposed sanctions on several European individuals and entities, including several members of the European parliament and national legislatures. Meanwhile, the US has shown itself willing to use sanctions on third countries even when they affect allies, as with Iran, which triggered the EU to work on its economic sovereignty strategy. Early in 2021, the US warned European companies that they face sanctions if they work on the Nord Stream 2 gas pipeline between Russia and Europe, which the US objects to but the economic benefits of which Germany refuses to forego.
So far China policy has not been particularly contentious within the EU but joining it with the strategic autonomy agenda risks creating division. Most member states have not been that engaged in China policy and it has not caused significant splits between them, but they have different priorities in their relationship with China and with the US. While for some, not least Germany, the main objective is mercantilism, for others, including many in Central and Eastern Europe, the relationship with China is much more instrumental politically and economically while the relationship with the US is of more fundamental importance owing to the security guarantee. Not all are looking to reduce their security dependence on the US. For example, Poland and the Baltic states are still exposed to a significant threat from Russia, while Germany is not. This shapes respective geopolitical calculations. As a result, in a disagreement with the US over a confrontational approach to China, there could be divisions within the EU if Washington uses its security guarantee as a lever.
The different levels of member states’ economic integration with the US and China will continue to influence EU decision-making. Economic growth forecasts support further economic engagement with China over the coming decade; the OECD expects the German and US economies to grow by about 50 per cent in nominal US dollar terms and the Chinese economy to expand by around 150 per cent. However, China’s focus on its domestic economy as opposed to opening up and the increasingly bifurcated technology landscape, together with closer ideological and political alignment, is likely to continue to draw EU countries closer to the US than to China. While wishing to remain neutral between the two is understandable, particularly from an economic perspective for countries such as Germany, this is likely to turn out to be a difficult balancing act.
The CAI case study
Many of the issues discussed above, including German dominance in the EU’s China policy and the interplay between economic objectives and political barriers, were prominent in the EU’s attempts to conclude an investment agreement with China, the EU–China Comprehensive Agreement on Investment (CAI). The CAI has the potential to support further European investment in China by opening up several sectors and easing restrictions on EU companies operating in China. From the EU perspective the aim is to ensure a level playing field with American firms that received some of the same access through the agreement that the US and China reached in early 2020, and to compete with Chinese companies. However, significant uncertainty remains over whether this will happen, not least as the CAI still needs to be approved by the European Council and the European parliament. The agreement would in any case be likely to benefit those member states that are already heavily invested in the Chinese economy. German firms, particularly in manufacturing and the automotive sector, once again stand to benefit from the loosening of foreign ownership restrictions. It was therefore not surprising that Germany, together with France, was among the driving forces getting the agreement over the line in late 2020. Some smaller member states objected to this, but not enough to derail the process.
Since then, the process of ratifying the agreement has highlighted the challenges posed by the increasingly difficult political and geopolitical environment for a European China policy that prioritizes economic gains. First, the increase in attention and stronger stances on China policy from national legislatures and the European parliament risks complicating the ratification of the CAI, which the latter must do. In the CAI, China has agreed to ‘make sustained and continuous efforts’ to ratify the International Labour Organization conventions on forced labour. Although not many in Europe think this is likely to happen anytime soon, the provisions are crucial to gain political support for the CAI. This was further complicated in early 2021 when China sanctioned several members of the European Parliament in retaliation for EU sanctions on Chinese officials alleged to be involved in human rights violations in Xinjiang, which has created further uncertainty for the CAI’s ratification.
The CAI debate also highlights the complicating factor of the transatlantic relationship and how historical differences in the extent of the transatlantic orientation of EU members are still on display. In the final stages of the CAI negotiations, when the process unexpectedly sped up due to new concessions from China, the Biden transition team urged the EU to wait until the new US administration was in place before concluding the agreement. However, France and Germany decided that the concessions by China – which were likely driven by a desire to split the transatlantic alliance before the new administration took office – were unlikely to be on offer later on and took the deal. This was despite the fact that some member states – with less invested in China than Germany and less interest in strategic autonomy than France, such as the Netherlands, or those that were more dependent on the US security guarantee, such as Poland – would have preferred to wait.
