The EU and China – more stick, less carrot

11 Jun, 2021

Only three months after China and the EU agreed the Comprehensive Agreement on Investment came sanctions, boycotts and a diplomatic standoff.

When in March the EU, in coordination with the US, UK and Canada, announced sanctions on four high level Chinese officials and a state security organisation over the abuse of Uyghurs in Xinjiang, China’s retaliation was quick and strong, taking many by surprise.

This leaves a question mark over the EU’s drive to manage a constructive relationship with China. After years of stalled negotiations, and with a strong push from Germany and France, the EU and China had reached a deal that offers market access liberalisation in the EU’s favour. Notably, the EU did not coordinate this with the Biden administration, signalling that, while it wants to work with the US, it also values its strategic autonomy in relation to China. However, China’s behaviour, and in particular its reaction to EU sanctions, has made walking the fine line between cooperation, competition and confrontation increasingly difficult for the EU.

During Biden’s visits to Brussels and London this week, China will dominate the agenda of meetings with the G7, EU and NATO. How will the EU engage?

Revisiting the carrot and stick strategy

The EU is determined to continue the competition-cooperation dynamic with China. While pursuing engagement, the stick has always been a part of the policy, but the EU has been seen by the US and indeed some inside the EU as too hesitant to use it.

Now the stance is toughening. According to the EU’s 2019 China Strategy, “the balance of challenges and opportunities presented by China has shifted”. The Commission has spent time mulling how to respond to Europe’s supply chain weaknesses and Chinese behaviour, as well as fleshing out its strategic autonomy agenda. The result is an increasing number of tools to combat what the Commission sees as unfair trading practices, including the recently proposed regulation on market distorting foreign subsidies, the mechanism to deter and counteract coercive action by non-EU countries, and the FDI screening mechanism. The EU is also making progress on the international procurement instrument. However, a number of issues vital for ensuring European competitiveness remain unaddressed, like battery production or the supply of raw materials and rare earths.

Chinese behaviour is now making the cooperative elements of the strategy harder to deliver. China is increasingly assertive in advancing its political and economic interests. Reconciling this with the notion of a 'comprehensive strategic partnership' has become more challenging. China’s treatment of the Uyghurs increases political objections to cooperation.

The Commission continues to work on technical implementation of the CAI, but the deal is at best on life support for now. China’s retaliatory sanctions have brought growing criticism of the deal across the EU, and its proponents are increasingly accused of being ‘soft’ on China. Given deteriorating public sentiment and the upcoming elections, both Germany and France may shift to a tougher public stance against the deal. China may have underestimated the amount of political capital that Germany, driven by its industrial interests, had to expend on securing support among Member States.

Managing the relationship with the US

The new US administration is a major new element in the equation. The Biden administration has largely continued the hard-line China policy of Trump but is gradually fostering a more cooperative approach with democratic partners. The US is concerned about China’s power and believes an alliance of Western democracies can help keep the balance in their favour. Biden will use the G7 and EU-US summits to push for a united front against China’s growing influence.

After Trump’s go-it-alone approach, the EU also wants stronger EU-US coordination on the global stage and a more shared approach to China. Chinese behaviour is, to a large extent, driving this.

China is seeing the signs of growing alignment in the West and with Asian democracies. This and the hope that it might exploit internal EU tensions may have influenced its stronger retaliation against Europeans than Americans and Canadians. But actions intended to divide the EU from the US have had the opposite effect. Gradual progress on settling some of their trade disputes has provided space for the EU and US to advance cooperation, for example relaunching the transatlantic dialogue on China or establishing the Trade and Technology Council during the EU-US Summit on 15 June.

But European expectations of the new US administration need to be managed; the administration has still not set out a developed policy on China. The EU is also coming to terms with the new administration’s wider desire to assert its primacy on major international issues, like WTO reform, vaccine diplomacy and climate change. The EU will work to protect its “strategic autonomy” and its distinctively European position on global issues.

Looking ahead: walking the tightrope

Businesses in the EU will welcome efforts to enforce a fairer economic relationship with China. But how China will react is uncertain, and this could undermine efforts to level the playing field for European businesses. The fate of the CAI is an example of this. Retaliation could also directly affect those who trade with China or invest there.

The EU does not want to be pulled into overt confrontation with China. It wants to keep open space for cooperation and fair competition and will continue to try to balance carrot and stick. The EU still believes the only way to shape a world in which China is one of the dominant players is by maintaining dialogue rather than separation. This balancing act is becoming harder in a tougher and more competitive geopolitical climate. It may become even more challenging following Biden’s European tour. How this plays out will be very important for business.

Andrea Klaric is a Manager at Flint and supports clients with EU and UK political and policy issues across a range of sectors, with a focus on digital and tech. To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch.

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