Europe’s Unequal Trade with China: Navigating Dependency Amid Supply Chain Disruptions

The COVID-19 pandemic acted as an eye-opener for nations across the globe. The significant supply chain disruptions caused by the pandemic raised awareness of dependency on authoritarian regimes, and as a result, many began diversifying their supply chains and reducing dependency on China. However, this was not the case for the European Union.

As per reports, China’s presence in the EU market exceeded 20% in 2022, showing a growing reliance on China despite the disruptions in the supply chain caused by the pandemic and then the war in Ukraine.
Europe’s heavy dependency on China is now bringing to the fore the issue of imbalanced trade between the European Union and China. 

This is because trade relations between these entities are strongly skewed in favor of China, resulting in a surplus of EUR 400 billion in its trade with the European Union, emphasizing the challenges posed by China’s dominance, especially in crucial sectors like technology and green transformation.

The imbalance stems from unequal market access, where the EU market is open to Chinese products, but European companies face restrictions in the Chinese market. China’s economic policy, geared toward strengthening economic security, poses a long-term threat to European competitiveness, leading to displacement from third-country markets where they compete with China.

The crux of the problem lies in goods imported from China, particularly those essential for the EU’s green transformation. For instance, four-fifths of lithium-ion batteries and rare earth metals used in Europe come from China, posing challenges for the EU to withdraw from this dependence.

Country-Specific Challenges:

The issue is not only regional but also affects individual countries. Poland, the third-largest importer of graphite from China, faces risks in producing electric car components due to China’s introduction of export licenses for graphite. Over 70% of imports to EU countries from China are intermediate goods, making sectors like clothing and electronics highly dependent on Chinese imports.

While the European Union authorities have recognized the gravity of the problem, the issue is much more complex, with a significant factor being the lack of access for European enterprises to the Chinese market, driven by China’s asymmetrically open market shaped by restrictive regulations.

For instance, Germany, with a strong presence in China, faces unique challenges, particularly in the automotive and chemical sectors. German companies, which once benefited from cooperation with China, are now being forced out of the Chinese market by local producers, signaling a shift that could impact the entire EU.

Strategic Dependence and Resistance:

While the European Commission announced plans to reduce dependence on China in strategic areas of the economy, it grapples with its strategic dependence. The resistance from some Member States, not just Germany, complicates the implementation of economic security strategies. The reluctance to disclose investment plans and harmonize export controls reflects the challenge of aligning national interests with broader EU objectives.

Moreover, China’s policies, including the Made in China 2025 Plan and subsidizing exports, have increased its dominance. The EU acknowledges the challenge but struggles to form a cohesive approach, unlike the United States, which has bipartisan agreement on its approach to China.

The proposed strategy includes ideas like investment screening for outgoing European enterprises, focusing on higher-risk markets such as China. However, resistance from member states and businesses has slowed progress. Export control harmonization is challenging due to independent decision-making, as exemplified by ASML Holding, a Dutch company that uses American technologies to supply advanced lithography machines.
 
The European Union’s attempt at investment screening mechanisms since 2019 lacks binding decisions on checking investments in third countries, emphasizing the ongoing challenges in implementing the economic security strategy. The resistance from member states and businesses highlights the delicate balance between safeguarding competitiveness and addressing security concerns.

The concept of derisking, closely associated with the pandemic’s aftermath, raises questions about whether to prioritize bringing production closer to sales markets or maintaining diversified supply chains. While diversification is necessary, there is recognition that strategic sectors should maintain a significant portion of production, presenting opportunities for Central and Eastern European countries.

Some argue that derisking may lead to de-globalization, but it’s crucial to differentiate it from decoupling. Derisking aims to enhance economic security selectively in strategic sectors without completely isolating from external partners, unlike the radical decoupling approach.

The success of derisking hinges on political will and collaboration with European businesses. It should be viewed as an insurance policy against potential risks without compromising overall business interests. The extent to which individual member states support this policy and are willing to transfer competencies to the European Commission for harmonization will significantly influence its effectiveness.

The geopolitical context, particularly China’s stance towards Russia, remains a variable impacting the European Union’s approach to derisking. The interplay of these factors adds complexity to the ongoing discussions within the EU regarding its economic security strategy. The delicate balance between derisking and maintaining diversified supply chains will shape the EU’s future approach to its economic ties with China.

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