The EU Is Divorcing From China
The era of close trade friendship between the EU and China is rapidly becoming a thing of the past. The not-so-coincidental chip shortage, the demonstrative technological support for Kremlin aggression, increasing tensions in Africa and around Taiwan — all of this has come as a cold shower for Western Europe. As a result, the EU has set a course towards what is diplomatically termed "resilience of its supply chains."
The European Union is accelerating its efforts to achieve trade and technological independence from China, especially as Beijing provides more reasons to fear overly close ties. For instance, starting from August 1, China intends to restrict the export of rare earth metals gallium and germanium to the EU and the US, which are vital for semiconductor and electric vehicle production.
Was Beijing's move unexpected for Brussels? Not at all. On July 11, the European Parliament adopted the Chips Act, a landmark law aimed at strengthening the EU's autonomy and competitiveness in the semiconductor sector.
The EU Chips Act had been in development for over a year, but recent events seem to have sharply expedited the process. In particular, the resolve of European lawmakers was reinforced by China's announcement of export control over gallium and germanium.
"The EU Chips Act will become a tool for technological and industrial leadership for Europe," wrote EU Commissioner Thierry Breton on Twitter on the day of the Chips Act's approval.
Photo: “The EU Chips Act will be an instrument of technological and industrial leadership for Europe,” tweeted EU Commissioner Thierry Breton. Source: Thierry Breton Twitter.
A Course towards Economic Sovereignty
This EU course to protect its economic resilience began in full swing in 2020. The pandemic dealt a blow to the EU's supply chains, which originate in China. The sudden halt of textile, electronic, and machinery enterprises in China due to quarantine measures deeply affected the European economy. Europe does not want a repeat.
The second stimulus was the lessons learned from Russian aggression in Ukraine and the necessity of imposing sanctions against the aggressor. Sanctions, in any case, are a double-edged weapon. And the less dependent EU is on the target of sanctions, the more effective and swift this measure of influence becomes.
Perhaps, for this very reason, the economic relationship between the EU and China became one of the key topics at the European Union Summit in Brussels, held on June 29-30.
According to the leaders of EU member states, China is both a partner and a systemic rival. Therefore, while Western Europe is interested in developing constructive and stable relations with China, the EU intends to continue "reducing its dependence and vulnerability to (Chinese) raw materials, striving for the resilience of its supply chains."
This thesis is precisely stated in the declaration of the heads of state and government of EU member countries, published after the Brussels Summit.
China Takes the First Step. Towards Moscow
The idea of increasing distance between the EU and China is not new. However, EU leaders have begun pushing it with renewed vigor following the visit of Chinese President Xi Jinping to Moscow on March 20-22, where he met with Russian President Vladimir Putin and agreed to deepen their partnership and economic cooperation.
After the meeting, European Commission President Ursula von der Leyen stated that the future relations between Brussels and Beijing would depend on China's changing cooperation with Russia. She emphasized that the interaction between China and Russia would be a "defining factor" for EU-China relations.
It's no secret that the EU is frustrated with China's stance on the Russian invasion of Ukraine. Ursula von der Leyen, back in early 2023, expressed her dismay that China had taken Russia's side in the Ukraine war. In April 2023, after her visit to Beijing, she called on all EU countries to develop a unified position on China, a "special European approach" that would leave room for cooperation with other partners.
In May 2023, EU Foreign Policy Chief Josep Borrell openly warned China that EU-China relations would not develop normally unless China could persuade Russia to withdraw from Ukraine. Borrell also highlighted the trade imbalance between the EU and China, emphasizing the need to reduce dependence on the Chinese market.
However, there are some differing opinions within the EU. For example, on July 13, the German government presented its strategy for developing relations with China, stating that Germany does not seek to separate from China and that "economic integration with China must be maintained."
China is indeed one of the EU's major trading partners. According to Eurostat data, EU exports to China reached 230 billion euros in 2022, an increase of 2.7% compared to the previous year. Imports from China to the EU reached 626 billion euros in 2022, a 32% increase compared to the previous year.
According to China's General Administration of Customs, trade between the EU and China in the first half of 2023 reached nearly $400 billion, a 1.7% increase compared to the previous year, accounting for 13.7% of China's total foreign trade volume.
The EU imports telecommunications equipment, portable electronics, computer technology, various electrical equipment, chemical products, as well as household goods and appliances (from baby carriages to furniture) from China. China, in turn, purchases automobiles, parts and components, pharmaceuticals and medical products, measuring equipment, and food products from the EU.
The success of the EU's plan to replace China as a trading partner remains uncertain. China currently supplies the EU with 98% of rare earth imports, which are widely used in electronics and nearly all modern technologies. Additionally, China is an important source of raw materials, accounting for 60% of global steel, cement, and aluminum production. It is important to remember that China has been and remains a global "assembly workshop." The Chinese manufacturing industry accounts for about 28% of the country's GDP.
Photo: Biggest partners. Source: the Council of the EU
A Countermove
But China also has something to lose. According to a study by the German Economic Institute in Cologne (IW), over half of China's imports come from the European Union. China depends on supplies of semiconductors and chips (although it also produces them itself), machinery products (such as aircraft and automobiles), high-precision and industrial equipment, and food products (especially imported meat, grains, eggs, and dairy).
Concerns over tension between China and the EU have reached a high point. On July 14th, Chinese Foreign Minister Wang Yi, during a meeting with Josep Borrell, called for refraining from politicizing economic issues and stated that the parties should strengthen communication, mutual trust, and deepen cooperation.
But the EU is unlikely to abandon its stated plans. In the 11th package of sanctions against Russia, Brussels included Chinese companies that, in its opinion, support the Russian military-industrial complex. The European Commission has also called on EU countries to restrict access to 5G networks for Chinese equipment suppliers Huawei and ZTE due to the risks of espionage by China. In addition, in June, it was announced that the European Union and the United States intend to restrict Chinese investments in the high-tech sector. China has not been idle either. As mentioned before, Beijing has promised to limit the export of gallium and germanium rare-earth metals to the EU and the United States starting from August 1st.
Thus, a new trade war is gaining momentum and already casting a shadow on the Chinese economy. In June, China's exports fell by 12.4% following a 7.5% decline in May. Imports in June decreased by 6.8% compared to a 4.5% drop in May. Among the reasons for these developments, experts cite the cooling of China's external economic relations with other countries.
It is worth noting that this trade war may affect not only China but also other countries that are part of the BRICS alliance and maintain business and political ties with Russia. This includes, for example, India, which lost a $19.5 billion joint semiconductor production project. The project was planned by the Taiwanese company Foxconn in collaboration with the Indian conglomerate Vedanta. However, in early July, Foxconn announced the closure of the project without providing any explanation. It seems that this is not the last disrupted deal of such magnitude.