Six priorities for “de-risking” EU relations with China (Internationale Politik)

The European Union needs to urgently prepare for uncertain times ahead and begin to build the blocks of “de-risking” its relations with China, say Mikko Huotari and Grzegorz Stec.

Diplomatic relations between the European Union and China seem a little more stable these days than this time last year. German Chancellor Olaf Scholz reopened high-level exchanges with China and visited Beijing at the end of 2022, as did European Council President Charles Michel. French President Emmanuel Macron will go in April. Beijing has softened its rhetoric toward the EU, and Fu Cong, China’s new ambassador to the EU, is making up for the post’s year-long vacancy, busily meeting key European stakeholders. Working dialogues are reviving—even the EU-China human rights dialogue has made a comeback.

The next EU-China summit, now anticipated around mid-year, will be a litmus test for both sides’ ability to form a more constructive relationship. The return of diplomatic exchanges is of course one ingredient of such a relationship. But let’s be realistic. Europe is in the process of recalibrating its China policy, which means rapprochement will be more conditional and possibly hard to maintain.

Brussels and EU capitals seem to increasingly converge on the idea of “de-risking” relations with China—essentially, limiting the EU’s vulnerability to a wider range of stress factors and possible disruptions caused by Beijing as well as China-related geopolitical tensions. This is the order of the day in the EU’s China policy—not pursuing a broad “decoupling” or continuing “dialogue of the deaf,” as EU High Representative for Foreign Affairs Joseph Borrell put it last year. To make de-risking the focal point of the EU’s China policy, Europeans need to be clear and consistent as to what it means for their governments and institutions.

A comprehensive, long-term de-risking will only succeed if it builds on, first, the responsible management of strategic divergence of the EU’s interests and values with China; second, the effective implementation and expansion of the EU’s defensive policy toolbox; third, a coordinated but independent European approach to high-tech relations with China; fourth, a proactive reduction of strategic vulnerabilities, especially in critical raw materials; fifth, much higher preparedness for a Taiwan conflict; and sixth, the right dose of China policy coordination with transatlantic and like-minded partners.

The cost of ignoring risks posed by Russia should be a wake-up call. Europe must take a lesson from the Russian invasion of Ukraine for its relations with China and proactively develop risk-mitigating strategies. Such strategies can avert even greater disruptions from the next geopolitical crisis and help manage rising tensions amid continued divergence today.

Acknowledge and manage strategic divergence with China

Beijing’s diplomatic charm offensive and economic reopening certainly hold appeal for the EU. Russia’s war in Ukraine and the resulting energy crisis have hit the European economy hard, so smoothing tensions with China and stabilizing economic relations has its allure—at least in the short term.

In the medium to long term, however, strategic divergence between the EU and China is likely to continue. For all the diplomatic gestures, signals from last year’s National Congress of the Chinese Communist Party and the National People's Congress in March confirm worrying trends—the CCP’s increasing dominance over state structures, a turn toward more distortive economic policies, and an increasingly confrontational stance in strategic competition with the United States.

Beijing also seems to lack a convincing vision for constructive engagement with the EU. The offers tested by Fu Cong in Brussels—simultaneously lifting the sanctions by the EU and China and unlocking the ratification process of the EU-China Comprehensive Agreement on Investment (CAI)—are hardly convincing for the EU and do not address the fundamental tensions in EU-China relations. Clearly, Beijing is not aiming to redefine its relationship with Europe. Instead, China’s EU policy largely continues to aim to prevent the EU from joining US-led initiatives targeting China and to stall the EU’s development of a more assertive China policy. It is not about cooperative re-engagement, but about maximizing room for maneuver in deep strategic competition with the US.

Unresolved issues between the EU and China continue to strain the relationship. These include the treatment of Uighurs in Xinjiang, China’s economic coercion of Lithuania that led to one of the EU’s two WTO cases against China, as well as concerns over China’s deepening market distortions and the increasing security implications of its involvement in Europe’s critical infrastructure.

Still underestimated by many in China or accepted as the price of backing Moscow, differences over Russia’s invasion of Ukraine are a key driver of deepening divergence. For the EU, the geopolitical stakes could not be higher. Beyond the humanitarian cost of Russia’s aggression, the war is also reshaping the European security system and the very future of the international order. Unfortunately, China’s recently released position paper on the war does not distinguish between aggressor and victim, favors Russia’s position, and implies that NATO’s expansion caused the invasion.

President Xi Jinping’s visit to Moscow on March 20-22 further signaled Beijing’s continued support for Vladimir Putin’s regime and commitment to coordinate with Russia on the global scene as indicated by a release of a joint statement on “deepening the comprehensive strategic partnership of coordination for the new era.” Beyond political messaging, the two actors also moved closer to finalizing negotiations on the Power of Siberia 2 pipeline that would shift Russia’s gas exports from Europe toward Asia. Xi’s anticipated first call with Ukraine’s President Volodymyr Zelensky since the beginning of the war is therefore unlikely to amount to more than a diplomatic stunt. The EU must remain united on both stating clearly its red lines (such as military support) as well as responding to Chinese overtures.

Implement and expand the EU’s defensive toolbox

In recent years, the EU has made considerable progress on developing a shared assessment of challenges posed by China and a common set of defensive policy tools. While theoretically not directed at any specific country, these target some of the key challenges related to China and include foreign direct investment screening, anti-coercion mechanisms, and measures to address distortions to the EU single market caused by third-country subsidies. Some member states lag behind in implementing the already agreed defensive measures. But even so, more is needed.

As the EU comes to grips with the risks in its relations with China, it is developing new measures that consider security, high-tech, and geopolitical factors. These are already taking shape. For instance, the EU is building capabilities to respond to China’s information manipulation and interference in other countries’ politics. It is also improving China-related cybersecurity in its own institutions—most recently, requiring employees of key EU institutions to delete the TikTok app, owned by Chinese company Bytedance, from work devices. Building on this, the EU should conduct a comprehensive China-focused risk mapping exercise to identify the areas that require new tools.

Devise a coordinated but independent approach to high-tech relations with China

High-tech relations with China have become extremely contested. The EU urgently needs to develop its own approach to managing innovation and technology entanglement with China. After last summer’s “doctrine change” in the US on technology controls, which seeks to undercut China’s high-tech capabilities, Beijing doubled down on its self-reliance ambitions in science and technology. That put the EU at risk of being caught in the middle.

Brussels and some member states have already begun to adjust to this new techno-nationalist world. They have devised new guidelines for research and knowledge security in higher education, sharpened export controls, and revised FDI screening mechanisms. But these measures still seem to lack the necessary teeth, considering the formidable task at hand: De-risking innovation entanglement with a high-tech-empowered, authoritarian China that increasingly leads the global innovation race for critical emerging technologies.

There is a significant gap in awareness and strategic alignment between member states. And they need to act fast to sharpen their approach. Export controls for dual-use, critical emerging technologies together with a narrowly defined policy on outbound investment screening could be a strong addition to the de-risking toolbox.

If the EU wants agency in its own affairs, it needs to be proactive in strengthening its own industrial base in key areas and in defining its own boundaries and approaches—in close conversation with industry leaders. It could learn from the recent experience of Dutch semiconductor equipment supplier ASML, which is still at the center of US-China "chip war,” where The Hague handled Washington’s pressure to impose export controls in limited coordination with the rest of the EU. Coordination with like-minded partners will be key, including the US. But waiting for guidance or pressure from Washington is not a responsible option. The EU and its member states should be clear about the desired scope of cleantech, biotech, and Artificial Intelligence (AI) cooperation with China on their own terms. But this also means being prepared for Chinese retaliation when restrictions are deemed necessary.

Reduce strategic vulnerabilities in critical raw materials

Europe’s dependence on imports of raw materials from China casts a shadow over its ability to capitalize on the green transition. As of now, China supplies over 90 percent of the rare earths necessary for the EU to develop green tech products. To address this, the European Commission is about to propose a Critical Raw Materials Act. It is expected to include a dedicated EU-level purchasing agency and set the goal of mining, recycling, and processing 10-40 percent of critical raw materials within the EU by 2030.

Such measures should be treated as an internal priority. But they must also shape the EU’s foreign economic policy and be implemented in coordination with external partners. The recent news of EU-US talks on a critical materials trade agreement is a welcome step in the right direction and should be followed by outreach to other like-minded partners.

Prepare for a Taiwan conflict

The EU needs contingency plans to manage a potential heightened conflict in the Taiwan Strait, the fallout of which would be much greater than from Russia’s invasion of Ukraine. The cost to the global economy of such a conflict in a blockade scenario is estimated at around $2 trillion in monetary terms alone, not counting international responses, secondary effects, and other repercussions. The geopolitical and humanitarian implications would undoubtedly be devastating.

The key objective for de-risking must therefore be to bolster the resilience of the status quo in the Taiwan Strait and prevent conflict from happening. The EU should consider a range of possible scenarios and develop a package of preventive and deterrence measures. These should include diplomatic signaling to China—bilaterally and in coordination with partners, ideally also from “Global South”—regarding the immense costs of a potential aggression. The EU should also develop its relations with Taiwan within the limits of the bloc’s self-defined “One China” policy and cooperate on improving the democratic resilience crucial for thwarting foreign interference. Navigating this challenge also requires intense and regular transatlantic exchanges, especially among lawmakers, on ways to manage growing tensions peacefully and responsibly.

Calibrate transatlantic and like-minded China policy coordination

De-risking relations with China cannot succeed without partners. The key challenge here is calibrating the EU’s transatlantic China policy despite partial differences in strategic outlook, diversity in the nature and extent of ties with China, and a deepening of EU-US industrial policy competition. The US has recently introduced more forceful unilateral measures targeting China, making coordination with the EU more relevant but difficult. And more such actions can be expected from the Biden administration as US-China tensions continue to flare. The bloc needs to be clear on what it wants and does not want to achieve in parallel or coordination with Washington.

The EU also needs to work with a broader set of partners. The emerging consensus on economic security provides an opportunity for this. A number of actors share the EU’s assessment that de-risking should not mean decoupling and that geopolitical bloc-building is not a desired policy direction. The Japanese presidency of the G7 in 2023 and the upcoming summit in Hiroshima offer the chance to form a wider consensus on these issues.

No time to spare

Implementing these steps to de-risk Europe’s relations with China and making them a focal point of European China policy will require EU member states to sync their assessments of future China-related tensions and disruptions. That means a comprehensive benchmarking of China’s policies and defining key risks that could inform EU policymaking. Member states must also continue to evaluate and adjust their own China policies and map their own resilience.

Achieving consensus across the EU will not be easy. Many member states have yet to define their China-related priorities. The new German China strategy has an important role to play as it can serve as an inspiration for other member states to create their own China policy papers. For that to happen, Berlin must deliver a clear and concerted message that endorses and helps shape a broader, EU-wide turn toward de-risking.

Regardless of how speedily member states come together, the EU needs to urgently prepare for uncertain times ahead and implement the building blocks of the de-risking agenda. It must make the best use of the relative calm in bilateral relations with China, which can turn on a dime in this uncertain geopolitical climate. There is no evidence now that Beijing is providing military equipment to Moscow, but events are hard to foresee—such as how Beijing will react when Taiwan’s President Tsai Ing-wen travels to the US to meet with House Speaker Kevin McCarthy later this year. There is really no time to spare.

This article was first published by IP Quarterly on March 24, 2023.