Valdai Club

Since the establishment of relations in 1975, China - EU cooperation has grown extensively, expanding from trade and economics to include technology, global governance, education, and so on. That fact has been reflected accordingly by the levelling of the relations status between the two over the years. In 1998, China and the EU established a long-term, stable and constructive partnership oriented towards the 21st century, which was followed by a comprehensive partnership in 2001 and then a comprehensive strategic partnership in 2003.

The publication of the China-EU 2020 Strategic Agenda for Cooperation in 2013 also has spoken volumes about the encompassing and growing nature of China. In 2014, President Xi called for China and the EU to build partnerships for peace, growth, reform and civilisation, recognising growth and development as the driving force of relations but also adding a civilisational and global dimension to China-EU relations.

Throughout the past decades, economic and trade relations have stayed the most important pillar of China-EU relations. Although it has never been friction or complaint free, the economic and trade link continues to provide both the basis and impetus for the bilateral relations. Compared with 1975, when two-way trade volume registered a mere 2.4 billion US dollars, it is a different world nowadays. Benefitting from China’s continuous reform efforts,  opening-up and integration into the global economy, as well as European entrepreneurship in exploring the Chinese market, the economic link has grown immense and resilient.

In terms of volume, trade between China and the EU reached a record high of US $800 billion in 2021, China remains the largest trading partner of the EU, and the EU is China’s second largest trading partner. The bilateral trade structure has continued to improve, with trade in aerospace, biology, optoelectronics, electronics and materials growing by more than 30%. In 2021, an agreement on geographical indications between China and the EU came into force.

Two-way investment between China and the EU has exceeded $270 billion, with active investment and cooperation in finance, new energy, electric vehicles and logistics. China’s investment in Europe continues to grow against the trend.

According to a 2021 survey of the European Union Chamber of Commerce in China, 60 percent of the companies surveyed plan to expand their operations in China, and nearly half of the companies surveyed have enjoyed higher profits in China than the global average. The conclusion of the Comprehensive Agreement on Investment (CAI) is the epitome of a win-win arrangement and reflects huge potential for China-EU economic cooperation.

However, in parallel to the continued prominence of the economic and trade link in overall China-EU relations, a trend of compartmentalisation is also developing, as the growth of economic and trade relations has not prevented a cooling down of the political relations between the two. Over the past several years, the two sides have had deep disagreements on issues related to Xinjiang and Hong Kong; EU criticisms of China’s governance model have been getting harsher. Still, the publication of EU’s China document in 2019, which labeled China a systemic rival, along with economic competitor and cooperating partner, had taken China by surprise.

The pandemic confirmed this trend. China’s speedy rebound from the first wave of the virus in mid-2020 helped to cushion Europe from the much heavier economic blow it experienced. However, for the Europeans, the outbreak of the Covid pandemic seemed to confirm their suspicions regarding China, and saw China’s medical aid to others as “mask diplomacy” set to undermine their own soft power in a “battle of narratives”.

The year 2021 witnessed unusual setbacks in their bilateral relations. The exchange of sanctions and counter-sanctions between the two sides in early 2021 did not only put the CAI, a document both sides want and need, on hold, but also created a lingering sense of uneasiness regarding bilateral relations. Although China intends to prevent a repeat of the case of Lithuania, which violated the one-China principle intentionally to reap geopolitical benefits, from damaging the entirety of China-EU relations, China’s legitimate counter-measures were interpreted as “economic coercion” targeting all of the EU.

The compartmentalisation trend is the result of a complex changing structure, a micro-level manifestation of great changes unseen in a century.

First is the contextual change. Since 2016, US presidential administrations have been bent on making the China-US rivalry a dominating theme for the world, hence re-introducing power politics and geopolitical competition into Europe. Europe has come to the conclusion that it should leverage whatever power it has so as not to be sidelined by the US-China competition. The European Commission, headed by Von der Leyen, has tasked itself with being the geostrategic face of Europe, speaking in the “language of power”, and taking care of the “strategic interests” of Europe. However, the EU is far from forming its own strategic thinking, independent from the US. Europe is blind to the fact that “values” have never been a decisive factor for US foreign policy, but a useful tool at its disposal. The US can claim some autocratic countries as steadfast allies against their evil enemies, without any moral burdens. The EU, however, insists on treating “values” as the sole factor in differentiating “us” from “them”, and according to their definition, China is not one of them and must be a rival.

Second is shifting model of China and Europe economic cooperation. Europe has long treated China as a market and one part of its global supply chain. From the European standpoint, China’s vast market, cheap labour and favourable investment environment, combined with Europe’s money, technology, and management model, is the formula for vast venues in China and abroad. However, as China accumulates wealth to invest abroad, and demonstrates competitiveness and ambition to lead in certain fields, the model of Chinese-European economic cooperation is shifting. Chinese M&A in Europe stoked fear, and Europeans zoomed in on the problem of a “level playing field” in China.

The European concern is that even though European businesses remain profitable in China, they would face increasing competition from Chinese businesses with “unfair advantages”. This is a concern more fundamental than the frictions of the past and is also the reason that the economic and trade link of today, though immense and important, is struggling to stabilise China-EU relations, because it is also part of the problem.

Unfortunately, the Ukraine conflict is likely to reinforce this compartmentalisation trend. The conflict may cause the EU to double down on the dimension of “strategic rivalry” in its three-pronged China strategy. While China does not wish to see the developments in Ukraine, has no part in the conflict and its policy since the conflict broke out is nothing extraordinary compared with other non-Western countries, the EU seems to have reinforced the EU’s worldview of an emerging rivalry — “autocracy vs. democracy”— and convinced the EU further with regard to China’s “otherness” and “rivalness”.

The Ukraine conflict has caused global market fluctuations and created more economic challenges for China and Europe. In the days ahead, the economic link will likely become more important for the two sides amid economic uncertainties. However, the economic link cannot address problems of political trust, and risks being more politicised in the future. The conflicts exposed Europe’s dependence on Russia and will propel the EU to reconsider its economic links with China and the further develop of its toolbox to increase its “resilience”. Therefore, the conflicts would likely result in a stricter and more selective EU approach to economic links with China.

China has been aware of the challenges in China-EU relations. The compartmentalisation trend of China-EU relations carries a lot of risks, and the ultimate one would be unlike in the past (like in 2008). Bilateral relations have lost the ability to bounce back after setbacks and will be locked in spiralling deterioration.

China views Europe from a long-term and strategic perspective and believed their relations are vital for world peace, stability and development and that their importance will only increase in a world beset by uncertainty. There are two things China would do. First, do its own homework and let deeds speak for themselves. Recently, The Standing Committee of the National People's Congress of China has ratified the International Labour Organisation’s Forced Labour Convention of 1930 and the 1957 Convention on the Abolition of Forced Labour, showcasing China’s real progress in reforms.

China has continued its step-by-step approach, providing better access, a level playing field, and more transparency to foreign companies. The unwavering commitment to reform and opening up will continue to be a powerful pull factor for Europeans.

Second, to have a frank and honest dialogue with Europe on the state and the future direction of the bilateral relation. The EU has said repeatedly that it does not want to be part of a new cold war with China and the two should agree on how to prevent a new cold war and re-set “peace and development” as the theme of our time despite the on-going Ukraine conflict. The two can and should address the emerging factor of Russia, our shared neighbour, on our bilateral relations, and start constructive discussion on rebuilding Ukraine after the conflicts.