Europe at a crossroads with China trade

In its current fight with China over trade issues, the European Union is finding that its own economic and political weaknesses put it in a disadvantage when dealing with Beijing’s commercial and military juggernaut.

Formally, the EU speaks with a single voice on international commerce. In reality, each of its 27 sovereign states can make separate foreign trade deals. Regarding China, Hungary circumvents heavy protectionist tariffs on Chinese-made electric vehicles by inviting China to build an EV plant with its borders.

European politicians are also at odds with one another over whether to take a hard line on China.

EU shortcomings in defending itself have encouraged Beijing to view Europe as an alternative destination for exports that formerly would have gone to the United States, which is engaged in its own trade war with China launched by President Donald Trump.

Europe faces an array of pressures from Beijing to play the role of Beijing’s New Best Friend. Some of the pressures are coercive. China is adept at fashioning retaliatory tariffs or other restrictions on European exports to discourage the EU from taking protectionist measures. European firms that wish to continue doing lucrative business with China oppose moves to engage in a US-style tit-for-tat tariff trade war.

China also employs covert means to sway European public opinion to challenge EU policies. It funds opposition politicians on the sly, publicly sanctions political voices that express wary of China’s mercantile policies, organizing spy rings to gather information on EU plans and flexing destructive muscle through covert sabotage of European economic infrastructure.

Continental academic researchers say Beijing’s actions are designed to wear down or warn off the EU from policies meant to redress trade imbalances favorable to China. The EU countries ran a €305 billion trade deficit with China last year.

Ivana Karaskova, who heads the China Observers in Central and Eastern, a research group based in the Czech Republic, during a recent parliamentary hearing advised the EU to “acknowledge China as an actor with an influencing agenda targeting European society and democratic processes.”

Karaskova argued that “China has a clear plan for Europe. It sees Europe as able to be influenced and tailors its influence accordingly.”

She said Chinese leader Xi Jinping has three economic and political goals vis a vis Europe:

• Keep open trade with the continent.
• Maintain access for China of advanced technologies available for sale.
• Discourage Europe from aligning itself with the United States in its ongoing trade war with Beijing.

The EU must “take steps to close the opportunities for malign actors,” she concluded.

Europeans harbor their own displeasure with Donald Trump and his “America First” trade policies, which forced the EU into negotiations to reduce its favorable trade balance with the US. That apparently encouraged China to conclude that European might join China in fighting Trump’s global use of tariffs to reduce its balance of payment deficits.

During an early July visit to Brussels, Wang Yi, China’s tough-talking Foreign Minister, tried to persuade EU leaders to join it in battling Trump and his “unilateralism and bullying.”

But the EU does not seem to regard China as a viable ally. China’s exporters dump cheaply priced products in Europe, undercutting local producers, economists say. Moreover, China’s economic, diplomatic and arms support for Russia in its war on Ukraine exclude close strategic relations, even in trade. Top EU leadership regards the war as an existential threat to the whole continent.

If China doesn’t“change on the economic imbalances, and they don’t change on their embrace of Russia” an EU official remarked in an interview with Hong Kong’s South China Morning Post newspaper, “it might be to their advantage. But it’s not to ours.”

A follow-up EU-China meeting in Beijing held in late September resolved neither issue. On trade, EU officials complained about China’s dumping its excess manufactures onto the continent. EU Commission President Ursula von der Leyen, the organization’s top executive, met briefly with Xi Jinping, and threatened to open a trade war. “It would be difficult for the EU to maintain its current level of openness,” she said. The Commission both manages EU domestic policy and runs its foreign relations

In a written statement, Xi said relations with the EU are at “a critical juncture” and “the right strategic choices” must be made.

For all the tough EU talk, there is doubt that Europe possesses sufficient diplomatic heft to battle China economically. Jacob Gunter, an analyst at the Mercator Institute for China Studies, a Berlin-based think tank, said China can depend on Europe’s own exporters as well as companies that operate factories in China to argue against EU retaliatory efforts.

If the EU were to launch a US-style trade conflict and moves to move industries from China, Beijing could quickly impose new tariffs or non-tariff barriers on European exports – in particular, agricultural products and beverages. Business owners and their employees in those sectors are important European voting blocs and prefer the status quo, Gunter assertd.

“China doesn’t need to have an explicit conversation with these companies … to encourage them that they should be lobbying for a more docile European strategy in order to maintain good business operations for them in China,” Gunter told the EU parliamentary hearing. In addition, “Exports are good for jobs. Lost exports mean lost jobs.”

China’s ability to fight Trump’s global trade war provides a relevant cautionary tale. Trump placed high tariffs on Chinese goods. Beijing restricyrf sales of rare earth metals, which are critical components of high-technology products, and canceled orders for soybeans, of which the US is a leading supplier.

In the end, Trump reduced tariffs and China canceled its retaliation – but, unlike many countries around the world, China showed it can fight back.

To cow Europe into accepting imbalanced trade, China can also exploit Europe’s demand for goods whose production it dominates, Gunter said. He specified production batteries, solar panels and photovoltaic algorithms used to enhance solar energy tools Europe needs to replace fossil fuel usage.

“Time is a critical factor in this regard,” Gunter advised. “Not only do we see greater and greater dependency on Chinese imports, including in critical areas, but China is becoming less dependent on European technology” – leading toward a situation of “dependency imbalances” that are “very much against European interests.”

There are tactics the EU can use to enhance its negotiation position, analysts suggest. The EU ought to identify Chinese industrial needs that Europe can best supply – sophisticated machinery, for instance – and use them as leverage in negotiations. In effect, the EU would mirror China’s own trade weaponization tactics.

Europe should also encourage industries for which it’s feasible to move production out of China and transfer it to the “Global South,” that is, to countries in Central and South America, Africa, Asia and the Pacific Ocean that can serve as an economical alternative to China.

Finally, the EU should use measures it has in place to challenge China for its use of economic punishment to influence internal politics. The measures – called the anti-coercion instrument – carry punishments that include restrictions on trade and access to continental financial markets. They can be applied to any country.

The regulations date from 2021, when China banned imports from Lithuania after the Baltic state permitted Taiwan to open a diplomatic office in Vilnius, the Lithuanian capital. The legal capability has never been applied: The anti-coercion instrument has never been used.

“Europe needs to speak the language of power,” suggested Tim Ruhlige, a researcher at the EU Institute for Security Studes.

Coupled with the war in Ukraine and American pressure on Europe to increase its own armed defenses, the economic conflict with China presents Europe with big decisions to make. Perhaps clarity will arrive at year’s end, when von der Leyen is scheduled to deliver a new EU “security doctrine.”