EU’s New Strategy on China: Implications for Businesses

We look at how the ‘Report on a New EU-China Strategy’ could shape the EU’s future engagement with Beijing on economic, trade, political, and security issues and how EU businesses could be affected more by Brussels’ position than China, as the latter is moving full steam ahead on market opening reforms.

On September 16, 2021, the European Parliament passed a Report on a New EU-China Strategy (the EU Report) with 570 votes in favor, 61 against, and 40 abstentions. The Report outlines six pillars on which the European Union (EU) should build a new strategy to engage with China: cooperation on global challenges, engagement on international norms and human rights, identifying risks and vulnerabilities, building partnerships with like-minded partners, fostering strategic autonomy, and defending the EU as a geopolitical actor and its interests on the global stage.

What are key points of the new EU-China strategy report?

Addressing global issues that require cooperation

The EU Report stipulates that the bloc’s strategy will involve China in dialogues that address global challenges. The challenges include human rights issues, nuclear disarmament, climate change, COVID-19 economic recovery and other global health issues, mutual student exchange, and the reform of international organizations. In terms of geopolitics, developments in Afghanistan, Hong Kong, and North Korea have been highlighted by the European Parliament.

The promotion of human rights

The European Parliament has condemned sanctions imposed by Chinese authorities, which erode trust and hinder bilateral cooperation. The EU Report also underlines that the ratification process for the EU-China Comprehensive Agreement on Investment (CAI) cannot begin until some of the sanctions against EU institutions and Members of European Parliament (MEPs) are lifted.

A market-opening agreement proposed in 2013 and reached in principle on December 30, 2020, the CAI is yet to be finally signed and ratified (see PDF here). The CAI is designed to further open China’s internal markets to EU companies by making changes to the business environment in which most EU businesses operate. China is due to also remove forced technology transfers, equity caps, requirements for joint ventures, and a number of other restrictions.

The European Parliament has further requested that the European External Action Service (EEAS) and Commission finalize a supply chain business advisory, with guidance for companies on risks of using alleged forced labor and support on how to find alternative supplies.

Identification of risks and challenges

The EU Report identifies political, social, technological, and economic risks associated with China. Among others, the EU Parliament suggests that “greater coordination” is needed between the Blue Dot Network and the EU’s Connectivity Strategy, as an alternative to China’s Belt and Road Initiative (BRI).

The EU Report calls on an EU-wide audit of EU dependency on China in certain strategically important and critical sectors (including pharmaceutical supplies) and building on the recent comprehensive analysis entitled ‘Strategic dependencies and capacities’ (SWD(2021)0352), which sets out plans to reduce risks related to undesired dependencies while maintaining overall relations with China.

Another strategic area identified is 5G and 6G networks. The European Parliament believes it is important to ensure companies that do not meet stipulated security standards are disqualified from the EU’s 5G and 6G network development.

Concerns have been raised about security issues, including concerns about cyberattacks, cyber-espionage, disinformation campaigns, and intellectual property theft.

Building partnerships

Another key point of the EU Report was the desire to build partnerships with “like-minded” partners, such as the US, the UK, Canada, India, South Korea, New Zealand, Taiwan, and Australia, and strengthen relations with ASEAN and the African Union.

The EU Report affirms the primary importance for the EU to develop and promote an ambitious and dynamic transatlantic relationship with the US Government and highlights that the new EU-US Dialogue on China should be one of the mechanisms for advancing shared interests and managing differences.

The European Parliament also stipulates that it is important for the EU Commission to provide comprehensive and timely reports on the world’s largest free trade agreement – the Regional Comprehensive Economic Partnership (RCEP).

Encouraging autonomy in investment and trade relations

The EU aims to decrease reliance on China by investing in research and innovation in areas like telecom, cloud computing, rare earth mining, and semiconductor production and microchips. It also aims to explore the option of pooling resources with other countries.

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In 2020, China was the EU’s largest partner for trade in goods, though with a trade balance to the EU’s detriment; the US, however, remains the EU’s top partner in trade in goods and services combined.

The EU Report believes that mutual investment levels have not reached their potential. Yet, while the EU Parliament believes there are economic benefits to trading with China, it will require a framework based on values and a commitment to human rights issues.

There are calls for the EU Commission to examine the EU’s dependency on essential raw materials, with some originating exclusively in China, and to diversify access to them. An excess of steel and aluminum is also a concern, with the European Parliament hoping that China re-engages in the Global Forum to eliminate excesses and even the playing field.

In terms of the trade relationship between the EU and China, there is an emphasis on forging a mutually beneficial relationship. There are concerns that China’s “dual circulation strategy”, referenced in the 14^th Five-Year Plan, may affect the business environment in which EU companies operate.

Europe as a geopolitical actor

The European Parliament aims to ensure that the EU becomes a more effective geopolitical actor by working with more countries, and ensuring that they can provide business activities, investments, and loans which rival China’s.

What are the implications for businesses?

While the EU Report recognizes the significance of the role of China in its trade exposure and reliance for essential raw material and critical sectors, it states that EU-China cooperation is needed in handling global challenges; the overall tone thus comes across “condescending”.

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Regarding the EU-China CAI, while agreeing on the positive implications of the agreement in addressing shortcomings linked to market access asymmetries, a level playing field, and sustainable development through rules-based engagement, the EU Report points out that the CAI alone would not solve all issues ailing EU-China’s economic and political relationship. The EU Report therefore proposes a strengthened and more assertive EU toolbox of unilateral measures. The Report also underlines that the European Parliament will scrutinize the CAI agreement thoroughly.

In particular, although this is not new, the EU Report formally connects the CAI with long alleged human right issues and the sanctions against EU institutions and MEPs, which makes it harder for businesses to anticipate the ratification of the CAI in the near term.

EU businesses wary of their China access and further market opening will need to stay calm and wait for the further developments. A silver lining here is that China’s business reforms are ongoing and will benefit all foreign companies in multiple industries and regions, regardless of the status of the CAI.

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