Other BriefingsThe EU’s New China Strategy – Understanding the Concept of “De-Risking”
The European Commission has reiterated its new policy of “de-risking” its economy from China, cementing its rejection of complete economic decoupling. The bloc’s latest decision suggests its current strategy will be to reduce its dependency on China for critical raw materials, but comes at a time when some European countries are looking to deepen trade and investment ties. We explain the changes to the EU’s China strategy and discuss how the bloc intends to reduce critical dependencies on China.
On June 30, 2023, the European Council (EC) issued a new decision on its official strategy towards China, in which it reiterated its goal to “de-risk” rather than “decouple” from the Chinese economy.
This decision, published in the form of a short press release, has widely been seen as an official confirmation of the EU’s new China strategy, which will involve reducing the bloc’s dependence on China for critical materials and commodities. The official affirmation of the EU’s de-risking strategy has also been read as a “softening” of the bloc’s official position on China, signaling a rejection of the US-led push for economic decoupling.
On July 13, the German government released its own China strategy document, which largely echoes the stance taken by the EC in the June 30 decision. On de-risking, the document states that “a reduction of risks is urgently required” but that “we reject a decoupling of our national economies.”
This sentiment is supported by the EC’s commitment to continue collaboration with China on important issues, affirming its “shared interest in pursuing constructive and stable relations, anchored in respect for the rules-based international order, balanced engagement and reciprocity.”
The extent to which the de-risking strategy will impact the EU-China relationship will depend on exactly how broad the scope of economic de-risking will be. At the same time, China has been engaging in dialogue and cooperation with several European leaders, with several EU countries pushing for more autonomy in their engagements with China.
In this article, we look at what the EU may do under its de-risking strategy and discuss the position against the backdrop of current EU-China relations.
When did the EU’s China strategy shift to de-risking?
The notion of de-risking rather than decoupling is not new. At the World Economic Forum (WEF) in January this year, EC President Ursula von der Leyen spoke of the need to “focus on de-risking rather than decoupling” in the context of the EU’s engagement with China on the manufacturing and development of clean technologies. This statement was noted as being a clear divergence from the US’ push to decouple its economy from China altogether, with von der Leyen also affirming that the EU needs to “work and trade with China – especially when it comes to this [green] transition.”
In March, in a speech at the Mercator Institute for China Studies (MERICS) and the European Policy Centre in March, von der Leyen reiterated the need for the EU “to focus on de-risk – not de-couple”. She explained that “Managing this relationship and having an open and frank exchange with our Chinese counterparts is a key part of what I would call the de-risking through diplomacy of our relations with China.”
It is therefore clear that the EU frames the shift toward de-risking in part as a rejection of decoupling, which von der Leyen stated “is neither viable – nor in Europe’s interest”.
The EU’s rhetoric on de-risking was nonetheless met with some backlash from Chinese officials. A readout released by the Chinese Ministry of Foreign Affairs (MFA) during Foreign Minister Qin Gang’s visit to Germany in May stated that while China appreciates the EU’s rejection of decoupling, it remains “concerned about the voice of ‘de-risking’ from the European side”. It went on to say that “If the EU seeks to decouple from China in the name of ‘de-risking’, it will decouple from opportunities, cooperation, stability, and development.”
The readout also questioned the scope of the strategy, stating that “when talking about ‘de-risking’, one must first consider what and where risks are.”
However, China has also sought to reframe the notion of de-risking in recent weeks. In June, during a meeting with representatives of major German internationals in Berlin, Chinese Premier Li Qiang noted that “it is understandable that all parties have their own security concerns” and that “what is important is how to reasonably define and guard against risks”.
He also called on the companies to take a leading role in risk prevention as “Enterprises have the most direct and acute sense of risks and know how to avoid and respond to them”. He also urged continued collaboration, stating that the biggest risk is “failure to cooperate”.
With both the Chinese and EU sides acknowledging the need to maintain collaboration and hedge against risks, the outcome of the EU’s new position will ultimately depend on how far the EU will push the concept and how the strategy will be implemented.
What does the EU mean by de-risking?
The EU has thus far not provided specific parameters or a roadmap for its de-risking strategy. The June 2023 press release simply stated that “the European Union will continue to reduce critical dependencies and vulnerabilities, including in its supply chains, and will de-risk and diversify where necessary and appropriate”.
The press release also stated that reducing “critical dependencies” on China is “in line with the Versailles agenda”. This refers to the Versailles Declaration, a document released by EU member countries on March 11, 2022, two weeks after the outbreak of the Russia-Ukraine war.
The document outlines the EU’s response to the war, including mechanisms for bolstering the bloc’s defense capabilities and reducing its dependency on imports for certain commodities of critical importance.
This includes “Reducing our strategic dependencies” in “sensitive areas”, such as critical raw materials, semiconductors, health, digital technologies, and food. In the China context, de-risking will therefore mean reducing the EU’s dependency on Chinese imports in these areas.
It is also important to remember that the EU’s de-risking strategy was initially raised by von der Leyen in the context of the EU’s transition to a green economy. In her speech at the WEF, von der Leyen noted that Europe is 98 percent dependent on China for certain rare earths required for the manufacturing of technology for wind power generation, hydrogen storage, and batteries.
Further complicating the situation is that, in the wake of the Russia-Ukraine war, decarbonization is increasingly a security issue for the EU. The Versailles Declaration outlines the need for the EU to reduce its energy dependencies, which will require reducing the reliance on fossil fuels and “speeding up the development of renewables and the production of their key components”.
This puts the tension between the EU’s need to collaborate with China on green technology and its desire to reduce its dependency on Chinese imports for key materials into sharp focus.
In March 2023, the EC proposed the Critical Raw Materials Act. This act aims to reduce the EU’s dependence on imports of 17 rare earth metals by increasing the bloc’s capacity for extraction, processing, and recycling to between 10 and 40 percent by 2030. Further, in the most recent round of deliberations, the EC proposed to set more ambitious goals for processing capacity and expand the list of metals included within the act’s scope.
De-risking in the context of ongoing EU-China dialogue
The EU’s recent rhetoric has been somewhat at odds with the actions of European leaders. Beijing has hosted a number of leaders from EU countries since its post-COVID reopening in late 2022, including German Chancellor Olaf Scholz and French President Emmanuel Macron.
During Scholz’s state visit in November 2022, the Chancellor struck a significantly more reconciliatory tone with regard to Germany’s relationship with China, in sharp contrast to the sentiment in the EU at the time. According to the readout from the German cabinet, Germany and China have a “shared global responsibility” and “wish to collaborate even more closely in dealing with global crises”. The Chancellor announced that the two sides had also agreed upon a bilateral climate and transformation dialogue.
Prior to his visit, Germany’s cabinet approved a deal for the Chinese shipping company COSCO to buy a stake in the Port of Hamburg.
A similar dynamic was observed during French President Emmanuel Macron’s visit to Beijing in April 2023. Macron traveled to China along with EC President von der Leyen, with the purpose of discussing systemic issues, such as trade imbalances, the Russia-Ukraine war, and climate change.
However, Macron personally also brought a delegation of around 50 business leaders, leading to the signing of 18 cooperation agreements by representatives of 36 French and Chinese companies across various fields. China and France also signed a joint commitment to deepen ties, including promoting economic exchange.
Another visit that received less media attention was the official state visit by Spanish Prime Minister Pedro Sánchez in March, which resulted in the signing of two phytosanitary protocols enabling China to buy more Spanish persimmons and almonds, “for which the Chinese market has enormous potential”.
It also bears mentioning that China’s relationship with EU member countries varies greatly. China’s relationship with Hungary, for instance, has generally been amicable, with the country even breaking ranks with the rest of the EU to welcome China’s Ukraine peace plan.
It is also clear that the EU’s ambitions to increase its renewable energy share to 32 percent by 2030 and become a climate-neutral continent by 2050 cannot be achieved without cooperation with China. In addition to rare earths, China is also the world’s largest manufacturer of a broad range of clean technologies, most notably solar panels and batteries. Many of the EU’s renewable energy companies have already formed partnerships with their Chinese counterparts, and China has invested heavily in the EU’s renewable energy sectors.
The EC acknowledges this relationship. Regarding cooperation on energy issues, the EC states that the “EU and China share common interests and goals for the clean energy transition”. China and the EU have for many years engaged in cooperation on matters related to climate change, and in 2019 established the EU-China Energy Cooperation Platform to support the green energy transition. On July 4, 2023, the Executive Vice-President of the EC, Frans Timmermans, and China’s First Vice Premier, Ding Xuexiang, held the fourth China-EU High-Level Dialogue on Environment and Climate (HECD) in Beijing, “to deepen cooperation on the global green transition”.
The EC’s June 30 decision also called for continued collaboration with China: “The European Union will continue to engage with China to tackle global challenges and encourages China to take more ambitious action on climate change and biodiversity, health and pandemic preparedness, food security, disaster reduction, debt relief, and humanitarian assistance.”
At China Briefing we will continue to monitor developments in EU-China relations and provide analysis on the impact that the EU’s China policy will have on European companies in China, as well as bilateral trade and investment.
Dezan Shira & Associates’ Presence in Europe
Europe has significant trade and investment dealings with Asia – China, ASEAN, and India – are all among the bloc’s top trade partners. With Asia emerging as a growth engine of the world economy and an area of certainty amid global volatility, there is a wealth of opportunities for European investors in the region. Incorporated in Munich in January of 2021, Dezan Shira & Associates’ European office under Riccardo Benussi serves as a first point of contact for European companies wishing to do business in Asia. Meanwhile, our Europe-based team in both the Munich and Milan offices works with a variety of partners to connect European businesses with developing Asian economies. To set up a call with our Europe-based team, please contact riccardo.benussi@dezshira.com.
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China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
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