EU has reason to keep things sweet with China despite protectionist rules

Although new EU measures covering environmental, human rights and anti-subsidy concerns threaten Chinese business interests, EU and Chinese leaders, braced for Trump 2.0, have reason to keep tensions from boiling over

Bob Savic

Published: 8:30pm, 26 Mar 2024

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While US lawmakers hit global headlines for pushing a bill aimed at forcing China’s ByteDance to divest of its TikTok operations in the US, the European Union has passed relatively low-key rules targeting China’s commercial interests. The EU’s measures, however, could have a more far-reaching impact on Chinese industries.

Arguably the most controversial is the EU’s new directive governing the oversight of international business supply chains. This will require large EU-based companies to monitor human rights and environmental policies in the countries they operate in, in connection with local suppliers and other business partners.

The measure prospectively targets all developing countries that have different regulatory standards in these areas, and many Chinese businesses are expected to fall under its focus.

According to a survey by the Chinese Chamber of Commerce to the EU, China’s enterprises are especially concerned over the law’s due diligence requirements, with compliance expected to impose high costs.

In particular, high compliance burdens are anticipated for Chinese solar and textile producers in accessing the EU market. Industry officials have been lobbying the EU for action as these Chinese companies have effectively elbowed out their EU competitors in the single market over the last decade.

In tandem with the new supply chain law, the EU has also agreed provisionally on new rules to prohibit products made from “forced labour”. This move is seen as aiming to more specifically target China’s alleged labour practices in its western region of Xinjiang.

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The EU’s new laws against forced labour would be interconnected with its supply chain legislation given that Xinjiang is a major producer of garments that are exported globally. The region is also China’s main producer of solar panels.

To rub salt into the wound, these extraterritorial laws come amid the EU’s anti-subsidy investigation into Chinese electric vehicle (EV) makers, which was launched last year.

It’s certainly the case that a large part of the EU’s trade strategy with China is driven by its efforts to achieve strategic autonomy in an increasingly geopolitical world. Another element of the EU trade policy is its intention to reduce its trade deficit with China. This reached €291 billion (US$321 billion) last year, according to EU data.

Even though this figure was about €100 billion less than in the previous year, the EU and other Western governments have complained of China’s “industrial overcapacity”, which they say risk spillover effects in their markets.

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In response, Beijing think tanks have countered with the charge that EU and US claims of overcapacity are grievances for their loss of dominance in advanced manufacturing sectors.

Yet, as the temperature on both sides appears to be on the verge of boiling over into a potential trade war, Chinese and EU leaders seem to be making efforts to bring back both parties from the brink of a protectionist spiral.

To this end, German Chancellor Olaf Scholz will visit Beijing next month while Chinese President Xi Jinping will reportedly head over to Paris in May.

It may well be that a more clear-headed approach in resolving Chinese and EU trade differences is at hand. This is likely to be driven, in large part, by growing mutual concerns of what a possible second Donald Trump presidency may mean for their respective international trade interests.

Such an outcome threatens to unleash an unprecedented wave of protectionism from Washington which would have destructive effects on trade for both China and the EU.

In a sign of what may come, Trump threatened earlier this month to impose a 100 per cent tariff on imported cars, including EVs, vowing that “you’re not going to be able to sell those guys if I get elected”.

In light of a potentially more complex trade environment, China and the EU may seek to cooperate more on direct investment policies.

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Such an approach could be boosted by European economic considerations: some analysts see Europe’s manufacturing and export competitiveness as at risk of being structurally endangered. This state of affairs is particularly influenced by the loss of cheap Russian energy to power its industries, especially in Germany’s manufacturing sector.

As an alternative, the vast German carmaking and chemical sectors have been investing heavily in the Chinese market. French companies have embraced a similar approach, albeit more focused on luxury consumer goods.

Although this process had begun a few years ago, it has gained considerable momentum since the waves of EU sanctions designed to cease trade with Russia’s energy and metals sectors that previously fed into Europe’s industrial supply chain.

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According to China’s Commerce Ministry, European direct investment rose by 92 per cent in 2022, albeit after declining flows during the pandemic years. Moreover, direct investment by Germany reached a record US$13 billion last year.

From this perspective, many goods currently produced in the EU may not appear on the EU’s trade data in the future, as they will increasingly be both produced and consumed in China.

And while the German government has sought to reduce the dependency of their large companies on China, alongside the EU introducing policies of screening outbound investments, the German Economic Institute asserts there is no trend indicating a decline of corporate investment into China.

In this context, the coming leaders’ meetings in Beijing and Paris should serve as affirmation of their intentions to support direct investment in China, thereby enhancing European corporate access to the growing Chinese market, while hedging against increased risks of trade protectionism.

Bob Savic is a senior research fellow at the Global Policy Institute in London, UK, and a visiting professor with the University of Nottingham’s Faculty of International Relations