The European Union Must Find Its Own Position

Germany ended its EU Council presidency by launching fireworks one day earlier than expected: on 30 December, the EU and China agreed to the terms of a Comprehensive Agreement on Investment (CAI), thus concluding seven years of negotiations. However, further steps that involve the US are necessary.

“Politics is the art of the possible”: The EU–China deal, as a feat of diplomatic artistry, is redolent of this famous adage from Otto von Bismarck. As the EU country that benefits the most from international trade with China, Germany under Merkel – entering her last year of office – took the initiative to strengthen European partnership with China, thus putting to good use the division and distraction prevailing in the US in the twilight days of Trump’s presidency. While the EU Council and Parliament still have to ratify the agreement, it could become an important building block for closer trade relations between Europe and China – two economic areas which have come under severe pressure in recent years.

In a widely discussed policy paper, the Federation of German Industries (BDI) called in 2019 for additional policy measures to help German companies remain competitive in the face of “systemic competition” from China. Many of the reforms advocated in the paper were integrated into the investment agreement, including the rolling back of restrictions to direct investment and foreign ownership, and the loosening of requirements to enter into joint ventures with Chinese companies. Further measures foreseen by the agreement will ease the ability of European companies to operate in certain areas of the Chinese economy, such as the financial sector and health care.

Yet beyond the challenges posed by barriers to market access, European companies are particularly hard pressed to compete with their Chinese counterparts when the latter are state owned or subsidised, given the extensive state aid restrictions on EU firms. To ensure a level playing field domestically, the EU already applies duties to imported goods that benefit from state subsidies. Furthermore, in a new white paper, EU regulators have recommended improving the mechanisms for monitoring the subsidies that flow from third countries to firms that operate in the single market. Considering EU authorities often have difficulty obtaining information about state aid activities from third countries, it can be helpful that the investment agreement also provides for transparency obligations for subsidies in the services sector.

To be sure, the interests of Europe – and especially Germany – diverge from that of the US when it comes to relations with China. Balance-of-trade statistics offer a case in point: While the absolute volume of US–China trade is comparable to that of EU–China trade, the value of Chinese exports to the US are four times that of US exports to China. By contrast, the imbalance between China and the EU is much smaller, at 1.75:1. Accordingly, Europe has not seen a mass displacement of jobs to China, as has occurred in the United States, a phenomenon that is frequently referred to in the US as “the China shock.” The Economist estimates that 10 of the 15 largest German companies earn more than 10 per cent of their revenues from business in China; just 5 of 15 do so in the US.

In its economic relations with China, the EU thus has its own unique interests, and must pursue them accordingly. However, the EU–China Comprehensive Agreement on Investment must be viewed as just one element of a much broader multilateral relationship that encompasses the world’s three largest economies (the US, China, and the EU). The issues in need of attention – from environmental protection and human rights to labour standards, fair trade, and security issues – are numerous. Biden’s election as US president would appear to offer a special opportunity for stronger joint action, given his avowed commitment to multilateralism. Here, as well, there is a pressing need to embrace the art of the possible.