EU-China trade: De-risking or defending?

As European Commission President Ursula von der Leyen pivots towards a more hawkish stance on trade relations between China and the bloc, EU institutions are busy preparing two new trade defence tools. Will we soon see a change in more than rhetoric?

The world is changing fast. While only a few years ago, the EU was still negotiating trade agreements with China, von der Leyen today laid the “Comprehensive Agreement on Investment” (CAI) between the EU and China to eternal rest before it ever had a chance to live.

“We know there are some areas where trade and investment poses risks to our economic and national security, particularly in the context of China’s explicit fusion of its military and commercial sectors,” the Commission president said in a speech on Thursday (30 March), when she laid out her new approach to China.

“Economic de-risking” is the name of the game, in which the EU identifies and bolsters the strategic sectors in which it is too reliant on China.

In the recently proposed Industrial Act, for example, the EU introduced a slight disadvantage for Chinese producers of renewable energy technologies to participate in European public procurement. And with the Critical Raw Materials Act, the EU wants to become less reliant on Chinese refining capacities.

But in both proposals, the Commission remains rather timid, fearing it could undermine the multilateral trade order even more than it already is.

Von der Leyen wants to “de-risk, not de-couple”, arguing that trade can remain strong with China, as long as the EU can increase its resilience in some strategic sectors.

However, the inconvenient truth is that with its still growing importance for European companies, the Chinese market as such has become strategic.

And China is not afraid of wielding its market power as a weapon, as we have seen in its de facto boycott of Lithuanian products after Lithuania allowed Taiwan to open a representative office in Vilnius in 2021.

In partial response to this, the EU began work on an anti-coercion instrument that should allow the EU to take countermeasures in such a case of economic interference. On Tuesday, EU member states and the European Parliament finalised their negotiations on this regulation, meaning that the tool will soon be available for use.

From July onwards, the EU will also have the Foreign Subsidies regulation at its disposal, allowing it to counteract distortive subsidies that companies get in third countries like the US or China.

“We now need the unity at EU level for a bolder and faster use of those instruments when they are required and a more assertive approach to enforcement,” von der Leyen said in her speech, referring to these two trade defence tools.

In other words, the unity is not there yet.

It is also unclear whether the anti-coercion tool will be applied to the most obvious case of Chinese economic coercion, namely its row with Lithuania. The Commission does not want to use the instrument retroactively.

Bernd Lange, who led the negotiations for the anti-coercion instrument for the Parliament, argued in favour of the tool’s use in the Lithuania-China case.

He likes to describe the instrument as “a gun on the table” that will help the EU make itself heard in trade conflicts even if one does not use it.

But even a gun on a table will only be a useful intimidation if the counterpart believes that you will actually pull the trigger. Will the EU?

When we are talking about European innovation, we are really talking about German innovation. Recent data from the European Patent Office (EPO) show that companies and individuals from Germany have lodged more than double the amount of patents than companies and individuals from other EU countries.

This is not to say that Germany has the most innovative companies. Relative to population size, for example, Luxembourg, Sweden, Denmark, the Netherlands, and Finland can boast more patent applications than Germany.

But in total numbers, it is German companies that contribute most to European innovation.

However, these numbers do not tell us anything about the quality of the innovations. Has a company innovated a revolutionary way to produce sustainable energy – or just added an extra blade to an already extortionately-priced men’s razor for a marginally more luxurious shaving experience? Total numbers don’t show that.

Moreover, the change in the number of patent applications compared with last year indicates that German innovation may have been struggling as of late. In 2022, patent applications from Germany tanked by more than 4% compared to 2021, in part due to the fact that a lot of German innovation comes from the car industry.

As EPO’s communications director Luis Berenguer explained to EURACTIV, the change from the combustion engine to electric vehicles also means a change from an area where German innovation was strong to a sector where it is less so.

At least the growth numbers for last year show that countries like France and the Netherlands are slowly picking up the pace.

EU Parliament approves pay transparency directive. European lawmakers voted in favour of adopting the EU’s pay transparency directive aiming to narrow the EU gender pay gap, during a plenary session on Thursday (30 March). The directive obliges companies with over 100 employees to report and fix their wage disparities and gives employers the right to access sex-disaggregated data on salary to check the application of the principle of equal pay. The directive will need to formally be adopted by member states before entering into force.

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EU lawmakers condemn situation of LGBTQ+ families’ rights in Italy. On Thursday (30 March), the Parliament condemned the Italian government’s decision to block the birth certificates’ registrations of rainbow families’ children in Milan, in a resolution on the rule of law. The EU Affairs Committee of the Italian Senate recently voted against the Commission’s proposal to recognise cross-border parenthood rights, which would ensure parental links established in one EU country are recognised in all member states. This would also apply to rainbow families, which makes the proposal unwelcomed by some member states.

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