Europe Can Afford to Fight With China

The book China Can Say No was a 1996 Chinese bestseller and a blunt expression of nationalism. Written by a group of right-wing intellectuals, the book called on China to reject liberal values and push back against Western interests conspiring to halt its rise.

Over 20 years later, after dismissing calls to democratize and advancing its state-led economy to become the world’s second largest, China has become well practiced at saying no. In its present-day “Wolf Warrior” diplomacy, China is now even learning to pressure the West to say yes to its own demands. Restricting access to the Chinese marketplace is often brandished to break the political will of offending parties.

Europe is a prime venue for China’s top diplomats to show this new assertiveness. Just last week, fearful of repercussions to its trade relationship with China, the European Union softened critical language in an upcoming report on China’s disinformation campaign about the coronavirus pandemic.

But Europe need not bow down to China’s economic bullying—it, too, can afford to say no. Not only is Europe far less reliant on the Chinese market than many presume, but the strategic vulnerabilities and loss of competitiveness from trading and investing in China are also starting to outweigh economic opportunities.

The EU’s recent capitulation to Beijing sends the wrong signal to member states facing similar pressures. Earlier this year, the Chinese Embassy in Prague threatened retaliation against Czech companies if a senior lawmaker visited Taiwan, which Beijing sees as a breakaway province. Not long after, the Chinese ambassador to Germany suggested harm might come to the market positions of German automakers in China if Berlin acted on security concerns to exclude the Chinese company Huawei from its 5G telecommunications networks.

At first glance, it is clear to see why Europe might give in to China’s political demands. The Chinese economy is slowing and is burdened by unprecedented debt levels, but China still represented over a quarter of global economic growth from 2013 to 2018, and its evolving consumer market is impossible for global corporations to ignore.

But despite its standing in the global economy, few questions are put to just how much of China’s economic growth is accessible to European and other foreign investors. After decades of promises from Beijing that its economy would open up, investment restrictiveness in China, such as limits on foreign equity, is still nearly four times as high as the average in advanced economies.

EU Trade Commissioner Phil Hogan recently remarked that even before the coronavirus pandemic scuttled high-level meetings this year, negotiations with Beijing had resulted in “little concrete progress on improving market access” for European companies. As Chinese corporations rise in competitiveness and Beijing pursues its “Made in China 2025” industrial policy to take the lead in high-tech manufacturing sectors, the future is not necessarily bright for many foreign investors.

At the same time, many European policymakers misread the importance of trade with China. EU officials often boast that every day over 1.5 billion euros ($1.6 billion) worth in goods flow between the regional body and China. But EU member states trade nearly 30 billion euros a day in total with internal and external partners. Europe’s economic dependency on China is a myth. China represented just 5.5 percent of the total trade of EU member states in 2018.As analysts at the Mercator Institute for China Studies in Berlin point out, if one goes strictly by the numbers, the most important trading partner for all EU member states is in fact the EU. Close to two-thirds of total trade on average for each member state is with its EU partners. Geographical proximity, business and cultural familiarity, and a single market and customs union drive forward this centrality.

Yet the common retort from European policymakers is that the top figures on trade do not tell the whole story. China’s economic importance is explained by the intangibles of its vital role in global supply chains, where it makes up one-third of intermediate products in complex, cross-border production processes, as well as its future market potential for European corporations.

But here too, China’s significance is misunderstood. Where there is trade between the EU and China, an asymmetrical relationship is developing. Trade integration with China has coincided with a fall in the EU’s share in global manufacturing exports from 44 percent in 2001 to 35 percent in 2018. Within global supply chains, China is exporting higher-value products to the EU but importing fewer goods in return. If Europe does not focus on building its own industrial competitiveness, it will continue to slip down the ladder in the global economy.

The coronavirus pandemic is also showing that depending on overseas production can be dangerous in times of crisis. As the coronavirus spread in China earlier this year and lockdowns brought many industries to a standstill, foreign countries and multinational corporations were left vulnerable by an over-reliance on particular Chinese intermediate products in consumer electronics, automobiles, and pharmaceuticals, not to mention crucial medical supplies. French Finance Minister Bruno Le Maire, among other European officials, cautioned that Europe needed to decease such points of dependence on China.

Neither is China any longer a land of vaulting revenue growth for many European corporations. Take Germany’s automobile giants, Volkswagen, Daimler, and BMW. They are some of the largest European investors in China, but over time their Chinese competitors, such as Changan and Geely, have taken on a growing market share.

Volkswagen’s executives maintain an upbeat outlook, but the company’s operating results in China have dropped by some 15 percent from 2015 to 2019. For Daimler, BMW, and the German industrial manufacturer Siemens, China’s share of total revenues compared to other countries and regions has stagnated over the same period. In euros and cents, it is often Europe, not China, that is generating higher levels of new revenue growth.

As a result, European corporations are less enamored with the Chinese economy than they used to be. Rising to above $15 billion in both 2011 and 2012, European investment levels in China fell to under $8 billion per year from 2016 to 2018. Until Beijing comprehensively rolls back trade and investment controls and restrictions, such as technology transfers for market access, growth levels for European and other foreign companies in China will remain limited and can even come back to bite competitiveness.

As the EU confronts the immense challenge of economic recovery from the coronavirus-induced recession, the pressure on Europe to submit to China’s political dictates on Huawei, Taiwan, and other national interests overseas may grow. But European policymakers need to recognize they have far more room for maneuver with Beijing than they might believe. Facing its own economic slowdown, China will also be searching for growth opportunities during the coming global recession and will not want to upset its trade and investment position in the European Union’s massive common market.

Fixating on negotiating market access with China can also blind Europe to broader horizons in the global economy. As emerging Asia overtakes China as the world’s main growth engine, Europe can build on its trade and investment portfolio across India and Southeast Asia. A recent free trade deal with Vietnam marks a promising start to such an expansion.

Closer to home, Europe can also foster manufacturing centers in Central and Eastern Europe and Turkey to revitalize its role in global trade. Rather than chasing every last dollar in China, Europe should invest in its regional innovation and industrial competitiveness. Nurturing its own leading corporations as global champions and supporting fellow democracies around the world better serve Europe’s economic and political interests.

Without subscribing to the same nationalist sentiments currently brewing strong in China, European leaders can encourage principled multilateralism in the world. But before such priorities can take hold, Europe must first learn to say no to China.