The relationship between the EU and China is at a historical low point. This blog post explains how this happened, what Covid, Lithuania and Putin have to do with it, and why, for the time being, the EU-China honeymoon is over – while rifts and tensions are here to stay.

The European Union and China are closely interconnected through trade and investment – especially since China’s WTO accession in 2001 and its subsequent integration into global value chains. And it has long been considered a mutually beneficial development.

In 2021, the EU and China even were the largest trade partners in goods. EU-China investment relations, however, are still asymmetrical, with the EU investing much more in China than vice versa. If only considered from an economic viewpoint – there is still untapped potential.

graph: china eu trade

EU perspective on China: From economics to geopolitics

However, the EU perspective on China has changed over the last three years. In 2019, the EU, for the first time, officially acknowledged China as a “systemic rival.” This assertive move can at least partially be traced back to, what I call, the “Kuka shock.”

In 2016, Chinese manufacturer of household appliances, Midea acquired the German robot manufacturer Kuka at a far higher price than its market value suggested and higher than European competitors would have been willing to offer.

One of the reasons for this was that Kuka’s technology exactly fit China’s industrial policy strategy, “Made in China 2025,” which aims to turn China into the world’s leading high-tech power by 2049. Government subsidies and acquisitions of foreign high-tech companies are included as a means to achieve this goal.

graph: fdi china eu

The case of Kuka triggered a heated debate in Germany and the EU on Chinese firms systematically buying up European key technology, – while at the same time, European companies still faced substantial hurdles in the Chinese market. To put it short: a Chinese Kuka would not fall into foreign hands.

Shortly after the Kuka case, the EU received another shock from the other side of the Atlantic: Donald Trump got elected as US president. He made rivalry the focus of US-China relations and triggered a trade war with China.

But he did not stop there and even moved against the EU, calling this longstanding trusted partner a “foe” of the United States. Both China and the EU were showered with tariffs, and in the case of the EU, were only removed by the Biden administration.

As a result of these two shocks, the EU started to embrace the geopolitical dimension in its external relations, with a strong focus on China – but not neglecting the changing quality of its relations with the United States either.

This also meant acknowledging that close economic interconnectedness implied critical dependencies that might be exploited politically. The EU has therefore started to revise its toolbox of defensive instruments to increase its capacity to manage these dependencies – a process which is still ongoing.

The pandemic shakes things further up

When the pandemic hit the continent, the EU prioritized dealing with the virus and its economic consequences. So other issues moved into the background for a while. China, though assumed to be the origin of the virus and criticized for lack of transparency in this regard, initially did astonishingly well with its “zero-Covid policy” to contain the pandemic and limit economic damage.

It even achieved economic growth in 2020, albeit comparably low – the only large economy worldwide to do so. Some Western observers were awed by these achievements, as China’s quick recovery helped the global economy, including in the EU  – especially export-driven ones like Germany – to mitigate the impact of the pandemic at home – at least to some degree.

It is therefore not surprising that the EU concluded in principle negotiations for the Comprehensive Agreement on Investment (CAI) with China at the end of December 2020 under Germany’s Presidency of the Council. Things even looked rosy again for EU-China relations at this point.

However, things turned out quite differently: in the course of 2021, the EU’s relationship with China deteriorated quickly. It became more apparent that China had delayed initial notification of the novel coronavirus. With more contagious variants of the coronavirus developing – especially Omicron – China’s zero-Covid policy also proved fatal for the country’s own economy and, given China’s role in global supply chains, to become a liability for the world economy. Moreover, the new US administration under Joe Biden revived the transatlantic axis and reinforced alliances with like-minded partners.

With his first-ever Summit for Democracy, Biden committed to strengthening democracy worldwide. This cast another shadow on EU-China relations, as China considers the thought of a transatlantic alliance against Beijing unsettling and hopes for the EU to “form an independent China policy,” that is, a China policy independent from that of the United States and thus potentially more favourable for China.

EU China relations table

Mutual sanctions and economic coercion further increase tensions

In March 2021, the EU, for the first time in 30 years, put sanctions on China, finally penalizing the systematic violation of human rights in Xinjiang province, where 1-2 million Uyghurs are estimated to have been put into prison-like reeducation camps. China immediately imposed countersanctions, targeting, for example, members of the European Parliament.

The initially much-celebrated CAI has been put on ice ever since. In November 2021, the EU extended its sanctions and was proven right to do so by the leak of the Xinjiang Police Files in May 2022. These delivered unprecedented evidence of the suppression of the Uighurs by the Chinese government.

The next moment of diplomatic distortion was created by China’s reaction to Lithuania’s opening of a Taiwanese representative office. China saw this as a violation of its One China principle. As a result, Lithuania was temporarily removed from China’s customs registry, de facto halting mutual trade relations.

China also economically coerced EU companies, the supply chains of which included Lithuania, for example, by blocking them at Chinese ports. The EU initiated a WTO dispute complaint against China in January 2022, which is still ongoing.

China’s dithering on Ukraine brings EU-China relations to a low point

And as if the above developments were not enough, China and Russia entered a friendship “with no limits” on February 4, 2022. This hugely disturbed EU member states and other democracies worldwide, especially the United States, as it made fears of a fully-fledged alliance of autocracies and a permanent systemic rivalry, maybe even a Cold War 2.0, more real.

A few weeks later, these fears turned out to be more justified than ever imagined, as Putin invaded Ukraine and China did … nothing. A diplomatic shilly-shally from the Chinese side followed, which brought the EU, expecting China to take on responsibility for dialogue and maybe even act as a mediator, to the end of its patience.

It is not surprising, therefore, that the EU-China virtual summit on April 1, 2022, characterized by eloquent speechlessness, constituted a distinct low point in mutual relations: never had the differences between the two on crucial issues, such as Ukraine, been more apparent.

The High-level Economic and Trade Dialogue (HED) was one of the few results of the summit and was deemed a success merely because it took place a few months later. But we should not be mistaken at this point: the EU-China honeymoon is over. Rifts and tensions are here to stay.

Outlook

Russia’s War against Ukraine has intensified the notion of systemic rivalry, which was already growing in the years before. While it will still be important for the EU to keep open channels of communication and cooperation with China, e.g. regarding climate change mitigation, and to not give up on multilateralism, it is very likely that, for the foreseeable future, rivalry is likely to become the defining factor in EU-China relations, as it has already been the case for US-China relations for quite some time.

In the future, the EU’s relationship with China will be characterized even more strongly by divergence rather than convergence of systems, distancing rather than partnership, and decoupling (in the sense of a reduction of critical economic dependencies) rather than market competition.

About the author

Cora is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is foreign direct investment and international trade (especially the role of emerging economies).

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