The EU and China balance their relationship

The European Union (EU) seeks to balance conflicting aims with China. It states it is simultaneously a partner, a competitor – and a systemic rival.

| 5 min read

Charles Michel, the President of the European Council, Ursula von der Leyen, the President of the European Commission and Josep Fontelle, the High Representative of the European Union will all meet Chinese President Xi Jinping and the Premier Li Qiang in Beijing in separate meetings.

Participants in global markets will be pleased that they are talking, but do not expect much to emerge from the dialogue. Next year will go better if these two giants avoid any further deterioration in their relations, with the introduction of major new obstacles to trade. China will be conscious that Ms von der Leyen may not keep her job after the European parliamentary elections next June, whilst the Presidency of the European Council rotates. This argues for concentrating on what can be achieved in the short term.

The European Union (EU) seeks to balance conflicting aims with China. It states it is simultaneously a partner, a competitor – and a systemic rival. The EU will criticise China’s stance on various issues, but knows it needs to trade with the vast Asian nation. It tries to develop more co-operation on climate change and biodiversity, health and pandemic preparedness, food security, disaster reduction, debt relief, and humanitarian assistance. The bloc does not commit itself to such an aggressive position as the US but is contemplating more action to limit various Chinese exports. It is very worried about the big trade imbalance.

The EU Council has stated its position on trade. “The European Union and China continue to be important trade and economic partners. The European Union will seek to ensure a level playing field, so that the trade and economic relationship is balanced, reciprocal and mutually beneficial. In line with the Versailles agenda, the European Union will continue to reduce critical dependencies and vulnerabilities, including in its supply chains, and will de-risk and diversify where necessary and appropriate. The European Union does not intend to decouple or to turn inwards.”

Support for Russia creates friction

The EU presses China to use its influence with Russia to stop the Ukraine war, and sides more with the US over access to the South China Sea and the vexed issue of Taiwan. It expresses concerns regarding forced labour, human rights, the treatment of minorities, the situation in Tibet and Xinjiang, and the honouring of China’s past pledges to Hong Kong.

The immediate issues to tackle include the Chinese ban on some Lithuanian exports to China. This was imposed when Lithuania set up a “Taiwanese diplomatic office” to strengthen links with what China regards as a wayward part of ‘One China’. There are also EU concerns about free passage in international waters off Taiwan.

The EU will doubtless raise the issue of Chinese support for Russia in prosecuting the war in Ukraine. Chinese technology and weapons are alleged to be helping Russia sustain the fight. China will defend its position, which does not declare directly for Russia. The EU will mention human rights issues and will be told not to interfere in Chinese domestic affairs.

The EU is investigating allegations that China has violated world trade and competition rules.

The central problem that matters most to markets will be whether China is using subsidies and other helpful interventions to flood European markets with cheap solar panels, wind turbines, electric vehicles and other products. The EU is investigating allegations that China has violated world trade and competition rules in a way which justifies tariffs or other retaliatory action. China will deny this and is well placed to increase its sales of green products substantially. China has patiently built a dominant position in larger batteries and in renewable power. The nation has access to the raw materials, can do much of the world’s processing of the crucial ones and has substantial fabrication capacity for the final products.

Carbon tax a concern

China is nervous about the likely imposition of a carbon border tax by the EU on imports. As the main seller of industrial products into the EU, China would face a hit to its exports as prices were adjusted to allow for the extra tax. It appears that 2024 is unlikely to see a relaxation of trade between the two, although there will be some more trade frictions next year. The best hope from the summit is that some of the threats of further obstacles to trade are diminished or delayed.

China will want to avoid a major row with the EU, seeing the EU as a more willing and less well armed competitor than the US. The EU will find that, nonetheless, the new China under a more autocratic President XI will be very keen to assert a different view of world politics to that of the West – and will be determined to further China’s interests as the dominant producer of green products as the world tries to speed its journey to ‘net zero’. We expect the summit to pass off without a new problem, but not to achieve any breakthroughs on the big issues that divide them.

What factors are likely to impact stock markets next year? As hopes of an economic recovery start to build, explore our twelve global market predictions for 2024.

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The EU and China balance their relationship

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