SITUATION UPDATE BRIEF: CHINA-EU: ACCENTUATED DIFFERENCES WILL MAKE IT HARDER TO FIND COMMON GROUND IN POST-COVID RELATIONS

Key Takeaways

The Covid-19 pandemic coupled with Beijing’s increasingly combative approach to foreign policy has largely altered the dynamic of China’s relations with the European Union. With the 27-member bloc taking a hardened stance on Beijing, major ideological differences may hinder efforts to resolve longstanding frictions in trade and investment.

Brussels is unlikely to make any significant concessions in future trade negotiations unless Beijing makes tangible progress in improving reciprocity and transparency. The Chinese government will remain reluctant to lose its grip over key industries such as technology and financial services. As a result, negotiations related to the Comprehensive Agreement on Investment (CAI) will be protracted, with agreements only likely to be reached in less sensitive areas as such agriculture.

Although national interests still largely dictate EU member states’ foreign policy considerations, a more ‘united front’ will help the bloc to wield stronger political and financial leverage when dealing with an assertive China.

With China-US relations at a very low ebb, maintaining an amicable relationship with the EU will be key for Beijing, as it tries to navigate through the challenging geopolitical climate in the post-pandemic international order.

Context and Background

Covid-19 and its impact on the global economy and geopolitical dynamics have resulted in China-EU ties entering one of their most turbulent phases in the 45 years since the establishment of diplomatic relations. Not only has the pandemic exacerbated structural weaknesses in the relationship, such as unbalanced and unequal trade arrangements, it has also accentuated the ideological chasm between European liberal democracies and an authoritarian China.

As an indication of growing rifts in the relationship, human rights issues such as Beijing’s treatment of the Uighur Muslim community in Xinjiang and the pro-democracy movement in Hong Kong featured prominently on the official agenda alongside more conventional topics – trade, investment, and climate change – during the latest China-EU summit, held virtually on 14 September. Likewise, human rights issues were repeatedly raised by European leaders during Chinese Foreign Minister Wang Yi’s recent five-country goodwill tour. Such issues, if mentioned at all, have typically been relegated to side-line talks when meeting with Beijing’s top mandarins.

With the Chinese economy showing promising signs of recovery, Wang’s diplomatic outreach demonstrates Beijing’s desire to further economic and trade ties with the EU in the post-pandemic era. However, while not wishing to underplay the value of a closer economic partnership with China, the EU has placed significant emphasis on Beijing’s actions (or lack thereof), rather than simply accepting its promises. This hardened attitude will likely underpin the EU stance and approach in
forthcoming negotiations with China on the Comprehensive Agreement on Investment (CAI).

Brussels will press Beijing for action in levelling up unbalanced trade relations

European Council President Charles Michel’s comment that the “EU is a player, not a playing field” captures the prevailing sentiment in the bloc with regard to the long-standing issues of reciprocity, transparency, fair competition, and predictability in its trade relations with China. Michel made this thinly veiled warning to China at a press conference following the virtual summit in September with Chinese President Xi Jinping.

Although China has made some progress in easing restrictions and reducing red tape on foreign investment over the past five years, it remains far from a level playing field compared to the environment faced by Chinese businesses in the EU, where they benefit from non-discriminatory regulations and robust rule of law. Indeed, Beijing’s introduction of new intelligence and cyber security regulations, coupled with moves to strengthen the Communist Party’s control over commercial organisations, have raised serious concerns over a more restrictive business environment among foreign companies and investors in China. This tightening grip on the domestic economy under President Xi, along with a more assertive foreign policy agenda, has resulted in rising anger among business leaders and lawmakers in the 27-member bloc. The negative sentiment driven by the Covid-19 pandemic has further exacerbated Brussels’ growing frustration about Beijing’s lack of concrete actions in addressing the unbalanced trade relationship.

However, with the EU as China’s largest trading partner, Beijing can ill afford to alienate Brussels, especially at a time when it faces intense pressure and scrutiny on the global stage, not least from Washington. The agreement reached during September’s summit on the protection of geographical indication (GI) labels on food and drinks illustrates that there is still scope to find common ground in the CAI negotiations. Going forward, however, we expect that Brussels will be more hesitant to give further concessions in the talks without Beijing making meaningful progress on thorny issues such as market access, state subsidies, and technological transfers. Indeed, Chinese investment in Europe, especially involving companies with links to the state or those that hold stakes in strategically important sectors, could be restricted by Brussels, should Beijing fail to improve reciprocity and transparency.

Shared interest in multilateralism will help to sustain Sino-French ties

Despite expressing strong concern over human rights issues during Wang Yi’s trip to Paris, the agreement on GI labels protection is a victory for French President Emmanuel Macron, with many types of French wine and cheese included in the deal. As one of the leading agricultural exporting nations in the EU, France will seek to further boost agri-goods trade, given China’s vast market potential. As the agricultural sector is generally less politically sensitive on China’s part, particularly when compared with finance and technology, it is likely to remain an area where ‘low-hanging fruit’ can be harvested in China-EU trade negotiations….

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