EU Gets Tougher on China
But also — RED, Trade, Comp, Gas
The Briefing
On 30 March the President of the Commission gave a speech to the Mercator Institute for China Studies (MERICS) and the European Policy Centre (EPC) on the future of EU-China relations, ahead of an official visit to China.
IN BREVIS • The President of the Commission took a firm stand by proposing the de-risking of EU-China relations. Although the EU is raising its voice, it is not going as far as aligning itself with the United States, which is fond of the more hawkish concept of decoupling.
BACKGROUND • Ursula von der Leyen will accompany Emmanuel Macron to China on 4 April. On March 24, Emmanuel Macron announced that von der Leyen would attend "a part" of the French state visit to China.
As a reminder, Olaf Scholz went to Beijing solo last autumn, drawing criticism from leaders frustrated by the lack of European coordination. The President of the European Council, Charles Michel, also visited China in December 2022. His trip took place amid a wave of protests against the Chinese government's zero-covid policy.
MERICS NON GRATA • The Mercator Institute for China Studies is among four institutions sanctioned by China in March 2021, after the EU imposed sanctions on individuals and entities accused of human rights abuses in Xinjiang. Among the individuals sanctioned by China is also MEP Raphaël Glucksmann.
The ratification of a major investment agreement (the CAI) was shelved shortly after Beijing imposed these sanctions, despite a political agreement reached at European level at the very end of the German Presidency of the Council of the EU in December 2020.
WARNINGS • In her speech, von der Leyen warns of the consequences of Beijing's “unlimited friendship” with Moscow:
"Any peace plan which would in effect consolidate Russian annexations is simply not a viable plan. We have to be frank on this point. How China continues to interact with Putin's war will be a determining factor for EU-China relations going forward."
Von der Leyen takes note of China's more muscular use of its economic power for geopolitical purposes:
"We saw it when China responded to the opening of a Taiwan office in Vilnius by taking retaliatory measures against Lithuania and other European companies. We have seen it with popular boycotts against clothing brands for speaking out on human rights or with sanctions against Members of the European Parliament, officials and academic institutions for their take on China's actions."
GAME PLAN • The response proposed by the President of the Commission to this new China is threefold.
Reduce risk. The EU is introducing a key new concept into its relations with China — de-risking. "Our relations are neither black nor white, and neither can our response. That's why we need to focus on risk reduction, not distancing."
Reduce economic dependencies. The EU must become more ‘resilient’, notably by diversifying its supplies of rare earths and lithium, for which dependence on China is almost total. Dual-use items are also covered, and more broadly sectors where relations with China pose risks to the EU's economic security. In this context, the Commission is considering the introduction of outward investment controls. "This would relate to a small number of sensitive technologies where investment can lead to the development of military capabilities that pose risks to national security."
Use existing legal instruments. The EU has recently developed an important legal toolkit — whether in terms of foreign investment controls (FDI regulation), tackling account distortions caused by non-European subsidies (foreign subsidies regulation), or economic coercion (anti-coercion instrument). The EU must now use these instruments.
FINE LINE • The European message to Beijing is hardening — both in relation to the Commission's past positions and the sensitivities of some Member States.
In 2019, the Commission and the European External Action Service had in a joint communication described China as a "partner, economic competitor, systemic rival", but it was not until Covid-19, the war in Ukraine, and (strong) pressure from the United States that the last part of the three-fold statement gained a more substantive meaning.
Within the EU, it is difficult to strike a balance between German Social Democrats as they are well aware of the importance of China for German industry; Lithuanians, targeted by the Chinese economic boycott; Southern European countries dependent on large Chinese investments; or the Netherlands, which recently followed the United States in banning the export of essential semiconductor components to China.
BEIJING SEES RED • While the approach adopted by the EU (de-risking) is softer than that of the United States (decoupling), Beijing does not see it in the same way. The Chinese authorities were quick to reply that Washington is dictating to Brussels its conduct.
China’s ambassador to the EU, Fu Cong, said Europe should oppose US demands, adding that countries that downgrade their trade relations with China will do so “at their own peril”.
In Case You Missed It
ENERGY • On 30 March, the Parliament and Council reached a provisional agreement on the revision of the EU's Renewable Energy Directive (RED). The agreement strengthens the ambition of the original text, raising the target for renewable energy in the EU's energy mix from 32% to 42.5% by 2030 — with sub-targets for each sector.
To encourage the development of renewables, the revision aims to speed up and simplify the procedures for granting wind and photovoltaic permits. Renewable energies will thus be considered to be in the "overriding public interest". For areas with high renewable energy potential and low environmental risks, permitting procedures will be particularly simple and fast.
France has overall failed to convince Member States to include nuclear power in the RED Directive. However, it has obtained a concession: hydrogen produced from nuclear energy can be included in a sub-target related to industry.
However, this concession will only benefit countries with a very large nuclear fleet, such as France and Sweden. France has thus alienated several Member States that are part of the coalition it has been leading for several weeks to obtain the inclusion of nuclear power in the European texts relating to the Green Deal - and which will not benefit from the concession obtained.
More generally, there appears to be frustration on the part of some Member States with the lobbying of France and Germany on nuclear and combustion engines respectively.
The agreement must now be formally adopted by the Parliament and the Council, after which the legislation will be published in the EU's Official Journal and enter into force.
TRADE • Parliament and Council also reached agreement on the Anti-Coercion Instrument (ACI), which is specifically aimed at "economic coercion" — when a third country seeks to put pressure on the EU or one of its Member States by applying or threatening to apply measures affecting trade or investment. This instrument is intended to strengthen the EU's “open strategic autonomy”.
The ACI is primarily intended to respond to Chinese pressure. For example, at the end of 2021, China put in place an embargo on all imports of products from Lithuania or with components from Lithuania. This decision was taken following the opening of a Taiwanese embassy in Vilnius, which was seen as an insult to the One China policy.
Before entering into force, the agreement must first be formally adopted by the Council and the Parliament.
COMP • EU Competition Commissioner Margrethe Vestager told the press that companies benefiting from the Inflation Reduction Act — the US's $369 billion plan to accelerate the energy transition — may have to notify their subsidies to the European Commission under the Foreign Subsidies Regulation.
This regulation came into force on 12 January 2023. From 12 July, the Commission will be able to initiate investigations into foreign subsidies that distort the internal market. From 12 October, these companies will be obliged to notify such subsidies.
GAS • On 30 March, the Council adopted a regulation extending for one year the voluntary gas consumption reduction target of 15% for each Member State. Between August 2022 and March 2023, the EU has already reduced its gas consumption by 19%.
What we’ve been reading
What’s the matter with Bulgaria? asks Rumena Filipova in Transitions. The founder of the Institute for Global Analytics tries to understand the roots of the country’s political instability and of its failure to deepen its engagement with its European partners.
Marianna Giusti interviewed Alberto Grandi, the academic whose claims that most of what we think of as traditional Italian food are in fact recent inventions have caused considerable controversy in the peninsula.
This week’s newsletter is brought to you by Ysabel Chen, Maxence de La Rochère and Augustin Bourleaud. See you next Monday!