Europe's Divided Line on China-Russia Friendship
But Also - AI, IRA, Macron, Taxonomy
Hi! This is Monday, 15 May 2023, and here’s the EU news you need this week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
The future of relations with China is in the spotlight. Last week, Ursula von der Leyen announced an eleventh package of sanctions relating to the war in Ukraine, which could penalize Chinese companies. In parallel, the 27 are working on an update of their line of conduct towards Beijing.
SANCTIONS • Visiting Kiev on Europe Day (May 9), Ursula von der Leyen announced an eleventh package of sanctions against Russia.
According to the FT, this could explicitly target eight Chinese companies accused of selling dual-use goods to Moscow — that is, goods that can have both civilian and military use, thus circumventing European sanctions.
Four of these companies are already subject to U.S. sanctions:
King-Pai Technology and 3HC Semiconductors, from southern China, are accused of supplying Russia with microelectronic equipment that can be used in long-range missile guidance systems.
Sinno Electronics and Sigma Technologies, both from Hong Kong, are also accused of providing material and technological support to the Russian war effort.
"This is not directed against any particular country, but against the sanctioned goods. We expect all countries, including China, to influence their companies with this in mind," explained Annalena Baerbock, German Foreign Minister.
She received her Chinese counterpart, Qin Gang, in Berlin to prepare the bilateral summit between the two countries in June. The prospect of sanctions against Chinese companies is making Beijing nervous — Qin Gang told the German minister that China would not hesitate to retaliate.
DILEMMA • The sanctions package has not yet been officially presented by the Commission and will require a unanimous vote of the member states to be adopted.
Disagreements are already being felt among the family of 27 EU Member States. Again according to the FT, Germany would like to see sanctions directed at European companies that in one way or another play a role in circumventing the sanctions.
COMMON LINE • In the background, EU’s China policy is at stake. Meeting in Stockholm at the end of last week, European foreign ministers discussed the subject at length.
Ahead of the meeting, Josep Borrell circulated a document calling for a recalibration of the EU's relations with China. "My colleagues agree on the broad lines of this recalibration of our strategy towards China, taking into account recent developments in the Chinese domestic situation and foreign policy trajectories," he said.
The head of EU diplomacy recalled the "triptych" that defines the current official position of the EU towards China, in which the country is perceived as a "partner", a "strategic competitor" and a "systemic rival".
"In recent times, the dimension of "rival" has become more and more prominent, as the complexity of our relations with China has increased," he explained.
Josep Borrell also insisted on the importance of reducing the risks — derisking — of the EU-China relationship. The EU seems to be moving towards a more distrustful position towards China, without however going so far as to align itself with the United States, which is more fond of the concept of decoupling.
UKRAINE • Regarding the war in Ukraine, Borrell said that "relations between the European Union and China will not develop in a normal way if China does not push Russia to withdraw from Ukraine".
Member States remain skeptical of China's attempts to act as an intermediary between Russia and Ukraine. In particular, they consider that the 12-point plan presented by the Chinese government is biased in favor of Russia. At the end of April, Xi Jinping phoned President Zelensky, assuring him that he would "not add fuel to the fire".
INVESTMENT • According to a study by Merics and Rhodium Group published on May 9, China's investments in the EU and the United Kingdom have fallen by 22% in 2022.
Now standing at $7.9 billion, investments are at their lowest since 2013 and represent only 15% of their 2016 level: $47.4 billion.
According to the report, this decline is mainly due to EU Member States' increased control over Chinese investments in strategic areas, such as new technologies and infrastructure.
In 2022, Italy and Germany, for example, blocked Chinese acquisitions in military drones and automotive electronic chips, respectively. This trend can also be seen across the Atlantic, with the U.S. Committee on Foreign Investment (CFIUS).
According to the study, this trend is expected to continue in Europe, where control mechanisms will come into effect in Belgium, Estonia and Ireland in 2023.
WHAT NEXT? • The Commission has yet to present the details of the 11th sanctions package, on which member states will have to agree unanimously.
As for the recalibration of relations with China, the European heads of state will probably discuss the subject at the next European Council on June 29 and 30.
In Case You Missed It
AI ACT • Three weeks after the political agreement reached between the Commission and the European Parliament, the European Parliament's internal market and civil liberties committees adopted a draft mandate for negotiating the AI Act. The proposed regulation — which aims to prohibit certain harmful practices related to artificial intelligence — has been turned upside down by the arrival of ChatGPT and "large language models" (LLMs), which has pushed the European legislator to reshape the text in recent months. The text will be voted on in the plenary of the Parliament the week of June 12.
TAXONOMY • Last month, the European Commission opened a public consultation on two draft delegated acts under the Taxonomy Regulation. The taxonomy regulation is a classification system that helps companies and investors identify "environmentally sustainable" economic activities in order to make sustainable investment decisions.
Neither NGOs nor industry associations seem to be satisfied with these plans. On the one hand, NGOs feel that the proposal lacks ambition. According to Transport & Environment, the draft delegated act "will lead to fossil activities being considered green". On the other hand, the industry is asking "that the entire aviation sector (manufacturers, leasing companies, airlines and other aircraft operators, airports, ground handling services and air navigation service providers) be included in the EU taxonomy.
Aircraft manufacturers are also very concerned about the exclusion of business aviation — jets. According to Dassault, these aircraft "represent 95 percent of the European fleet of certified civil aircraft. This is just the beginning of a long lobbying battle.
MACRON • Ahead of the Choose France summit, which has been hosting the heads of the world's largest companies since 2018 to promote the country's attractiveness, the French President penned an op-ed the Financial Times.
What Europe needs is "more factories and less dependence", according to Emmanuel Macron. He welcomes the fact that the existence of an industrial policy is no longer a taboo and pleads its usefulness for the digital and climate transitions - referring to the Net Zero Industry Act and the Chips Act. "We are no longer naïve," he said.
Macron insisted on the need for more sovereignty for Europe and distinguished five essential pillars:
The competitiveness of companies, especially in the tech sector, in order to compete with American and Chinese champions.
An important industrial policy that will be accompanied by a regulation of state aid more advantageous than today.
The protection of European strategic interests through the regulation of company acquisitions in the sectors concerned.
Respect for the principle of reciprocity in trade policy.
Multilateral solidarity and in particular openness to the countries of the South.
IRA • On May 12, Northvolt, Europe's leading manufacturer of lithium-ion batteries for electric vehicles, declared that it would build its next factory in Germany — a multi-billion euro investment.
The company had previously announced that it was putting its factory plans on hold, considering the higher subsidies and lower production costs in the US.
In order to convince Northvolt to build the plant in Europe, Germany could subsidize it to the tune of about half a billion euros, according to Euractiv.
If the subsidies are approved by the Commission, Germany's aid could be the first to benefit from the Temporary Crisis and Transition Framework (TCTF), which allows Member States, under certain conditions, to offer higher levels of state aid if a foreign country is likely to attract investment from outside Europe.
The TCTF was adopted to allow the EU to compete with the US Inflation Reduction Act, which offers massive subsidies and tax credits to companies investing in energy transition, in particular the production of electric cars and batteries.
What we’ve been reading
In the Financial Times, Ian Johnston worries about a loosening of single market enforcement since Ursula von der Leyen took office as president of the European Commission.
In a column for Bruegel, Christophe Carugati hails the beginning of a new era of innovation in AI, fueled by competition and massive private sector investment.
This week’s newsletter is brought to you by Battiste Murgia, Augustin Bourleaud and Maxence de la Rochère. See you next Monday!