EU-China relations – a health report after Xi’s visit and new EV tariffs

The political relations between the EU and China are deteriorating. They may not be on such a clear path towards fraction and decoupling as the US-China relation, but the writing is on the wall. Developments this early summer – President Xi’s visit to Europe and the new EU tariffs on electric vehicles (EVs) – show neither side seem to have an alternative idea.

Commentators elsewhere have, and not without reason, pointed to China’s divide-and-rule tactic behind Xi’s visit to Europe. Far from coincidental, President Xi’s destination choices for his European tour were drawn together by one thing: to varying degrees and with all due differences, France, Hungary and Serbia are amongst the European countries that have been the most sceptical, if not outright impervious, against US interference in the Old Continent’s affairs.

With his repeated talks of “strategic autonomy”, even going so far as to say that Europe should not have been reduced to a “US vassal”, French President Emmanuel Macron has been, perhaps somewhat simplistically, viewed by Xi as the perfect interlocutor to drive a wedge between EU and US positions. At a time when Biden announced 100% tariffs on Chinese-made electric vehicles, batteries and solar cells and von der Leyen pre-announced provisional countervailing duties on imports of Chinese EVs, Xi sought to rekindle relations with Europe his own way – that is, not as a bloc, but rather by leveraging its most fault-finding members.

In a similar spirit, in his visit to Budapest to cement massive economic deals, Xi sought to send out an unequivocal message with his tribute to the Eurosceptic par excellence, Viktor Orbán. Perhaps even more notable though was the Serbian leg of the tour. Albeit not part of the EU, Serbia is important in Europe’s strategic thinking, both for historical reasons and for his all-weather friendship with both Russia and China. Serbia’s welcoming of Xi on the 25^th anniversary of the US bombing of the Chinese embassy in Belgrade, where three Chinese nationals had died, certainly signalled that China’s old grievances with the West are far from buried. It also served as yet another powerful reminder that Europe’s outward persona is not a monolith but a patchwork of interests, ideologies, and loyalties.

At the same time, the last-minute decision to skip the very visit of the bombing memorial site struck some as a Chinese attempt to take a cautious approach towards dividing Europe. While Xi’s overall behaviour surely aimed to cut through existing European fault lines, it also revealed a somewhat ambivalent take to it rather than an aggressive one. This is most evident when looking at China’s commercial patterns vis-à-vis Europe.

During her State of the Union Address, Ursula von der Leyen tried to put EU member states on guard against China’s threat to the European clean tech industry as “global markets are now flooded with cheaper Chinese electric cars.” A more granular look at the data paints a more complex picture. An analysis by Simon J. Evenett and Fernando Martín from the Global Trade Alert project reveals that Chinese exports of electric vehicles in 2022 only accounted for roughly 16% of the world total, half of which came from Tesla Gigafactory in Shanghai rather than from Chinese state-funded industrial establishments. Perhaps even more surprisingly, however, their study shows that while EU imports of Chinese EVs have certainly taken off over the last few years, so have purchases of German and Spanish EVs and at remarkably sustained rates too. Despite recognizing that Chinese EVs do keep claiming ever increasing market shares, the authors’ bottom line is that the surge of Chinese EV exports is yet to take on the proportions of a worldwide invasion.

Beyond trade, many in the EU are particularly wary of Chinese investments in the Old Continent. The mayor of Budapest and political opponent to Prime Minister Orbán has criticised his fellow countryman’s enthusiastic acceptance of Beijing investments in various sectors, including universities and factories, dubbing it as the “the underhanded sale of our sovereignty”. Similarly, local authorities from the Italian region of Sardinia have recently denounced China’s purchase of the largest solar project ever planned in Italy and Europe from a Spanish company. This incident follows years of heightened scrutiny by Italian governments over Chinese investments, due to concerns about unauthorized technology transfers, that culminated in the Meloni government’s decision last December to withdraw Italy from China’s Belt and Road Initiative. Belgium’s current Foreign Affairs Minister also famously drew significant backlash from Beijing by expressing concerns over Chinese investments in European seaports when she highlighted the potential dual-use nature of these investments, noting that civilian ships manufactured by Chinese state-owned shipping company COSCO could be converted into military vessels.

China is certainly working to expand its influence in Europe through strategic investments, many of which appear designed to create dependencies. These investments often target critical infrastructure, such as ports, telecommunications, and energy sectors, which can potentially give China leverage over European economies and political decisions. What many forget, however, is that investments are also leaps of faith. Investing means first and foremost being invested: if things go wrong between two countries, trade patterns can be partly reversed or redirected; divestment, on the other hand, is a much more painful strategy. As China invests in Europe, it exerts more influence, but it also ties itself more closely to Europe’s fate. Moreover, for those fearing a Chinese economic invasion, it is worth reminding that China’s FDI to Europe decreased again year-on-year in 2023 to reach its lowest point since 2010.

In any case, Xi’s visit to Europe appears to have produced some effect. Despite seeming to threaten US-like tariffs on Chinese EVs, the European Commission determined last week that it would “only” impose temporary, lower-percentage duties on Chinese-made electric vehicles. Surely, the EU had expressed its readiness to resolve the issue through negotiations with China before the new tariffs would take effect on July 4 yet talks failed to avert this rosy scenario. Nevertheless, said duties can be up to 37.6% – little more than a trifle with respect to the US’ 100% tariff rate. Moreover, there is a four-month period during which duties will remain provisional, and intense negotiations are anticipated to continue between the two parties, as Beijing formally threatens extensive retaliation. The EU’s counteroffensive on China still appears largely more ceremonial than substantial. This turn of events reveals a much less confrontational approach on the EU’s part, a tactic that somehow matches Xi’s cautious stance at dividing the bloc.

This change of pace most likely stems from the consideration that the EU cannot afford to engage in a full-fledged trade war with China. On the eve of a likely Trump comeback and at a time when European competitiveness has become one of the bloc’s main concerns, as we have shown extensively elsewhere, the EU needs to expand its trade opportunities, not curtail them in order to become more competitive. Trade has always been one of the very motors of European competitiveness, one the EU cannot afford to lose. This is not to suggest that the EU should stay put when China distorts international competition or denies market access to European firms. Taking a more forceful position when raising the reciprocity problem with China or seeking international collaboration to address government subsidization, however, could be more valid options. Waging a tariff war on China because it offers its businesses government subsidies will simply not do. Shooting oneself in the right foot because the left one is already bleeding is no way to go about it.