EU-China Relations in a Post-Covid-19 World: Turning Doubt into Strength

The pandemic has dashed hopes of a high-level summit including the conclusion of a comprehensive EU-China investment agreement. But politicians should use 2020 as a year of preparation.

Jörg Wuttke

Deutsche Version

2020 was supposed to be the year that defined EU-China relations. The European business community had been looking forward to its issues finally being prioritised by China through a number of high-level, strategic dialogues in early June, followed by the EU-China Summit later in the month.

These meetings were to pave the way for the crowning achievement of the year: a September summit in Leipzig with the EU, heads of member states, and President Xi himself in attendance. Central to this was to be the unveiling of the long-awaited Comprehensive Agreement on Investment (CAI).

Then came Covid-19, its reverse Midas touch reducing the EU-China Summit to a virtual meeting, putting an end to the chances of a pinnacle moment in Leipzig and changing 2020 from the year of action to the year of doubt.

European companies: in China for China

European businesses in China now find themselves navigating in the dark. Supply chains have been disrupted as never before, demand has fluctuated with extreme volatility and an impenetrable fog is clouding the outlook. The indefinite postponement of a meaningful CAI has further depleted business confidence.

Feelings of grave uncertainty are being exacerbated by the potential for a second wave of infections – and the unspeakable consequences that would have on the global economy – as well as the ongoing US-China trade war: Will it continue its seemingly ineluctable march towards a tech war, or even a financial one?

There are a couple of things we are sure of, however.

We are sure that most European companies are in China for China and will continue to be so for the foreseeable future. It is simply impossible to be a global player without a presence in a market holding a fifth of the world’s consumers, producers and innovators.

European companies recognise the need to dig in and continue fighting for market share. Just surrendering it to competitors from China, which could then leverage their massive local scale and unique advantages like dirt-cheap financing from state-owned banks, is not an option. It would hand them an enormous advantage as they move into third-markets, and even Europe, to compete with us.

Unfortunately, we are also sure that China’s business environment is bifurcating into a «one-economy, two systems» model.

State-owned Enterprises: bigger, stronger, better

On the one hand, China has steadily opened up parts of its economy to foreign investment, and European businesses have noted continuous progress in the regulatory environment, which is slowly but surely showing signs of aligning with international norms. In these sectors, market forces are being given greater play, and the innovative prowess of China’s fiercely competitive private companies has reached parity with, if not exceeded, their European counterparts.

On the other hand, nearly every sector with a significant presence of state-owned enterprises (SOEs) is seeing a deterioration of market conditions as SOEs are championed by China’s leadership to become «bigger, stronger, better». This trend has become more prevalent with China choosing to lean on the perceived stability the SOEs provide in the post-Covid-19 landscape.

The European business community remains confident that China’s leaders will eventually answer the Covid-19 crisis with economic liberalisation, as they did in the late 1980s and the early and late 1990s, but Europe’s leaders cannot simply sit and wait for that to happen.

They must continue to fight for an open business environment in China so our companies can compete fairly for a share of this critical market. A major component of this will be following through on the work already undertaken to realise a robust CAI that creates reciprocity to the greatest extent possible.

It will also entail protecting European players at home and in third markets from distortions emanating from China’s state-led economy. In the wake of Covid-19, in particular, Europe needs to rapidly develop measures that can prevent predatory takeovers.

More precise investment screening is needed that can compensate for distortions without preventing legitimate private investors from bringing their capital, ideas and technology to our home market. This can be supplemented by other mechanisms, like the international procurement instrument, which applies negative reciprocity to companies from markets that close off procurement to European players.

It is clear that 2020 will not be the year of EU-China action, but that should not prevent it from becoming the year of preparation. By continuing to work with China towards a meaningful CAI, while putting in place the safeguards it needs to protect its economy from distortions caused by non-market forces, Europe can emerge from the Covid-19 crisis on a much stronger global footing than ever before.

Jörg Wuttke

Jörg Wuttke is President of the European Union Chamber of Commerce in China. He has lived and worked in the People's Republic for more than thirty years.
Jörg Wuttke is President of the European Union Chamber of Commerce in China. He has lived and worked in the People's Republic for more than thirty years.