This article by Angeline Sanzay and Byford Tsang was written as part of the compendium by the European Policy Centre.
Introduction
In recent years, EU-China relations have become increasingly complex owing to a growing number of irritants, ranging from asymmetric trade and investment relations, lack of reciprocity in market access and an uneven playing field, to geopolitical misalignment, Beijing’s ‘no-limits’ partnership with Moscow, and tensions in the South China Sea and the Taiwan Strait, among others. Following the expected rightward shift in the European Parliament elections, and with competitiveness, strategic autonomy and economic security now at the top of the EU’s agenda, tensions are bound to escalate as policymakers increasingly see China as a threat in all three areas. China’s dominance in some key strategic sectors has prompted calls for ‘de-risking’ strategies, including in clean technologies. As the EU enters a new political cycle, de-risking will be at the centre of the political debate. The outcomes of this debate will not only shape Europe’s future relationship with China, but also impact the speed of the energy transition in Europe, China and beyond.
Key issues
Despite the introduction of the ‘partner, competitor, systemic rival’ triptych in 2019, EU-China relations have continued their downward spiral, with economic competition and systemic rivalry taking precedence. The EU and China have failed to achieve any notable negotiating successes since concluding in principle the Comprehensive Agreement on Investment (CAI) negotiation in December 2020, which has been put into deep freeze after a series of tit-for-tat sanctions over China’s human rights record. Economic security is now among the priority issues on the EU’s agenda, with the bloc pointing fingers at China for its unfair trade practices and the lack of action to level the playing field.
Recent crises, including COVID-19 and Russia’s war on Ukraine, have exposed the fragility of global supply chains and the reorientation of the EU’s perception of dependencies and exposure to geopolitical risks. These have fuelled concerns over Europe’s economic stability and energy security and left policymakers wondering whether Europe should rely on one dominant energy technology provider as it embarks on its decarbonisation journey. The looming threat of Chinese economic coercion for political purposes, as in the case of Australia and Lithuania, has also eroded Europeans’ trust in Beijing.
To address this increasingly wide range of perceived risks associated with China, Commission President Ursula von der Leyen outlined her vision for a new ‘de-risking’ strategy in March 2023, setting a new EU approach to China. President von der Leyen contrasted the de-risking approach with decoupling. She stressed that the bloc should adopt a more moderate approach, focusing on targeted measures where dependencies or risks are identified. This approach won the consensus of the G7 when they agreed on a common approach to de-risking their economic relations with Beijing and Moscow.
Although a relatively new concept, the EU’s de-risking strategy builds on several existing, mostly country-agnostic, measures and policies. However, these are primarily defensive actions, not driven by any long-term objective, but the result of current issues or identified risks.
Main challenges and opportunities
As EU anti-subsidy investigations proliferate and tougher rhetoric from EU leaders against China heats up, some fear a trade war is looming between the two major economies.
Unlike the US, where there is a consensus among political parties on more assertive policies on China, EU member states are much more divided on their views on how they should position themselves along the spectrum of the EU-China relations triptych. While the EU as a bloc is not significantly dependent on trade with China, the level of dependency varies significantly among member states. Notably, Germany, which is responsible for three-fifths of the EU’s car exports, has the highest share of China exports within its extra-EU exports—cars being the EU’s most exported product (by value) to China.
If the EU is to systematically unwind its clean tech dependency on China while staying on course with the ambitious climate and energy targets set out in the RePowerEU and Green Deal Industrial Plan, policymakers will need to make tough choices over trading off economic, climate, security, and industrial competitiveness objectives. The EU will have to carefully navigate competition dynamics to avoid creating a divide between its member states. Moreover, as tensions rise, the space for EU-China climate diplomacy could shrink, threatening the future of global climate governance and much-needed joint leadership on climate action between the EU and China, which are among the world’s biggest emitters, both in current and historical terms.
De-risking: what does it really mean?
The challenge of de-risking is to know what the trade-offs are and what type and level of risks the EU is willing to accept. As the EU tries to draw a line with China, a rift is opening up between its member states. On the one hand, countries including France and Lithuania are advocating for strong trade measures to shield European industries from unfair competition. On the other, countries including Germany, Sweden and the Netherlands are more hesitant to usher in protectionist policies that would affect their companies’ ability to operate in China if Beijing retaliates.
At the heart of the debate is a significant lack of clarity and agreement among experts and member states on the definition of de-risking and the scale and scope of the strategy to be implemented, often driven by their level of economic and political dependence on China.
Ultimately, it all comes down to the level of trust the European Commission and each member state have: in Beijing for not weaponizing deep economic dependencies; in Chinese renewable technology manufacturers and their ability to fend off government influence over their operations; and also in their own companies’ ability to manage economic and supply chain dependencies of national security importance (German Chancellor Olaf Scholz argues that de-risking supply chains is the prerogative of businesses, not the state). As Vice President Margrethe Vestager said in April 2024: “As we further develop the strategy for clean technologies, we must reflect on the question of trustworthiness”.
The appropriate level of risks & what risks?
To deliver on the EU’s promise to make Europe the first climate-neutral continent in the world, green technologies will be a cornerstone of the strategy. Driving China’s economic growth in 2023, the “new three” industries of solar, electric vehicles and batteries testify to China’s global leadership in the clean transition. Globally, China accounts for over 80% of solar cell exports, over 50% of lithium-ion batteries and over 20% of electric vehicles.
With Europe’s ambitious target of 600 GW of solar energy by 2030 and China’s unrivalled position in terms of speed, scale and affordability in the solar supply chain, there is an increasing risk the EU will become almost entirely dependent on China for its solar expansion. To date, over 90% of the solar panels deployed in the EU are imported from China.
Chinese manufacturers also hold a significant grip on the entire battery supply chain, controlling a considerable proportion of key minerals such as cobalt, lithium and graphite globally, as well as having a strong presence in mineral processing and the production of key battery components such as cathodes and anodes.
China has also emerged as a formidable competitor in the electric vehicle market with the EU becoming by far China’s largest customer, and rapidly so. With the EU set to ban combustion engine cars by 2035 and an overarching goal to decarbonise its road transport, Chinese electric vehicle manufacturers are poised to capitalise on this new thriving market which will directly threaten one of Europe’s bedrock industries: the automotive sector.
However, rolling back decades of globalisation and eroding trade gains is neither feasible nor desirable. The extent and nature of the risks posed by deep economic integration with China in these three sectors vary, requiring a tailored approach that considers both the costs and benefits of de-risking. While there is a temptation to approach de-risking solely through the lens of trade defence to shield domestic industries or to protect Europe from economic coercion risks, this should not come at the expense of the EU’s economic competitiveness or international climate commitments. At the same time, advocates of climate policies should not lose sight of the impact that unfair trade in green technologies could have on job markets. Support for climate policies could be in jeopardy if the promise of a green revolution only brings in low-cost green technologies, but not high-paying green-collar jobs.
The collateral damage
China’s green technology boom has created a very unbalanced economic situation, with overcapacity and fierce domestic competition in the electric vehicle and battery sectors, forcing the industry to turn to export markets. Beyond Europe and the US, emerging markets and developing economies are also raising concerns about China’s fast-growing green technology exports. In a sign of growing discontent and tension over China’s industrial policy, Brazil and Türkiye have both imposed import tariffs on Chinese electric vehicles.
The EU’s climate diplomacy vis-à-vis developing countries has become increasingly challenging, not least since their launch of its very own climate-related trade measure, the Carbon Border Adjustment Mechanism (CBAM). CBAM is one of many initiatives that are seen by the Global South as a deeply unfair and one-sided EU foreign policy tool. The BRICS group of countries (Brazil, Russia, India, China, and South Africa) has used their annual leaders’ gathering to criticise the measure as ‘unilateral’ and ‘protectionist’. India has led the charge to confront the CBAM at the World Trade Organisation.
The issue of ‘unilateral measure’, referring to policies that regulate the trade of carbon-intensive and green technologies alike, has also flared up in recent international climate talks. At COP28 in Dubai, an attempt by the BASIC group of countries – consisting of Brazil, South Africa, India, and China – to introduce ‘unilateral trade measures related to climate change’ to the COP agenda could have resulted in an impasse in the climate talks. The motion was supported by key developing countries negotiating blocs including the G77 (consisting of 134 countries). In the end, the situation was defused by the United Arab Emirates, which chaired the talks; yet the sentiment from developing countries regarding initiatives such as CBAM and tariffs on green technologies was reflected in the final negotiated text in Dubai: “unilateral measures should not lead to unjustifiable or arbitrary discrimination or restriction in international trade.”
Recommendations and Conclusions
Map the risks, know the trade-offs, keep the European Green Deal rolling
How to address dependencies, supply chain vulnerabilities, and economic and political risks will require a delicate balancing act by the EU to avoid both the risk of doing too little and the danger of doing too much. De-risking should be understood as a process of risk mitigation and management, rather than the elimination of all risk.
It is important to distinguish between renewable energy dependency, considered a stock, and classic fossil fuel dependency, regarded as a flow. Although reliance on a single technology provider may pose risks, it is crucial to highlight that renewable dependency naturally decreases over time as the power sector decarbonises and the stock of solar panels and wind turbines expands. For the EU, this transition is expected to occur within the next 11-15 years, rendering it a short-term dependency that inherently limits the urgency and extent of necessary actions.
To systematically reduce its dependence on China for clean technologies while maintaining the momentum of the green transition, the EU cannot solely rely on trade defence instruments to protect its industry. Instead, a coherent and ambitious industrial strategy is needed to strengthen Europe’s clean industries and overall competitiveness. This includes not backtracking on the EU’s Green Deal initiatives.
Deepening, broadening and refining partnerships with third countries is an integral part of the EU’s de-risking strategy. Strategic, co-developed and mutually beneficial clean transition partnerships with key emerging economies would help the EU rebuild trust with the Global South, increase its geo-economic resilience vis-à-vis China and enhance its competitiveness and geopolitical clout in future-proof clean sectors. Europe’s strength therefore lies in cooperating with a wide range of countries also concerned by China’s cleantech dominance, coming up with joint strategies to diversify manufacturing while effectively building its capacities at home.
Cooperate where we can
Despite increasing economic competition and political tensions, along with a stalled dialogue in most areas of their relationship, the EU-China partnership on certain areas of climate and environment has proved productive. While there is growing frustration on both sides at the lack of concrete progress, it is still worth putting our energy into maintaining all existing technical cooperation and strengthening existing formats to cover both climate and trade issues at ministerial level. There are still issues that both the EU and China can and should work on together such as tackling physical climate risks, managing the socio-economic impact of the transition and working on adaptation strategies.
A unified, long-term vision for EU-China relations
While the 2019 triptych provides a solid foundation for defining the EU’s relationship with China, it has yet to live up to its potential on the climate dimension. In the race to become the next ‘climate superpower’, it is inevitable that the EU and China will engage in intense economic competition and at times see each other as rivals. Meanwhile, the promise of climate cooperation should be more than a placeholder in the partnership bucket of the triptych and yield concrete outcomes in terms of emissions cuts.
As we enter a new European political cycle, with a new mandate for both the European Parliament and the European Commission in 2024, this is a perfect opportunity for the EU to adopt a coherent, comprehensive, and consistent long-term China strategy that ensures:
- Reciprocity. While the concept of reciprocity has historically been associated with trade and market access, reciprocity should be the basis of EU-China cooperation writ large. On climate, that would mean alignment of the respective national climate targets to the Paris Agreement 1.5C temperature target. Regarding security, both sides to adhere strictly to the principle of non-interference in international relations. An assessment of reciprocity across all issues should be the basis of any recalibration of the EU’s long-term China strategy.
- A clear scope for cooperation. While climate issues may not always fit neatly into the cooperation framework, there are areas where both partners can collaborate effectively, such as the alignment of sustainable finance regulations, addressing climate risks to regional stability, and supporting clean transition financing in third countries. It is essential to recognize the boundaries of cooperation, acknowledging factors like clean technology competition and each nation’s influence in third-party countries.
- A cohesive approach. While China is not a unique case, the EU will have to grapple with the lack of unity among its member states on the right strategy to define its future relationship with Beijing and agree on a common understanding of its de-risking strategy. The lack of coherence and strategic vision could lead to a multiplication of instruments that do not adequately define, address, or mitigate risks, and eventually raise concerns among the EU’s partners, rendering its efforts counterproductive.
