A new report by Economist Intelligence (EIU) says that the focus of the EU’s economic security strategy in 2023-27 will be to “de-risk” from China in critical sectors.
It adds that while Europe wants to reduce its reliance on China, “a full decoupling would be neither desirable nor achievable.”
Policy Shift
The new focus marks a departure from Europe’s stance on China a few years ago, when member countries were “keen to enhance investment ties.” However, the new policy will encourage diversification of European supply chains in “strategically important areas,” such as raw materials.
The report outlined Europe’s “overreliance” on China for resources that are key to the EU’s green transition. For example, 97% of the EU’s lithium imports and almost all of Europe’s supply of rare earth elements — a key input for electric-vehicle batteries — are sourced from China. Europe also sources about 80% of its solar panels from China.
Alongside the US, China is the EU’s most important trading partner—accounting for 9% of European goods exports and more than 20% of European goods imports. How will EU’s reliance on China affect the region’s approach to “de-risking” from China? https://t.co/Ld6OsTnz8N pic.twitter.com/BcrEBoUF24
— Economist Intelligence: EIU (@TheEIU) July 21, 2023
Despite the shift, the report states that “significant shocks to EU-China trade flows in the short to medium term are unlikely.”
It also noted that countries might tighten their transatlantic policy coordination on China, similar to the EU’s alignment with US chip export controls and negotiations on an EU-US deal on critical raw materials.
Measures
The EU will bolster its vulnerabilities and “strengthen existing measures (such as rules on inbound FDI and export controls) in order to protect the EU economy.”
It also announced “a new outbound investment mechanism for key technologies with military applications (dual-use technologies),” which will be launched by the end of 2023.
Causes
The report notes that European attitudes towards China “have been hardening for several years” due to “long-standing concerns” surrounding:
- Unfair competition from Chinese firms,
- Human rights violations,
- China’s refusal to condemn Russia’s invasion of Ukraine, and
- Escalation of conflict over Taiwan.
However, the report concluded that Europe “will continue to engage with China in areas of mutual interest,” such as climate change, “but only on a transactional basis.”
“The scope for EU-China co-operation is narrowing as China shifts towards greater prioritisation of security and ideology over economic goals,” it said.